<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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3DFX INTERACTIVE, INC.
(Exact name of Registrant as specified in its charter)
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CALIFORNIA 3674 77-0390421
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of
incorporation or organization) Classification Code Number) Identification Number)
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3DFX INTERACTIVE, INC.
4435 FORTRAN DRIVE
SAN JOSE, CALIFORNIA 95134
(408) 935-4400
(Address and telephone number of Registrant's principal executive offices)
------------------------
GARY P. MARTIN
VICE PRESIDENT, ADMINISTRATION AND
CHIEF FINANCIAL OFFICER
3DFX INTERACTIVE, INC.
4435 FORTRAN DRIVE
SAN JOSE, CALIFORNIA 95134
(408) 935-4400
(Name, address and telephone number of agent for service of process)
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Copies to:
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ROBERT P. LATTA, ESQ. THOMAS A. BEVILACQUA, ESQ.
WILSON SONSINI GOODRICH & ROSATI BROBECK PHLEGER & HARRISON LLP
PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE
650 PAGE MILL ROAD 2200 GENG ROAD
PALO ALTO, CA 94304 PALO ALTO, CA 94303
(415) 493-9300 (415) 424-0160
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock, no par value.............................. $41,055,000 $12,441
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(1) Estimated solely for the purpose of computing the amount of the registration
fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of
1933, as amended.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 17, 1997
[L O G O]
4,200,000 SHARES
COMMON STOCK
All of the 4,200,000 shares of Common Stock offered hereby are being sold
by 3Dfx Interactive, Inc. ("3Dfx" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. Of the
4,200,000 shares of Common Stock offered hereby, it is currently anticipated
that 700,000 shares will be purchased by Sega Enterprises, Ltd. at the price per
share set forth under "Proceeds to Company" below. See "Investment by Sega." It
is currently estimated that the initial public offering price will be between
$ and $ per share. See "Underwriting" for information relating
to the method of determining the initial public offering price.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING AT PAGE 6.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share.................................... $ $ $
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Total(2)..................................... $ $ $
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(1) Before deducting expenses payable by the Company, estimated at $700,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 630,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ ,
respectively.
-------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens &
Company"), San Francisco, California, on or about , 1997.
ROBERTSON, STEPHENS & COMPANY
MONTGOMERY SECURITIES
UBS SECURITIES
The date of this Prospectus is , 1997
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND MAY
IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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TABLE OF CONTENTS
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PAGE
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Summary........................................................................... 4
Risk Factors...................................................................... 6
Investment by Sega................................................................ 20
Use of Proceeds................................................................... 20
Dividend Policy................................................................... 20
Capitalization.................................................................... 21
Dilution.......................................................................... 22
Selected Financial Data........................................................... 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 24
Business.......................................................................... 31
Management........................................................................ 49
Certain Transactions.............................................................. 58
Principal Shareholders............................................................ 59
Description of Capital Stock...................................................... 61
Shares Eligible for Future Sale................................................... 63
Underwriting...................................................................... 65
Legal Matters..................................................................... 67
Experts........................................................................... 67
Additional Information............................................................ 67
Index to Financial Statements..................................................... F-1
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The Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by an independent public
accounting firm and quarterly reports for the first three quarters of each year
containing interim unaudited financial information.
Glide, Obsidian, Voodoo Graphics and Voodoo Rush and the 3Dfx logo are
trademarks of the Company. All other trademarks or tradenames referred to in
this Prospectus are the property of their respective owners.
The Company was incorporated in California in August 1994. The Company's
executive offices are located at 4435 Fortran Drive, San Jose, California 95134
and its telephone number at that address is (408) 935-4400.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. Prospective investors should consider carefully the
information discussed under "Risk Factors." This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
3Dfx Interactive is a leading developer of high performance, cost-effective
3D media processors, software and related technology for the interactive
electronic entertainment market. The Company has developed 3D technology that
enables a highly immersive, interactive and realistic 3D experience across
multiple hardware entertainment platforms. Furthermore, the Company's technology
facilitates the virtually seamless portability of software content across the
three primary interactive electronic entertainment platforms: the PC, the home
game console and the coin-operated ("coin-op") arcade system. The Company's
strategy is to provide a 3D media processor solution that will become the
standard graphics engine for the interactive electronic entertainment market.
The Company believes that the benefits of its technology, coupled with its
software content strategy, provide powerful incentives for the leading PC
original equipment manufacturers ("OEMs") and entertainment hardware
manufacturers to utilize the 3Dfx solution.
The growth of the interactive electronic entertainment market has been
constrained by the absence of a high performance, cost-effective 3D solution,
the lack of an architecture that facilitates virtually seamless porting across
the three primary platforms and the limited number of high quality 3D software
titles. The implementation of 3D graphics is extremely complex and
mathematically intensive and requires significant computing power. Consequently,
despite the desirability of 3D graphics, high quality 3D continues to remain a
niche technology not prevalent outside of high-end engineering workstation and
professional applications. To date, attempts to bring high quality, affordable
3D solutions to the entertainment market have required consumers to accept a
trade-off between visual realism, or fill rate, and gaming performance, or frame
rate. Today, the interactive electronic entertainment industry is demanding a
no-compromise 3D solution that will deliver both visual realism and performance
at a cost-effective price. The solution must also drive content development by
enabling developers to create a new generation of high quality 3D software that
delivers a realistic and immersive experience.
The Company's technology is optimized to alleviate the traditional consumer
trade-off between visual quality and gaming performance by providing a 3D
solution with both high fill rates and frame rates. To that end, the Company's
technology enables a highly immersive, interactive 3D experience with compelling
graphics, realistic motion and complex character and scene interaction at real
time frame rates. In addition, the Company's technology embodies a single
hardware/software architecture that can be deployed as the graphics engine for
each of the three primary interactive electronic entertainment platforms. To
promote the rapid adoption of its products, the Company's architecture supports
most industry standard 3D application programming interfaces ("APIs"), including
Apple Computer's Rave3D, Argonaut's BRender, Criterion's Renderware, Intel's
3DR, Microsoft's Direct3D and Silicon Graphics' OpenGL. Additionally, the
Company has developed Glide, its proprietary low-level 3D API, which facilitates
the virtually seamless portability of software content across multiple
entertainment platforms utilizing the Company's 3D media processor, thereby
leveraging the significant development and marketing expenses associated with a
given title.
Voodoo Graphics, the Company's first product, and subsequent 3D media
processors now under development are designed around a common architecture to be
utilized as the graphics engine for PCs and coin-op arcade systems. For PC
applications, Diamond Multimedia Systems, Inc. ("Diamond") and Orchid Technology
("Orchid") have each introduced consumer multimedia add-in cards incorporating
the Company's 3D media processor for sale in the retail channel and for
incorporation into PCs manufactured by, among others, Apricot/Mitsubishi, Falcon
Northwest, Hewlett-Packard and NEC. In the coin-op arcade market, the Voodoo
Graphics 3D media processor is being utilized by Acclaim, Kaneko, Midway Games
and Taito, among others. Voodoo Graphics technology is also the graphics
architecture for the 3D media processor chipset that the Company is developing
for license to Sega Enterprises, Ltd. ("Sega") for use in Sega's next generation
consumer home game console. The Company's second product, Voodoo Rush, is
designed to incorporate a 3D/2D solution into a single personal computer
interface ("PCI") board. Voodoo Rush began sampling in November 1996 and limited
commercial shipments are expected in the second quarter of 1997. The Company has
commenced development of Banshee, which is intended to be a high performance,
fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade
markets. The Company expects to begin commercial shipments of Banshee in the
first quarter of 1998. All of the Company's products are manufactured,
assembled, tested and packaged by third-party suppliers.
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THE OFFERING
Common stock offered by the
Company............................. 4,200,000 shares
Common stock outstanding after the
offering.......................... 22,395,199 shares(1)
Use of proceeds..................... For working capital and other general
corporate purposes, including expansion
of sales and marketing and research and
product development efforts and
financing of accounts receivable and
inventories, and for capital
expenditures. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.............................. TDFX
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
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YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
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1995 1996 1996 1997
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STATEMENT OF OPERATIONS DATA:
Total revenues(2).................................................... $ -- $ 6,390 $ -- $ 5,247
Loss from operations................................................. (5,106) (14,810) (2,687) (1,134)
Net loss............................................................. (5,039) (14,751) (2,652) (1,161)
Pro forma net loss per share(3)...................................... $ (0.75) $ (0.06)
Shares used in pro forma net loss per share calculations(3).......... 19,661 20,621
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MARCH 31, 1997
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ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
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BALANCE SHEET DATA:
Cash and cash equivalents............................................ $ 4,141 $ 4,369 $
Working capital...................................................... 6,049 6,277
Total assets......................................................... 15,586 15,814
Capitalized lease obligations, less current portion.................. 468 468 468
Accumulated deficit.................................................. (20,951) (20,951) (20,951)
Total shareholders' equity........................................... 9,146 9,374
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(1) Based on shares outstanding as of March 31, 1997. Excludes (i) 3,750,943
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1997, with a weighted average exercise price of $1.36 per share,
(ii) 154,317 shares of Common Stock issuable upon exercise of warrants
outstanding as of March 31, 1997, with a weighted average exercise price of
$1.62 per share and (iii) 2,248,607 shares of Common Stock reserved for
future issuance under the Company's stock plans. See "Management -- Stock
Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to
Financial Statements.
(2) Total revenues for the three months ended March 31, 1997 include $750,000 of
development contract revenues. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
(3) See Note 1 of Notes to Financial Statements for an explanation of shares
used in pro forma net loss per share calculations.
(4) Pro forma information gives effect to the issuance of 212,900 shares of
Common Stock upon the exercise of warrants that expire automatically upon
the closing of this offering.
(5) Adjusted to give effect to the sale of 4,200,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$ per share and the application of the estimated net proceeds
therefrom after deducting estimated underwriting discounts and commissions
and offering expenses payable by the Company. See "Use of Proceeds" and
"Capitalization."
------------------------
Except as set forth in the financial statements or as otherwise indicated
herein, all information in this Prospectus (i) reflects an increase in the
authorized shares of Common Stock to 50,000,000 shares effected in April 1997,
(ii) reflects the conversion of all of the Company's outstanding shares of
Preferred Stock into shares of Common Stock, which will occur automatically upon
the closing of this offering, (iii) reflects the filing, upon the closing of
this offering, of Restated Articles of Incorporation authorizing 5,000,000
shares of undesignated Preferred Stock, (iv) assumes that warrants to purchase
212,900 shares of Common Stock that expire automatically upon the closing of
this offering are exercised and (v) assumes that the Underwriters'
over-allotment option is not exercised. See "Description of Capital Stock,"
"Underwriting" and Notes 1 and 5 of Notes to Financial Statements.
5
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RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective purchasers of the Common Stock
offered hereby should carefully review the following risk factors as well as the
other information set forth in this Prospectus. This Prospectus contains
forward-looking statements based upon current expectations that involve risks
and uncertainties. The Company's actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES
The Company has had a limited operating history, has been engaged primarily
in research and product development with only limited revenues to date and has
incurred net losses in every quarter. The Company was founded in August 1994 and
was a development stage company until its first commercial product shipments in
the third quarter of 1996. The Company has been primarily dependent on private
equity financings to provide cash for operations. The Company's limited
operating history makes the assessment of future operating results difficult.
The Company incurred net losses of approximately $5.0 million, $14.8 million and
$1.2 million in 1995, 1996 and for the three months ended March 31, 1997,
respectively, and had an accumulated deficit of $21.0 million at March 31, 1997.
These net losses were attributable to the lack of substantial revenue and
continuing significant costs incurred in the research and development of the
Company's 3D media processor products and product testing. The Company expects
to incur additional net losses at least in the near term as it continues to
incur substantial research and development and sales and marketing expenses to
commercialize its products. There can be no assurance that significant revenues
or profitability will ever be achieved or, if they are achieved, that they can
be sustained or increased on a quarterly or annual basis in the future. See
"-- Dependence on Emerging 3D Interactive Electronic Entertainment Market,"
"-- Future Capital Needs; Uncertainty of Additional Funding" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON RELATIONSHIP WITH SEGA
In March 1997, the Company entered into a Technology Development and
License Agreement with Sega (the "Sega Agreement"), under which the Company will
develop and license to Sega the technology for a 3D media processor chipset (the
"Sega/3Dfx Chipset") for use in Sega's next generation home game console product
(the "New Sega Game Console"). The Sega Agreement grants Sega the exclusive
right for three years to the Company's architecture solely for use in home game
consoles. Through the end of 1998, the Company expects to earn development
contract revenues and certain development bonuses provided that certain
milestones set forth in the Sega Agreement are met. The Company will derive
royalty revenue for each Sega/3Dfx Chipset incorporated into products sold by
Sega. Therefore, the timely development of the Sega/3Dfx Chipset by the Company
and the successful introduction and sale of the New Sega Game Console by Sega
will be critical factors affecting the Company's future business, financial
condition and results of operations. The Company has not yet completed
development of the Sega/3Dfx Chipset, and there can be no assurance that the
Company will successfully complete such development or, if such development is
completed, that the Sega/3Dfx Chipset will perform as expected. Despite
pre-release testing of the Sega/3Dfx chipset by the Company, there can be no
assurance that, once the Sega/3Dfx Chipset is made available to Sega,
performance errors and deficiencies will not be found, or if discovered, that
the Company will be able to successfully correct such performance errors and
deficiencies in a timely manner, if at all. If the Company is unable to complete
the development of the Sega/3Dfx Chipset or successfully deliver it to Sega, the
Company's business, financial condition and results of operations would be
materially adversely affected.
There can be no assurance that Sega will ever introduce the New Sega Game
Console. Published reports in the financial press have indicated that Sega may
discontinue the manufacture and marketing
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of its home game console hardware. The Company's business, financial condition
and results of operations would be materially adversely affected if Sega does
not introduce the New Sega Game Console. If introduced, there can be no
assurance that the New Sega Game Console will achieve market acceptance. The
home game console industry has been characterized by unpredictable and sometimes
rapid shifts in the popularity of products, by severe price competition and by
frequent introductions of new technology and new products. Only a small number
of products have achieved broad market acceptance. Such market acceptance has
often followed intense competition between competing formats, such as those of
Nintendo Company, Ltd. ("Nintendo") and Sony Corporation ("Sony"). Any
competitive, technological or other factor adversely affecting the introduction
or sales of the New Sega Game Console or related software titles would have a
material adverse effect on the Company. Further, there can be no assurance that
Sega will successfully manage the introduction of the New Sega Game Console. As
is typical with any new product introduction, quality and reliability problems
may arise and any such problems may result in reduced orders, manufacturing
rework costs, delays in collecting accounts receivable, additional service and
warranty costs and a decline in Sega's competitive position. Further, Sega will
not manufacture all major subassemblies and will be dependent on several vendors
as manufacturers of such subassemblies. There can be no assurance that such
vendors will manufacture such subassemblies on a timely basis and with
acceptable quality, or, if demand for the New Sega Game Console increases, that
such vendors will be able to accelerate production of the subassemblies to meet
demand for such increases. Even if the New Sega Game Console is successfully
introduced and does gain initial market acceptance, competitive products with
comparable price and performance characteristics are likely to be introduced by
competitors. This competition may reduce future market acceptance for the New
Sega Game Console and result in decreased royalty revenues arising from the
Sega/3Dfx Chipset. The failure of the Company to successfully develop and
deliver the Sega/3Dfx Chipset or Sega's failure to successfully introduce and
market the New Sega Game Console or its failure to achieve market acceptance
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Result of Operations -- Overview" and
"Business -- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company believes that, even if it does achieve significant sales of its
products, quarterly and annual results of operations will be affected by a
variety of factors that could materially adversely affect revenues, gross profit
and income from operations. These factors include, among others, demand and
market acceptance for the Company's products; changes in product or customer
mix; the successful development of the Sega/3Dfx Chipset; the success of the New
Sega Game Console; unanticipated delays or problems in the introduction or
performance of the Company's next generation of products; unanticipated delays
or problems experienced by the Company's product development partners;
fluctuations in the level and timing of royalty revenues and development
contract revenues under the Sega Agreement; market acceptance of the products of
the Company's customers; new product announcements or product introductions by
the Company's competitors; the Company's ability to introduce new products in
accordance with OEM design requirements and design cycles; 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; fluctuations in manufacturing capacity;
competitive pressures resulting in lower average selling prices; the volume of
orders that are received and can be fulfilled in a quarter; the rescheduling or
cancellation of customer orders; supply constraints for the other components
incorporated into its customers' products; the unanticipated loss of any
strategic relationship; seasonal fluctuations associated with the tendency of PC
sales to increase in the second half of each calendar year; seasonal
fluctuations associated with sales of home game consoles; the level of
expenditures for research and development and sales, general and administrative
functions of the Company; costs associated with protecting the Company's
intellectual property; and foreign exchange rate fluctuations. Any one or
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more of these factors could result in the Company failing to achieve its
expectations as to future revenues. Because most operating expenses are
relatively fixed in the short term, 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 results of
operations. The Company may be required to reduce prices or increase spending in
response to competition or to pursue new market opportunities which could result
in inventory write-offs. If new competitors, technological advances by existing
competitors or other competitive factors require the Company to invest
significantly greater resources in research and development efforts, the
Company's results of operations in the future could be materially adversely
affected. Accordingly, the Company believes that period-to-period comparisons of
its results of operations 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 results of operations may be below the expectations of public
market analysts or investors. In such event, the market price of the Common
Stock could be materially adversely affected.
DEPENDENCE ON EMERGING 3D INTERACTIVE ELECTRONIC ENTERTAINMENT MARKET
The market for 3D interactive electronic entertainment for use in PCs, home
game consoles and coin-op arcade systems has only recently begun to emerge. The
Company's ability to achieve sustained revenue growth and profitability in the
future will depend to a large extent upon the demand for 3D multimedia
functionality in PCs, home game consoles and coin-op arcade systems. There can
be no assurance that the market for 3D interactive electronic entertainment will
continue to develop or grow at a rate sufficient to support the Company's
business. If the market for 3D interactive electronic entertainment fails to
develop, or develops more slowly than expected, or if the Company's products do
not achieve market acceptance, even if such market does develop, the Company's
business, financial condition and results of operations could be materially
adversely affected. Demand for the Company's products is also dependent upon the
widespread development of 3D interactive electronic entertainment applications
by independent software vendors ("ISVs"), the success of the Company's customers
in effectively implementing the Company's technology and developing a market for
the Company's products and the willingness of end users to pay for full function
3D capabilities in PCs, home game consoles and coin-op arcade systems.
Currently, there is not a sufficient quantity or breadth of software game
applications that support or take advantage of 3D functionality in PCs, home
game consoles and coin-op arcade systems. There can be no assurance that such a
base of software game applications will develop in the near term or at all.
Consequently, there can be no assurance that a broad market for 3D multimedia
functionality in PCs, home game consoles and coin-op arcade systems will
develop, or that the Company will successfully sell 3D media processor products
if such a market does develop.
DEPENDENCE ON THE PC MARKET
For 1996 and the three months ended March 31, 1997, the Company derived 82%
and 76%, respectively, of its revenues from products sold for use in PCs. The
Company expects to continue to derive a significant portion of revenues from the
sale of its products for use in PCs. The 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 PC market has grown substantially in recent
years, there can be no assurance that such growth will continue. A reduction in
sales of 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 PCs generally, or
for a particular product that incorporates the Company's 3D media
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processors, could have a material adverse effect 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 ("Intel") and Microsoft
Corporation ("Microsoft"). The Company could be required, as a result, to invest
significant time and resources to redesign the Company'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
have a material adverse effect on the Company's business, financial condition
and results of operations. To the extent that future developments in other 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 have a material adverse effect on the Company's
business, financial condition and results of operations.
ACCEPTANCE OF THE COMPANY'S 3D/2D SOLUTION FOR THE PC MARKET;
DEPENDENCE ON DEVELOPMENT OF A SINGLE CHIP SOLUTION
The Company's success depends upon market acceptance of its 3D media
processor products as a broadly accepted standard for high performance 3D
interactive electronic entertainment in PC applications. Currently, the majority
of multimedia PCs incorporate only 2D graphics acceleration technology. As a
result, the majority of entertainment titles currently available for play on PCs
are written for 2D acceleration technology. Because of the substantial installed
base of 2D acceleration technology and related game content, the Company
believes that for its 3D media processor products to gain wide market
acceptance, such products must also offer 2D performance comparable or superior
to existing 2D technology. To address this demand, the Company is working with
Alliance Semiconductor Corporation ("Alliance"), Macronix International Co., Ltd
("Macronix"), Media Reality Technology, Inc. ("MRT") and Trident Semiconductor,
Inc. ("Trident") to offer a 3D/2D chipset branded as the Company's Voodoo Rush
product. Voodoo Rush will function with a partner's companion 2D or 2D/3D
accelerator within a single PCI solution. There can be no assurance, however,
that the Company's 3D/2D chipset will perform the desired functions, offer
significant price/performance benefits or meet the technical or other
requirements of potential buyers to realize market acceptance. Despite
pre-release testing of the Company's 3D/2D product, there can be no assurance
that performance errors and deficiencies will not be found, or if found, that
the Company will be able to successfully correct such performance errors and
deficiencies in a timely manner, if at all. Further, there can be no assurance
that the Company's partners will manufacture their respective 2D or 2D/3D
accelerators for use in the Company's 3D/2D chipset on a timely basis and with
acceptable quality, or that, if demand for the Company's products increases,
such vendors will be able to accelerate production of their respective chipsets
to meet demand for such increases.
The Company's 3D media processors for use in PC applications are currently
designed as a two or three chip solution. Typically, as the functionality of a
given semiconductor becomes technologically stable and widely accepted by users,
the cost of providing the functionality is reduced by means of large scale
integration of such functionality onto a single semiconductor chip. The Company
expects that such integration onto a single chip will occur with respect to the
functionality provided by the Company's current products used in PC
applications. Therefore, the Company's success will be largely dependent on its
ability to develop products on a timely basis that integrate the Company's 3D
technology along with superior performance 2D technology. The Company is
currently developing Banshee, a proprietary 3D/2D single chip solution which the
Company expects will be available for commercial shipment in the first quarter
of 1998. There can be no assurance that the Company will successfully complete
such development on a timely basis or, if such development is completed, that
the resulting single chip 3D/2D solution will perform the desired functions,
offer sufficient price/
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performance benefits or meet the technical or other requirements of potential
buyers to realize market acceptance. Furthermore, most PC OEMs have a lengthy
evaluation process, and, in order for the Company's single chip product to be
designed into the OEM's system, the Company must complete the development of its
product to meet the deadline for the start of the OEM's evaluation cycle. If the
Company is unable to complete the timely development of, and successfully
manufacture and deliver, a single chip 3D/2D solution, the Company's business,
financial condition and results of operations would be materially adversely
affected.
If successfully introduced, there can be no assurance that the Company's
single chip 3D/2D solution will achieve market acceptance. The market for PC
media processors has been characterized by unpredictable and sometimes rapid
shifts in the popularity of products, by severe price competition and by
frequent new technology and product introductions. Only a small number of
products have achieved broad market acceptance. Such market acceptance has often
been followed by intense competition between alternative solutions. Any
competitive, technological or other factor adversely affecting the introduction
or sales of the Company's single chip 3D/2D solution for PC applications would
have a material adverse effect on the Company's business, financial condition
and results of operations. Even if the Company's single chip 3D/2D solution is
successfully introduced and does gain initial market acceptance, competitors are
likely to introduce products with comparable price and performance
characteristics. This competition may reduce future market acceptance for the
Company's product and result in decreasing sales and lower gross margins. The
failure of the Company to successfully develop and deliver a single chip 3D/2D
solution for PC applications or its failure to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON THIRD PARTY DEVELOPERS AND PUBLISHERS
The Company believes that the availability of a sufficient number of high
quality, commercially successful software entertainment titles and applications
will be a significant competitive factor in the sales of multimedia hardware for
the interactive electronic entertainment market. The Company depends on third
party software developers and publishers to create, produce and market software
titles that will operate with the Company's 3D media processor products. Only a
limited number of software developers are capable of creating high quality
entertainment software. Competition for these resources is intense and is
expected to increase. There can be no assurance that the Company will be able to
attract the number and quality of software developers and publishers necessary
to develop a sufficient number of high quality, commercially successful software
titles compatible with the Company's 3D media processor products. Further, there
can be no assurance that these third parties will publish a substantial number
of software entertainment titles or, if software entertainment titles are
available, that they will be of high quality or that they will achieve market
acceptance. Further, the development and marketing of game titles that do not
fully demonstrate the technical capabilities of the Company's 3D media processor
products could create the impression that the Company's technology offers only
marginal, if any, performance improvements over competing 3D media processors.
Because the Company has no control over the content of the entertainment titles
produced by software developers and publishers, the software entertainment
titles developed may represent only a limited number of game categories and are
likely to be of varying quality. See "Business -- Sales and Marketing."
COMPETITION
The Company's strategy of targeting the interactive electronic
entertainment market across the PC, coin-op arcade systems and home game console
platforms requires the Company to compete against different companies in each of
these market segments, all of which are intensely competitive. See
"Business -- Competition."
Within the entertainment segment of the PC market, the Company competes
primarily against companies that typically have operated in the PC 2D graphics
market and that now offer 3D capability
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as an enhancement to their 2D solutions, such as ATI Technologies, Inc. ("ATI"),
Cirrus Logic, Inc. ("Cirrus"), Oak Technology Inc. ("Oak Technology"), S3
Incorporated ("S3") and Trident. Many of these competitors have introduced 3D
functionality on new iterations of existing graphics chips. The Company also
competes with companies that have recently entered the market with an integrated
3D/2D solution but which have not traditionally manufactured 2D solutions, such
as Chromatic Research, Inc. ("Chromatic"), nVidia Corporation ("nVidia") and
Rendition Inc. ("Rendition"). In addition, the Company competes with Videologic
Group Plc which has partnered with NEC ("NEC/Videologic") to focus exclusively
on developing a 3D solution for the interactive electronic entertainment market.
In addition to competition from companies in the entertainment segment of
the PC market, the Company also faces potential competition from companies that
have focused on the high-end of the 3D market and the production of 3D systems
targeted for the professional engineering market, such as 3Dlabs Inc., Ltd
("3Dlabs"), Integraph Corporation ("Integraph"), Real 3D ("Real 3D"), an
operating unit of Lockheed Martin Corp. ("Lockheed"), and Silicon Graphics, Inc.
("SGI"). These companies are developing lower cost versions of their 3D
technology to bring workstation-like 3D graphics to mainstream applications.
There can be no assurance that these companies will not enter the interactive
electronics entertainment market or that the Company would be able to compete
successfully against them if they did.
Furthermore, a substantial number of companies including Intel and
Microsoft have announced plans to release 3D graphics chips in 1997 and 1998
that promise to provide low cost 3D functionality for PCs and workstations. If
successful, products based on any of these initiatives would be directly
competitive with the Company's 3D media processors and could materially
adversely affect the Company's competitive position and results of operations.
The market for interactive electronic arcade entertainment is comprised of
a small number of companies, including Acclaim Entertainment Inc. ("Acclaim"),
Namco, Ltd. ("Namco"), Sega, Taito Corporation, Ltd. ("Taito") and WMS
Industries Inc. ("Williams"), and its subsidiary Midway Games, Inc. ("Midway").
The home game console segment is dominated by three companies, Nintendo, Sega
and Sony. In each of the coin-op arcade and home game console segments, the
Company primarily faces competition from in-house divisions of the companies
which currently comprise such markets. In addition, there can be no assurance
that any of the companies which currently compete in the 3D PC markets, will not
enter the coin-op arcade market, or if they do, that the Company will be able to
compete against them successfully.
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less costly
than the Company's 3D media processors or provide better performance or
additional features not currently provided by the Company. The Company believes
that the principal competitive factors for 3D graphics solutions are product
performance, conformity to industry standard APIs, software support, access to
customers and distribution channels, manufacturing capabilities and price. The
Company seeks to use strategic relationships to augment its capabilities, but
there can be no assurance that the benefits of these relationships will be
realized or be sufficient to overcome the entrenched positions of the Company's
largest competitors as incumbent suppliers to the large PC OEMs. Regardless of
the relative qualities of the Company's products, the market power, product
breadth and customer relationships of its larger competitors, including Intel
and Microsoft, can be expected to provide such competitors with substantial
competitive advantages. The Company does not seek to compete on the basis of
price alone.
Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since they maintain their
own semiconductor foundries and may therefore
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benefit from certain capacity, cost and technical advantages. The Company's
ability to compete successfully in the rapidly evolving market for 3D
interactive electronic entertainment will depend upon certain factors, many of
which are beyond the Company's control, including, but not limited to, success
in designing and subcontracting the manufacture of new products; implementing
new technologies; access to adequate sources of raw materials and foundry
capacity; the price, quality and timing of new product introductions by the
Company and its competitors; the emergence of new multimedia and PC standards,
the widespread development of 3D applications by ISVs; the ability of the
Company to protect its intellectual property; market acceptance of the Company's
3D solution and API; success of the competitors' products; and industry and
general economic conditions. There can be no assurance that the Company will be
able to compete successfully in the emerging 3D interactive electronic
entertainment market.
ADOPTION OF GLIDE
The Company's success will be substantially affected by the adoption by
software developers of Glide, its proprietary, low-level 3D API. Although the
Company's products support game titles developed for most industry standard
APIs, the Company believes that Glide currently allows developers to fully
exploit the technical capabilities of the Company's 3D media processor products.
Glide competes with APIs developed or to be developed by other companies having
significantly greater financial resources, marketing power, name recognition and
experience than the Company. For example, certain industry standard APIs, such
as Direct3D ("D3D") developed by Microsoft and OpenGL developed by SGI, have a
much larger installed customer base and a much larger base of existing software
titles. Developers may face additional costs to port games developed on other
standard APIs to Glide for play on the Company's architecture. There can be no
assurance that Glide will be adopted by a sufficient number of software
developers or that developers who have utilized Glide will continue to do so in
the future.
Intel has entered into an agreement with the Company to license an early
version of Glide. Intel also has an option to license future versions of Glide
on terms no less favorable than licenses of Glide to other third party graphics
hardware manufacturers. Intel has not implemented Glide nor has it announced any
intention to do so. However, because of Intel's significant market penetration,
marketing power and financial resources, if Intel were to implement this early
version of Glide as a standard development tool for current or future Intel 3D
chipsets, it could substantially reduce or even eliminate any competitive
advantages that the Company's products may have.
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 successfully develop new
products for the 3D interactive electronic entertainment market. As a result,
the Company believes that significant expenditures for research and development
will continue to be required in the future. The PC, home game console and
coin-op arcade system markets for which the Company's products are designed are
intensely competitive and are characterized by rapidly changing technology,
evolving industry standards and declining average selling prices. The Company
must anticipate the features and functionality that consumers will demand,
incorporate those features and functionality into products that meet the
exacting design requirements of the PC, home game console and coin-op arcade
system manufacturers, price its products competitively and introduce the
products to the market within the limited window for OEM design cycles. 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 Taiwan Semiconductor Manufacturing Corporation ("TSMC")
and any additional manufacturers 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 the
Company'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 PC, home game console and coin-op arcade system
manufacturers and consumers of interactive electronic entertain-
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ment, will be successfully developed or will be introduced within the
appropriate window of market demand. The failure of the Company to successfully
develop and 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.
Because of the complexity of its technology, the Company 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. 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, the Company 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 and gross margins. There can be no
assurance that the Company will successfully identify new product opportunities
or develop and bring new products to market in a timely manner, that products or
technologies developed by others will not render the Company'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 the Company's business, financial condition and results of operations.
CUSTOMER CONCENTRATION
Because of the Company's limited operating history and early stage of
development, it has only a limited number of customers. For these reasons, the
Company's sales are highly concentrated. Revenues derived from sales to Orchid,
Diamond and Williams accounted for 44%, 33% and 11%, respectively, of product
revenues for 1996. Revenues derived from sales to Diamond and Williams accounted
for 59% and 15%, respectively, of product revenues for the three months ended
March 31, 1997. Development contract revenues recognized under the Sega
Agreement represented 14.3% of total revenues during the three months ended
March 31, 1997. The Company expects that a small number of customers will
continue to account for a substantial portion of its revenues for the
foreseeable future. Furthermore, substantially all of the Company's sales are
made on the basis of purchase orders rather than 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 PCs, home
game consoles or coin-op arcade systems sold by a single customer or by a small
number of customers. In addition, there can be no assurance that revenues from
customers that have accounted for significant revenues in past periods,
individually or as a group, will continue, or if continued, will reach or exceed
historical levels in any future period.
PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS
The Company's revenues are dependent on the markets for 3D media processors
for PCs, coin-op arcade systems and home game consoles and on the Company's
ability to compete in those markets. Since the Company has no other products,
the Company's revenues and results of operations would be materially adversely
affected if for any reason it were unsuccessful in selling 3D media processors.
The PC, home game console and coin-op arcade system markets frequently undergo
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 PC, home game console and coin-op arcade system
manufacturers, the Company would be likely to lose design wins and, moreover,
not have the opportunity to compete for new design wins until the next product
transition occurred. Thus, a failure to develop products with required feature
sets or performance standards or a delay as short as a few
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months in bringing a new product to market could significantly reduce the
Company's revenues for a substantial period, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON INDEPENDENT MANUFACTURERS AND OTHER THIRD PARTIES;
ABSENCE OF MANUFACTURING CAPACITY; MANUFACTURING RISKS
The Company does not manufacture the semiconductor wafers used for its
products and does not own or operate a wafer fabrication facility. The Company's
products require wafers manufactured with state-of-the-art fabrication equipment
and techniques. All of the Company's products are currently manufactured by TSMC
in Taiwan. The Company obtains manufacturing services from TSMC on a purchase
order basis. Because the lead time needed to establish a strategic relationship
with a new manufacturing partner could be several months, there is no readily
available alternative source of supply for any specific product. A manufacturing
disruption experienced by TSMC would impact the production of the Company's
products for a substantial period of time, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company believes that long-term market acceptance for the Company's products
will depend on reliable relationships between the Company and TSMC (and any
other independent foundries qualified by the Company) to ensure adequate product
supply responsive to customer demand. The Company's relationship with TSMC has
only recently been established, and there can be no assurance that this
relationship will meet the business objectives of the Company. In addition, TSMC
fabricates wafers for other companies and could choose to prioritize capacity
for other uses or reduce or eliminate deliveries to the Company on short notice.
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 the Company's intellectual
property. The Company is dependent on TSMC, and expects in the future to be
dependent upon TSMC, 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. The Company's wafer requirements represent a very small portion
of the total production of TSMC. Although the Company's products are designed
using TSMC's process design rules, there can be no assurance that TSMC 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 TSMC 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 a third party
subcontractor, Advanced Semiconductor Engineering Group ("ASE"). Such assembly
and testing is conducted on a purchase order basis rather than under a long-term
agreement. As a result of its reliance on ASE 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. See "Business -- Manufacturing."
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MANUFACTURING YIELDS
The fabrication of semiconductors is a complex and precise process. 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 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.
Once production yield for a particular product stabilizes, the Company pays an
agreed price for wafers meeting certain acceptance criteria pursuant to a "good
die" only pricing structure for that particular product. Until production yield
for a particular product stabilizes, however, the Company must pay an agreed
price for wafers regardless of yield. Accordingly, in this circumstance, the
Company bears the risk of final yield of good die. Poor yields would materially
adversely affect the Company's revenues, gross profit 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. This
risk is compounded by the offshore location of the Company's manufacturer,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems. As the Company's relationships with TSMC and any
additional manufacturing partners develop, yields could be adversely affected
due to difficulties associated with adapting the Company's technology and
product design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's potentially 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 profit. 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 due to a defect or recall, the Company's revenues and
gross profit could be materially adversely affected.
MANAGEMENT OF GROWTH
The ability of the Company to successfully offer services and products and
implement its business plan in a rapidly evolving market requires an effective
planning and management process. The Company's rapid growth has placed, and is
expected to continue to place, a significant strain on the Company's managerial,
operational and financial resources. As of March 31, 1997, the Company had grown
to 87 employees from 35 employees as of December 31, 1995. If the Company's
products achieve market acceptance, the Company expects that the number of its
employees will increase substantially over the next 12 months. The Company's
financial and management controls, reporting systems and procedures are also
very limited. Although some new controls, systems and procedures have been
implemented, the Company's future growth, if any, will depend on its ability to
continue to implement and improve operational, financial and management
information and control systems on a timely basis, together with maintaining
effective cost controls, and any failure to do so would have a material adverse
effect on the Company's business, financial condition and results of operations.
Further, the
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Company will be required to manage multiple relationships with various customers
and other third parties. There can be no assurance that the Company's systems,
procedures or controls will be adequate to support the Company's operations or
that the Company's management will be able to achieve the rapid execution
necessary to successfully offer its services and products and implement its
business plan. The Company's inability to effectively manage any future growth
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Employees" and
"Management".
DEPENDENCE ON KEY PERSONNEL
The Company's performance will be substantially dependent on the
performance of its executive officers and key employees, most of whom have
worked together for only a short period of time. None of the Company's officers
or employees are bound by an employment agreement, and the relationships of such
officers and employees with the Company are, therefore, at will. Given the
Company's early stage of development, the Company will be dependent on its
ability to attract, retain and motivate high quality personnel, especially its
management and development teams. The Company does not have "key person" life
insurance policies on any of its employees. The loss of the services of any of
its executive officers, technical personnel or other key employees would have a
material adverse effect on the business, financial condition and results of
operations of the Company. The Company's success depends on its ability to
identify, hire, train and retain highly qualified technical and managerial
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be able to identify, attract, assimilate or
retain highly qualified technical and managerial personnel in the future. The
inability to attract and retain the necessary technical and managerial personnel
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Employees" and
"Management."
CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY
The semiconductor industry has historically been characterized by rapid
technological change, cyclical market patterns, significant price erosion,
fluctuating inventory levels, alternating periods of over-capacity and capacity
constraints, variations in manufacturing costs and yields and significant
expenditures for capital equipment and product development. In addition, the
industry has experienced significant economic downturns at various times,
characterized by diminished product demand and accelerated erosion of product
prices. The Company may experience substantial period-to-period fluctuations in
results of operations due to general semiconductor industry conditions.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
As the Company begins commercial production of its products in increasing
volumes, it will be required to invest significant working capital in inventory
and accounts receivable. The Company intends also to continue to invest heavily
in research and development for its existing products and for new product
development. The Company's future liquidity and capital requirements will depend
upon numerous factors, including the costs and timing of expansion of research
and product development efforts and the success of these development efforts,
the costs and timing of expansion of sales and marketing activities, the extent
to which the Company's existing and new products gain market acceptance,
competing technological and market developments, the costs involved in
maintaining and enforcing patent claims and other intellectual property rights,
the level and timing of development contract revenues, royalty revenues
associated with the Sega Agreement, available borrowings under line of credit
arrangements and other factors. The Company believes that the proceeds from this
offering together with the Company's current cash balances and cash generated
from operations and from available or future debt financing will be sufficient
to meet the Company's operating and capital requirements through December 1998.
However, there can be no assurance that the Company will not require additional
financing within this time frame. The Company's forecast of the period of time
through which its financial resources will be adequate to support its operations
is a forward-looking
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statement that involves risks and uncertainties, and actual results could vary.
The factors described earlier in this paragraph will impact the Company's future
capital requirements and the adequacy of its available funds. The Company may be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to the
Company, or at all. Furthermore, any additional equity financing may be dilutive
to shareholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its technologies or
products. The failure of the Company to raise capital when needed could have a
material adverse effect on the Company's business, financial condition and
results of operations. See " -- Limited Operating History; Anticipation of
Continued Losses," "-- Potential Fluctuations in Quarterly Results," "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
RISKS RELATING TO INTELLECTUAL PROPERTY
The Company relies primarily on a combination of patent, mask work
protection, trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. The Company has five patent applications pending in the United States
Patent and Trademark Office ("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.
In addition, 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. See
"Business -- Patents and Proprietary Rights."
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There can be no
assurance that 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. 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.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses for the infringing technology.
INTERNATIONAL OPERATIONS
The Company's reliance on foreign third-party manufacturing, assembly and
testing operations, all of which are located in Asia, and the Company's
expectation of international sales subject it to a number of risks associated
with conducting business outside of the United States. These risks include
unexpected changes in, or impositions of, legislative or regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs, quotas and other trade barriers and restrictions,
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the
17
<PAGE> 19
Company's control. The Company is also subject to general political risks in
connection with its international trade relationships. Although the Company has
not to date experienced any material adverse effect on its business, financial
condition or results of operations as a result of such regulatory, political and
other factors, there can be no assurance that such factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations in the future or require the Company to modify its current
business practices. In addition, the laws of certain foreign countries in which
the Company's products are or may be manufactured or sold, including various
countries in Asia, may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely. See "-- Risks Relating to Intellectual Property." Currently, all of the
Company's product sales and its arrangements with its foundry and assembly and
test vendor provide for pricing and payment in U.S. dollars. Although currency
fluctuations have been insignificant to date, there can be no assurance that
fluctuations in currency exchange rates will not have a material adverse effect
on the Company's business, financial condition and results of operations in the
future. In addition, to date the Company has not engaged in any currency hedging
activities, although the Company may do so in the future. Further, there can be
no assurance that one or more of the foregoing factors will not have a material
adverse effect on the Company's business, financial condition and results of
operations or require the Company to modify its current business practices. See
"Business -- Sales and Marketing."
NO PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or, if one does develop, that it will be maintained. The initial public offering
price, which will be determined through negotiations between the Company and the
Underwriters, may not be indicative of prices that will prevail in the trading
market. In addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of particular companies. The market prices of the common stock of
many publicly held semiconductor companies have in the past been, and can in the
future be expected to be, especially volatile. The market price of the Company's
Common Stock is likely to be highly volatile and may be subject to wide
fluctuations in response to announcements of technological innovations or new
products by the Company, its customers or its competitors, release of reports by
securities analysts, developments or disputes concerning patents or proprietary
rights, economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results. See "Underwriting."
CONTROL BY EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES
The Company anticipates that the officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately 49%
of the Company's outstanding Common Stock following the completion of this
offering (48% if the Underwriters' over-allotment option is exercised). These
shareholders, if acting together, would be able to elect a majority of the
Company's board of directors and would have the ability to control the Company
and influence its affairs and the conduct of its business. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Principal Shareholders."
EFFECT OF CERTAIN CHARTER PROVISIONS ON PRICE OF COMMON STOCK
The Board of Directors of the Company has the authority to issue shares of
Preferred Stock and to determine the rights, preferences, privileges and
restrictions of such shares without any further vote or action by the
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The possible issuance of Preferred Stock could
have the effect of delaying, deferring or preventing a change in control of the
Company. These provisions could also limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock. See
"Description of Capital Stock -- Preferred Stock."
18
<PAGE> 20
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock prevailing from time to time. The number of shares of Common Stock
available for sale in the public market is limited by restrictions under the
Securities Act of 1933, as amended (the "Securities Act"), and lock-up
agreements executed by certain of the security holders of the Company under
which such security holders have agreed not to sell or otherwise dispose of any
of their shares until the later of 180 days after the date of this Prospectus or
the open of market on the third trading day following the date of public
disclosure of the Company's financial results for the fiscal year ending
December 31, 1997, without the prior written consent of Robertson, Stephens &
Company. In addition to the 4,200,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), there will be
18,195,199 shares of Common Stock outstanding as of the date of this Prospectus,
all of which are "restricted" shares under the Securities Act. As a result of
the lock-up agreements described above and the provisions of Rules 144(k), 144
and 701, the restricted shares will be available for sale in the public market
as follows: (i) no shares will be eligible for immediate sale on the date of
this Prospectus, (ii) no shares will be eligible for sale 90 days after the date
of this Prospectus, (iii) approximately 6,600 shares will be eligible for sale
120 days after the date of this Prospectus upon expiration of lock-up agreements
and (iv) approximately 17,975,699 shares will be eligible for sale on the later
of 180 days after the date of this Prospectus or the open of market on the third
trading day following the date of public disclosure of the Company's financial
results for the fiscal year ending December 31, 1997 and (v) approximately
212,900 shares will be eligible for sale approximately one year from the date of
this Prospectus. After this offering, the holders of approximately 14,043,697
shares of Common Stock and rights to acquire 154,317 shares of Common Stock will
be entitled to certain demand and piggyback rights with respect to registration
of such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights." If such holders, by exercising their demand
registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the Company's Common Stock. If the Company were to initiate a
registration and include shares held by such holders pursuant to the exercise of
their piggyback registration rights, such sales may have an adverse effect on
the Company's ability to raise capital. See "Shares Eligible for Future Sale"
and "Underwriting."
ABSENCE OF DIVIDENDS; DILUTION
The Company does not anticipate paying any dividends in the foreseeable
future. See "Dividend Policy." The initial public offering price will be
substantially higher than the net tangible book value per share of Common Stock.
Investors purchasing shares of Common Stock in this Offering will therefore
incur immediate and substantial net tangible book value dilution. See
"Dilution."
19
<PAGE> 21
INVESTMENT BY SEGA
It is currently anticipated that Sega will purchase a portion of the shares
of Common Stock offered hereby upon the same terms and conditions as the other
investors in this offering, except that the per share purchase price paid by
Sega will equal the per share "Proceeds to Company" price as indicated on the
cover page of this Prospectus. The total investment by Sega will be
approximately $ million if Sega completes the purchase. Assuming a per
share Proceeds to Company price of $ , Sega would purchase
approximately 700,000 shares and would own approximately 3% of the outstanding
Common Stock following the offering.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,200,000 shares of
Common Stock offered by the Company hereby, are estimated to be approximately
$ (approximately $ if the Underwriters' over-allotment option
is exercised in full) at an assumed initial public offering price of $
per share and after deducting estimated underwriting discounts and commissions
and offering expenses payable by the Company.
The Company intends to use the net proceeds of the offering for working
capital and other general corporate purposes, including expansion of sales and
marketing and research and product development efforts and financing of accounts
receivable and inventories. The Company also expects to use approximately $6.5
million of the net proceeds for capital expenditures through the end of 1998,
primarily for the purchase of computer equipment and related software tools,
furniture, fixtures and leasehold improvements. The foregoing represent
estimates only, and the actual amounts expended by the Company for these
purposes and the timing of such expenditures will depend on numerous factors,
including the status of the Company's product development efforts, the extent to
which the Company's products gain market acceptance and the competition the
Company and its products encounter in the marketplace. The Company may also use
a portion of the net proceeds for the acquisition of technologies, businesses or
products that are complementary to those of the Company, although no such
acquisitions are planned or are being negotiated as of the date of this
Prospectus, and no portion of the net proceeds has been allocated for any
specific acquisition. Pending such uses, the net proceeds of this offering will
be invested in short-term, interest bearing, investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its capital stock.
The Company currently expects to retain any future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of March 31, 1997, (ii) the capitalization of the Company on a pro forma
basis giving effect to an increase in the authorized shares of Common Stock to
50,000,000 shares effected in April 1997, the conversion of all outstanding
Preferred Stock into Common Stock and the authorization of 5,000,000 shares of
undesignated Preferred Stock upon the closing of this offering, and the issuance
of 212,900 shares of Common Stock upon the exercise of warrants that expire
automatically upon the closing of this offering and the application of the net
proceeds therefrom, and (iii) the pro forma capitalization of the Company as
adjusted to give effect to the sale of the 4,200,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$ per share and the application of the estimated net proceeds therefrom
after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company. The capitalization information set forth below
should be read in conjunction with Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
PRO
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Capitalized lease obligations, less current portion(1)........ $ 468 $ 468 $ 468
-------- -------- ----
Shareholders' equity:
Preferred Stock, no par value; 14,633,000 shares authorized,
14,043,697 shares issued and outstanding actual;
5,000,000 shares authorized, none issued and outstanding
pro forma and as adjusted................................ 29,222 -- --
Common Stock, no par value; 25,033,000 shares authorized,
3,938,602 shares issued and outstanding actual;
50,000,000 shares authorized, 18,195,199 shares issued
and outstanding pro forma and 22,395,199 shares issued
and outstanding as adjusted(2)........................... 2,078 31,861
Warrants.................................................... 353 20 20
Notes receivable............................................ (12) (12) (12)
Deferred compensation....................................... (1,544) (1,544) (1,544)
Accumulated deficit......................................... (20,951) (20,951) (20,951)
-------- -------- ----
Total shareholders' equity............................. 9,146 9,374
-------- -------- ----
Total capitalization................................ $ 9,614 $ 9,842 $
======== ======== ====
</TABLE>
- ------------
(1) See Note 8 of Notes to Financial Statements.
(2) Excludes (i) 3,750,943 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1997, with a weighted average exercise
price of $1.36 per share, (ii) 154,317 shares of Common Stock issuable upon
exercise of warrants outstanding as of March 31, 1997, with a weighted
average exercise price of $1.62 per share and (iii) 2,248,607 shares of
Common Stock reserved for future issuance under the Company's stock plans.
See "Management -- Stock Plans," "Description of Capital Stock" and Notes 5
and 6 of Notes to Financial Statements.
21
<PAGE> 23
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1997
was approximately $9,374,000, or $0.52 per share of Common Stock. "Pro forma net
tangible book value" per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding (assuming the conversion of all then outstanding Preferred Stock
into Common Stock). After giving effect to the receipt of the net proceeds from
the sale of the 4,200,000 shares of Common Stock offered by the Company hereby
at an assumed initial public offering price of $ per share (after
deducting estimated underwriting discounts and commissions and offering expenses
payable by the Company), the Company's net tangible book value as of March 31,
1997 would have been $ , or $ per share of Common Stock. This
represents an immediate increase in net tangible book value of $ per
share to existing shareholders and an immediate dilution of $ per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price................................ $
Pro forma net tangible book value as of March 31, 1997............. $0.52
Increase attributable to new investors.............................
-----
Pro forma net tangible book value after offering.....................
-----
Dilution to new investors............................................
=====
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing shareholders and by new public investors purchasing shares in this
offering at an assumed initial public offering price of $ per share
(before deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ----------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 18,195,199 81.0% $31,957,000 % $1.76
New investors............. 4,200,000 19.0
---------- ----- ----------- -----
Total........... 22,395,199 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing computations assume no exercise of stock options or warrants
after March 31, 1997. As of March 31, 1997, there were outstanding options to
purchase 3,750,943 shares of Common Stock, with a weighted average exercise
price of $1.36 per share, and outstanding warrants to purchase 154,317 shares of
Common Stock, with a weighted average exercise price of $1.62 per share. In
addition, as of March 31, 1997, 2,248,607 shares of Common Stock were reserved
for future issuance under the Company's stock plans. To the extent that any
shares available for issuance upon exercise of outstanding options, warrants or
reserved for future issuance under the Company's stock plans are issued, there
will be further dilution to new public investors. See "Management -- Stock
Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to Financial
Statements.
22
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The statement of operations data for the years
ended December 31, 1995 and 1996 and the three month period ended March 31, 1997
and the balance sheet data as of December 31, 1995 and 1996 and March 31, 1997
are derived from financial statements of the Company that have been audited by
Price Waterhouse LLP, independent accountants, and are included elsewhere in
this Prospectus. The statement of operations data for the three month period
ended March 31, 1996 is derived from unaudited financial statements included
elsewhere in this Prospectus. The unaudited financial statements have been
prepared on the same basis as the audited financial statements and, in the
opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the Company's
operating results for such period. The operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS
31, ENDED MARCH 31,
-------------------- --------------------
1995 1996 1996 1997
------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product.................................................. $ -- $ 6,390 $ -- $ 4,497
Development contract..................................... -- -- -- 750
------- -------- ------- --------
Total revenues................................... -- 6,390 -- 5,247
Cost of product revenues................................... -- 5,123 -- 2,582
------- -------- ------- --------
Gross profit............................................... -- 1,267 -- 2,665
------- -------- ------- --------
Operating expenses:
Research and development(1).............................. 2,940 9,435 1,659 1,953
Selling, general and administrative(1)................... 2,166 6,642 1,028 1,846
------- -------- ------- --------
Total operating expenses......................... 5,106 16,077 2,687 3,799
------- -------- ------- --------
Loss from operations....................................... (5,106) (14,810) (2,687) (1,134)
Interest and other income (expense), net................... 67 59 35 (27)
------- -------- ------- --------
Net loss................................................... $(5,039) $(14,751) $(2,652) $ (1,161)
======= ======== ======= ========
Pro forma net loss per share(2)............................ $ (0.75) $ (0.06)
======== ========
Shares used in pro forma net loss per share
calculations(2).......................................... 19,661 20,621
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 865 $ 5,291 $ 4,141
Working capital (deficit).................................. (307) 6,637 6,049
Total assets............................................... 2,440 15,581 15,586
Capitalized lease obligations, less current portion(3)..... 544 632 468
Accumulated deficit........................................ (5,039) (19,790) (20,951)
Total shareholders' equity................................. 552 9,621 9,146
</TABLE>
- ------------
(1) Research and development expenses include amortization of deferred
compensation of $22,000, $50,000, $6,000 and $48,000 for 1995, 1996 and the
three month periods ended March 31, 1996 and 1997, respectively. Selling,
general and administrative expenses include amortization of deferred
compensation of $34,000, $146,000, $8,000 and $73,000 for 1995, 1996 and the
three month periods ended March 31, 1996 and 1997, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
(2) See Note 1 of Notes to Financial Statements for an explanation of shares
used in pro forma net loss per share calculations.
(3) See Note 8 of Notes to Financial Statements.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. The Company's actual results
and the timing of certain events could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company was founded in August 1994 to design, develop, market and
support 3D media processors, subsystems and API software for the interactive
electronic entertainment market. The Company had no operations during the period
from inception (August 24, 1994) through December 31, 1994. The Company was
considered a development stage enterprise and was primarily engaged in product
development and product testing until its first commercial product shipments in
the third quarter of 1996. The Company incurred losses in 1995, 1996 and the
three months ended March 31, 1997 and as of March 31, 1997 had an accumulated
deficit of $21.0 million. These net losses were attributable to the lack of
substantial revenue and continuing significant costs incurred in the research
and development of the Company's 3D media processor products and product
testing. The Company expects to incur additional net losses at least in the near
term as it continues to incur substantial research and development and sales and
marketing expenses to commercialize its products. There can be no assurance that
significant revenues or profitability will ever be achieved or, if they are
achieved, that they can be sustained or increased on a quarterly or annual basis
in the future
The Company derives revenue from the sale of 3D media processors and
subsystems and from development contracts. The Company's products are designed
for use in PCs, home game consoles and coin-op arcade systems. The Company began
commercial shipments of its first 3D graphics product, the Voodoo Graphics
chipset, in September 1996. The Company's second product, the Voodoo Rush
chipset, is currently in the later stages of development, with limited
commercial shipments expected to begin in the second quarter of 1997. The
Company has also commenced development of Banshee, which is intended to be a
high performance, full-featured single chip 3D/2D media processor for the PC and
coin-op arcade markets. Historically, the Company has also marketed and sold
limited quantities of its Obsidian products, a line of Voodoo Graphics-based 3D
processor boards. The Company currently intends to sell the Obsidian product on
an opportunistic basis in the future. As a result of the Company's limited
operating history and early stage of development, it has only a limited number
of customers. Revenues derived from sales to Orchid, Diamond and Williams
accounted for 44%, 33% and 11%, respectively, of product revenues in 1996.
Revenues derived from sales to Diamond and Williams accounted for 59% and 15%,
respectively, of product revenues for the three months ended March 31, 1997. The
Company expects that a small number of customers will continue to account for a
substantial portion of its total revenues for the foreseeable future.
The Company is developing a 3D media processor chipset for Sega's next
generation home game console pursuant to the Sega Agreement. During the three
months ended March 31, 1997, the Company recognized development contract
revenues of $750,000 under the Sega Agreement representing a non-refundable
amount due for the delivery of certain engineering designs to Sega. Future
development contract revenues under the Sega Agreement will be recognized by the
Company under the percentage of completion method of accounting based upon costs
incurred relative to total contract costs. Development contract revenues
recognized under the Sega Agreement represented 14.3% of total revenues during
the three months ended March 31, 1997. The Company may earn additional
development contract revenue and certain development bonuses provided that
milestones set forth in the Sega Agreement are met. Under the Sega Agreement,
the Company will also derive royalty revenue for each Sega/3Dfx Chipset
incorporated into products sold by Sega. The timely development and availability
for shipment of the Sega/3Dfx Chipset by the Company and the successful
introduction and sale of the New Sega Game Console will be critical factors
affecting the
24
<PAGE> 26
Company's future results of operations and financial condition. See "Risk
Factors -- Dependence on Relationship with Sega" and "Business -- Products,
Products Under Development and Technology License -- Strategic Relationship with
Sega" for a description of the Sega Agreement.
As part of its manufacturing strategy, the Company leverages the expertise
of third party suppliers in the areas of wafer fabrication, assembly, quality
control and assurance, reliability and testing. This strategy allows the Company
to devote its resources to research and development and sales and marketing
activities while avoiding the significant costs and risks associated with owning
and operating a wafer fabrication facility and related operations. The Company
does not manufacture the semiconductor wafers used for its products and does not
own or operate a wafer fabrication facility. All of the Company's semiconductor
products are currently manufactured by TSMC in Taiwan. The Company obtains
manufacturing services from TSMC on a purchase order basis. The Company provides
TSMC with a rolling six month forecast of its supply needs and TSMC builds to
the Company's forecast. The Company purchases wafers and die from TSMC and pays
an agreed upon price per wafer and die meeting certain acceptance criteria. Such
wafer and die purchases constitute a substantial portion of cost of products
revenues once products are sold. See "Risk Factors -- Dependence on Independent
Manufacturers and Other Third Parties; Absence of Manufacturing Capacity;
Manufacturing Risks."
In connection with the grant of stock options to employees since inception
(August 1994), the Company recorded aggregate deferred compensation of
approximately $1.9 million, representing the difference between the deemed fair
value of the Common Stock for accounting purposes and the option exercise price
at the date of grant. This amount is presented as a reduction of shareholders'
equity and is amortized ratably over the vesting period of the applicable
options. These valuations resulted in charges to operations of $56,000 ($22,000
of which was recorded in research and development expenses and $34,000 of which
was recorded in selling, general and administrative expenses), $196,000 (of
which $50,000 and $146,000 were recorded in research and development expenses
and selling, general and administrative expenses, respectively) and $121,000 (of
which $48,000 and $73,000 were recorded in research and development expenses and
selling, general and administrative expenses, respectively) in 1995, 1996 and
the three months ended March 31, 1997, respectively, and will result in charges
over the next 15 quarters aggregating approximately $121,000 per quarter (of
which $48,000 and $73,000 will be recorded in research and development expenses
and selling, general and administrative expenses, respectively).
RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 and 1996
Revenues. Revenues from product sales are recognized upon product
shipment. Revenue resulting from development contracts is recognized by the
Company under the percentage of completion method of accounting based upon costs
incurred relative to total contract costs. The Company's total revenues were
$5.2 million in the three months ended March 31, 1997. No revenues were
generated in the three months ended March 31, 1996.
Product revenues were $4.5 million in the three months ended March 31,
1997. Product revenues in the three months ended March 31, 1997 were principally
attributable to sales of the Company's Voodoo Graphics chipset and, to a lesser
extent, sales of the Company's Obsidian graphics subsystems. The Company
currently plans to sell the Obsidian product on an opportunistic basis in the
future.
Development contract revenues of $750,000 were recognized in the three
months ended March 31, 1997 representing a non-refundable amount due for the
delivery of certain engineering designs to Sega. Development contract revenues
are billable by the Company to Sega based on a schedule of set forth in the Sega
Agreement. Development contract revenues in future quarters will be recognized
under the percentage of completion method of accounting as costs are incurred
relative to total contract costs and will fluctuate from quarter to quarter.
These fluctuations in development contract revenues will cause fluctuations in
the Company's total revenues, gross margins and results of operations. See "Risk
Factors -- Potential Fluctuations in Operating Results," "-- Overview" and
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<PAGE> 27
"Business -- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega."
Gross Profit. Gross profit consists of total revenues less cost of product
revenues. Cost of product revenues consists primarily of costs associated with
the purchase of components, the procurement of semiconductors and printed
circuit board assemblies from the Company's contract manufacturers, labor and
overhead associated with such procurement and warehousing, shipping and warranty
costs. Cost of product revenues does not include expenses related to development
contract revenues. Gross profit was $2.7 million in the three months ended March
31, 1997. Cost of product revenues was $2.6 million in the three months ended
March 31, 1997. Gross profit as a percentage of total revenues was 50.8% in the
three months ended March 31, 1997. However, given the Company's limited
operating history and limited history of product shipments, the Company believes
that analysis of gross profit as a percentage of total revenues is not
meaningful. The Company's future gross profit will be affected by the overall
level of sales; the mix of products sold in a period; the mix of revenues
between product revenues, development contract revenues associated with the Sega
Agreement and licensing revenues in a period; manufacturing yields; and the
Company's ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
the Company's foundries in connection with manufacturing start-up of new
products. In addition, costs associated with development contracts are included
in research and development. Research and development expenses increased 17.7%
from $1.7 million in the three months ended March 31, 1996 to $2.0 million in
the three months ended March 31, 1997. Research and development expenses include
costs associated with development contract revenues of approximately $80,000.
The increase reflects increased personnel costs associated with the general
expansion of the Company's research and development activities and increased
nonrecurring engineering costs incurred in connection with the commencement of
manufacturing of the Voodoo Rush chipset. The market for the Company's products
is characterized by frequent new product introductions and rapidly changing
technology and industry standards. As a result, the Company's success will
depend to a substantial degree upon its ability to rapidly develop and introduce
new products and enhancements to existing products that meet changing customer
requirements and emerging industry standards. Accordingly, the Company expects
to continue to make substantial investments in research and development and
anticipates that research and development expenses will increase in absolute
dollars in future periods, although such expenses as a percentage of total
revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 79.6% from $1.0 million
in the three months ended March 31, 1996 to $1.8 million in the three months
ended March 31, 1997. The increase resulted from the addition of personnel in
sales, marketing, finance and administration as the Company expanded operations,
and increased commission expenses associated with the commencement of commercial
sales. The Company expects that selling, general and administrative expenses
will increase in absolute dollars in future periods, although such expenses as a
percentage of total revenues will fluctuate.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net decreased from net interest and other income of $35,000 in the
three months ended March 31, 1996 to net interest and other expense of $27,000
in the three months ended March 31, 1997. The decrease resulted from higher
interest expense as a result of outstanding balances under the equipment line of
credit and capitalized lease obligations, partially offset by interest income
earned on outstanding cash balances.
Provision For Income Taxes. The Company recorded no provision for income
taxes in the three months ended March 31, 1996 and 1997 as it incurred losses
during such periods. As of March 31, 1997,
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<PAGE> 28
the Company had net operating loss carryforwards of approximately $19.1 million
for federal income tax purposes. If not utilized, the net operating loss
carryforwards will begin to expire in 2010. Under the Tax Reform Act of 1986,
the amount of and the benefit from net operating losses that can be carried
forward may be impaired in certain circumstances, including for example, a
cumulative ownership change of more than 50% over a three-year period. As of
March 31, 1997, the Company's net operating loss carryforwards were not subject
to any material annual limitations on utilization. The offering will result in
an annual limitation of the Company's ability to utilize net operating losses
(from the effective date of this offering).
At March 31, 1997, the Company had approximately $8.2 million of deferred
tax assets, comprised primarily of net operating loss and expenses not currently
deductible for tax purposes. The Company believes that available objective
evidence creates sufficient uncertainty regarding the realizability of such
deferred tax assets; therefore a full valuation allowance has been recorded. The
factors considered include the Company's history of losses, the lack of
carryback capacity to realize deferred tax assets, the uncertainty of the
development of the products and markets in which the Company competes and the
fact that the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology. The Company believes that based on
the currently available evidence, it is more likely than not that the Company
will not generate sufficient taxable income to realize the Company's deferred
tax assets.
Years Ended December 31, 1996 and 1995
Revenues. The Company's total revenues were $6.4 million in 1996. In 1995
the Company was still in the development stage and did not generate any
revenues. Substantially all of the revenues in 1996 were derived from sale of
the Company's Voodoo Graphic chipset, which began commercial shipments in
September 1996 and, to a lesser extent, sale of Obsidian graphics subsystems.
There were no development contract revenues in 1996.
Gross Profit. Gross profit and cost of product revenues were $1.3 million
and $5.1 million, respectively, in 1996. Gross profit as a percentage of total
revenues was 19.8% in 1996. Cost of product revenues in 1996 reflected
significant prototype and manufacturing start-up expenses incurred in connection
with the initial commercial shipment of the Voodoo Graphics chipset.
Research and Development. Research and development expenses increased
220.9% from $2.9 million in 1995 to $9.4 million in 1996, as the Company
significantly increased research and product development activities and incurred
increased nonrecurring engineering costs in connection with beginning
manufacturing of the Voodoo Graphics chipset. The increased research and
development expenditures primarily related to compensation and related personnel
expenditures as the Company expanded its research and development operations.
Selling, General and Administrative. Selling, general and administrative
expenses increased 206.6% from $2.2 million in 1995 to $6.6 million in 1996, as
the Company (i) increased finance and administration staffing and related costs
necessary to support higher levels of operations, (ii) established sales and
marketing operations to support the commencement of commercial product shipments
and (iii) incurred commission expenses associated with product sales.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net decreased from $67,000 in 1995 to $59,000 in 1996. The decrease
resulted from higher levels of interest expense as a result of higher
outstanding balances of capitalized lease obligations partially offset by higher
interest income as a result of higher outstanding cash balances.
Provision for Income Taxes. The Company recorded no provision for income
taxes in 1995 and 1996 as it incurred losses during such periods.
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<PAGE> 29
Quarterly Results of Operations
The following table sets forth unaudited quarterly results of operations
data for each quarter during the year ended December 31, 1996 and for the three
months ended March 31, 1997. This unaudited information has been prepared by the
Company on a basis consistent with the Company's audited financial statements
appearing elsewhere in this Prospectus and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The unaudited quarterly information
should be read in conjunction with the Financial Statements and Notes thereto
included elsewhere in this Prospectus. In light of the Company's limited
operating history, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues:
Product................................ $ -- $ -- $ 1,887 $ 4,503 $ 4,497
Development contract................... -- -- -- -- 750
------- ------- ------- ------- -------
Total revenues................. -- -- 1,887 4,503 5,247
Cost of product revenues................. -- -- 1,719 3,404 2,582
------- ------- ------- ------- -------
Gross profit............................. -- -- 168 1,099 2,665
------- ------- ------- ------- -------
Operating expenses:
Research and development............... 1,659 2,864 2,626 2,286 1,953
Selling, general and administrative.... 1,028 1,529 1,661 2,424 1,846
------- ------- ------- ------- -------
Total operating expenses....... 2,687 4,393 4,287 4,710 3,799
------- ------- ------- ------- -------
Loss from operations..................... (2,687) (4,393) (4,119) (3,611) (1,134)
Interest and other income (expense),
net.................................... 35 3 8 13 (27)
------- ------- ------- ------- -------
Net loss................................. $(2,652) $(4,390) $(4,111) $(3,598) $(1,161)
======= ======= ======= ======= =======
</TABLE>
The Company was founded in August 1994 and was a development stage company
until it began commercial shipments of its first product, Voodoo Graphics, in
the third quarter of 1996. Product revenues were derived primarily from the sale
of the Voodoo Graphics chipset in the three month periods ended September 30,
1996, December 31, 1996 and March 31, 1997. The Company's product revenues
remained relatively flat in the three months ended March 31, 1997 as compared to
the three months ended December 31, 1996 due to seasonality in the PC market.
During the three months ended March 31, 1997, the Company recognized development
contract revenues of $750,000 under the Sega Agreement representing a
non-refundable amount due for delivery of certain engineering designs to Sega.
Development contract revenues in future quarters derived pursuant to the Sega
Agreement will fluctuate from quarter to quarter. See "-- Overview." The
increase in cost of product revenues during the three months ended December 31,
1996 was primarily attributable to increased product revenues and manufacturing
inefficiencies as the Company increased commercial product sales. Total
operating expenses fluctuated from quarter to quarter as the Company expanded
research and development and sales and marketing activities in 1996 to support
the manufacture, development and marketing of Voodoo Graphics and Voodoo Rush,
respectively. Operating expenses in the three month period ended March 31, 1997
decreased from the prior periods as the Company began cost containment measures
and incurred lower manufacturing start-up expenses.
The Company believes that, even if it does achieve significant sales of its
products, quarterly and annual results of operations will be affected by a
variety of factors that could materially adversely affect revenues, gross profit
and income from operations. Accordingly, the Company believes that
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<PAGE> 30
period-to-period comparisons of its results of operations 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 results of operations may be
below the expectations of public market analysts or investors. In such event,
the market price of the Common Stock could be materially adversely affected. See
"Risk Factors -- Potential Fluctuations in Quarterly Results."
Impact of Adoption of New Accounting Standards
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123") which established a fair value based method of
accounting for stock-based compensation plans and requires additional
disclosures for those companies that elect not to adopt the new method of
accounting. In January 1996, the Company adopted the disclosure requirements of
FAS 123. The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." The adoption of the disclosure requirements of FAS 123 did not have
a material impact on the Company's financial condition or results of operations.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121")
which requires the Company to review for impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets whenever
events or changes in circumstances indicate that the carrying amount of an asset
might not be recoverable. In certain situations, an impairment loss would be
recognized. Effective January 1, 1996, the Company adopted FAS 121. The adoption
of FAS 121 did not have a material impact on the Company's financial condition
or results of operations.
In February 1997, the Financial Accounting Standards Board Issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128")
which adjusts the calculation of earnings per share under generally accepted
accounting principles. FAS 128 is effective for the Company's fiscal year ending
December 31, 1997. See Note 1 of Notes to Financial Statements for the effect of
FAS 128 on the Company's pro forma net loss per share presentation.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of equity securities yielding approximately $31.3 million. As
of March 31, 1997, the Company had approximately $1.6 million of equipment line
financing in place. As of March 31, 1997, the Company had approximately $4.1
million in cash and cash equivalents.
Net cash used in operating activities was approximately $3.9 million, $17.2
million and $1.8 million in 1995, 1996 and the three months ended March 31,
1997, respectively. For 1995, net cash used in operating activities was due
primarily to the net loss of $5.0 million, partially offset by increases in
accounts payable and accrued liabilities. Net cash used in operating activities
in 1996 was due primarily to the net loss of $14.8 million, a $4.9 million and
$1.5 million increase in inventory and accounts receivable, respectively,
associated with the generation of revenues which was partially offset by a $2.6
million increase in accounts payable and accrued liabilities. For the three
months ended March 31, 1997, net cash used in operating activities was due
primarily to the net loss of $1.2 million, a $2.6 million increase in accounts
receivable, increases in other assets and decreases in accounts payable
partially offset by a $2.0 million decrease in inventory and an $800,000
increase in deferred revenue.
Net cash used in investing activities was approximately $589,000, $2.2
million and $334,000 in 1995, 1996 and the three months ended March 31, 1997,
respectively, and was due, in each period, to the purchase of property and
equipment. The Company does not have any significant capital spending or
purchase commitments other than normal purchase commitments and commitments
under leases. As of March 31, 1997, the Company had capital equipment of $5.1
million less accumulated depreciation
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<PAGE> 31
of $1.6 million to support its research and development and administrative
activities. The Company has financed approximately $1.9 million from capital
lease obligations through March 31, 1997. The Company has an equipment line of
credit, which provides for the purchase of up to $2.0 million of property and
equipment, of which approximately $1.6 million had been utilized as of March 31,
1997. Borrowings under this line are secured by all of the Company's owned
assets and bear interest at the bank's prime rate plus 1.50% per annum (10.0% as
of March 31, 1997). The agreement requires that the Company maintain certain
financial ratios and levels of tangible net worth profitability and liquidity.
The Company was in compliance with its covenants as of March 31, 1997. The lease
line of credit expires in August 1998. The Company expects to use approximately
$6.5 million of the net proceeds of this offering for capital expenditures
through the end of 1998, primarily for the purchase of computer equipment and
related software tools, furniture, fixtures and leasehold improvements. The
Company expects capital expenditures to increase over the next several years as
it expands facilities and acquires equipment to support the planned expansion of
its operations.
Net cash provided by financing activities was approximately $5.4 million,
$23.8 million and $988,000 in 1995, 1996 and the three months ended March 31,
1997, respectively, due primarily to proceeds from the issuance of Preferred
Stock.
The Company has a line of credit agreement with Silicon Valley Bank, which
provides for maximum borrowings in an amount up to the lesser of 75% of eligible
accounts receivable plus 100% of cash and cash equivalents or $4.0 million.
Borrowings under the line are secured by all of the Company's owned assets and
bear interest at the bank's prime rate plus 1.50% per annum. The agreement
requires that the Company maintain certain financial ratios and levels of
tangible net worth, profitability and liquidity. The Company is in compliance
with its covenants as of March 31, 1997. The line of credit expires in August
1997. At March 31, 1997, there were no borrowings outstanding under this line of
credit.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the costs and timing of expansion of research and
product development efforts and the success of these development efforts, the
costs and timing of expansion of sales and marketing activities, the extent to
which the Company's existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining and
enforcing patent claims and other intellectual property rights, the level and
timing of development contract revenues and royalty revenues associated with the
Sega Agreement and available borrowings under line of credit arrangements and
other factors. The Company believes that the proceeds from this offering
together with the Company's current cash balances and cash generated from
operations and from available or future debt financing will be sufficient to
meet the Company's operating and capital requirements through December 1998.
However, there can be no assurance that the Company will not require additional
financing within this time frame. The Company's forecast of the period of time
through which its financial resources will be adequate to support its operations
is a forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described earlier in this paragraph will impact
the Company's future capital requirements and the adequacy of its available
funds. The Company may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies or products. The failure of the Company to raise capital when
needed could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Possible Future
Capital Requirements."
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BUSINESS
3Dfx Interactive is a leading developer of high performance, cost-effective
3D media processors, software and related technology for the interactive
electronic entertainment market. The Company has developed 3D technology that
enables a highly immersive, interactive and realistic 3D experience across
multiple hardware entertainment platforms. Furthermore, the Company's technology
facilitates the virtually seamless portability of software content across the
three primary interactive electronic entertainment platforms: the PC, the home
game console and the coin-operated arcade system. The Company's strategy is to
provide a 3D media processor solution that will become the standard graphics
engine for the interactive electronic entertainment market. The Company believes
that the benefits of its technology, coupled with its software content strategy,
provide powerful incentives for the leading PC OEMs and entertainment hardware
manufacturers to utilize the 3Dfx solution.
Voodoo Graphics, the Company's first product, and subsequent 3D media
processors now under development are designed around a common architecture to be
utilized as the graphics engine for PCs and coin-op arcade systems. For PC
applications, Diamond and Orchid have each introduced consumer multimedia add-in
cards incorporating the Company's 3D media processor for sale in the retail
channel and for incorporation into PCs manufactured by, among others,
Apricot/Mitsubishi Electronic PC Division ("Apricot/Mitsubishi"), Falcon
Northwest Computer Systems ("Falcon Northwest"), Hewlett-Packard Company
("Hewlett-Packard") and NEC Corp. ("NEC"). In the coin-op arcade market, the
Voodoo Graphics 3D media processor is being utilized by Acclaim, Kaneko, Ltd.,
Midway and Taito, among others. Voodoo Graphics technology is also the graphics
architecture for the Sega/3Dfx Chipset that the Company is developing for
license to Sega for use in the New Sega Game Console. The Company's second
product, Voodoo Rush, is designed to incorporate a 3D/2D solution into a single
PCI board. Voodoo Rush began sampling in November 1996 and limited commercial
shipments are expected in the second quarter of 1997. The Company has commenced
development of Banshee, which is intended to be a high performance,
fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade
markets. The Company expects to begin commercial shipments of Banshee in the
first quarter of 1998. All of the Company's products are manufactured,
assembled, tested and packaged by third-party suppliers.
INDUSTRY BACKGROUND
The goal of interactive electronic entertainment is to create a realistic
and immersive environment in which users can actively participate. Interactive
electronic entertainment began in the 1970s with Atari's introduction of Pong, a
simplistic, 2D, black and white, coin-op arcade game resembling ping pong, and
has evolved to realistic and engaging 3D action games such as Quake and Tomb
Raider.
While interactive electronic entertainment started in the arcade, it was
brought to the mass market through the advent of inexpensive, dedicated home
game consoles that attached to televisions. Over the past 15 years, Nintendo,
Sega, Sony and other OEMs have introduced successive generations of these
consoles that, combined with better quality games, have provided increasing
realism and enhanced game play. The overall entertainment experience on these
platforms has been improving as a result of the recent introduction of first
generation 3D hardware and software in the arcade and console markets. Despite
its desirability, high performance 3D technology continues to be prevalent only
in high-end engineering workstations that typically cost tens of thousands of
dollars.
The ultimate goal of the use of 3D for entertainment applications is to
create an interactive experience with video quality comparable to that of motion
pictures. Interactive electronic entertainment applications employing 3D
graphics create plausible illusions of reality and thus provide more engaging
presentations of complex action and scenery than traditional 2D graphics. The
Company believes that once consumers experience high quality 3D technology on
any entertainment platform, they will demand it from all interactive
entertainment experiences.
Interactive electronic entertainment products today are generally played on
three hardware platforms -- the coin-op arcade system, the home game console and
increasingly the PC. Coin-op
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arcade games have traditionally offered the most compelling and immersive
experience for game players and, as a result, 3D gaming was first introduced in
this high-end market. However, coin-op arcade games are based on high cost,
proprietary hardware and, consequently, the coin-op arcade market has remained a
relatively small segment of the overall 3D market. Like coin-op arcade systems,
home game console hardware is typically proprietary. However, the attractive
price point, traditionally $300 or less, continual technological improvements
and convenience of home play that home game consoles offer have fueled the
platform's substantial consumer adoption even though performance still trails
that of the arcade.
Although 3D interactive electronic entertainment has enjoyed success on
both the coin-op arcade and home game console platforms, which are optimized for
game play, to date 3D entertainment has had limited success in the PC market. In
fact, in 1996, PC games accounted for less than 20% of the total video game
market. Several recent developments, however, are enabling the PC to become a
more suitable platform for interactive electronic entertainment. First, the
emergence of more powerful microprocessors and dedicated graphics processors
have provided the necessary computing power to handle the computationally
intensive processing of 3D graphics at acceptable costs. Second, the PC industry
has adopted wider data buses in the PC architecture that are capable of
transmitting the vast streams of data needed for high quality 3D graphics.
Third, cost reductions in memory and other components have allowed PC OEMs to
offer lower cost, general purpose computing platforms that are ideal for 3D
interactive electronic entertainment. Finally, the industry has developed and
adopted industry standard 3D APIs, like Microsoft's D3D and SGI's OpenGL, which
serve as software bridges between applications and the 3D graphics processor.
In addition to the performance capabilities of the hardware, the success of
any game platform ultimately depends on the quality and quantity of software
titles developed for the platform and the ease with which developers can create
new software for, or port existing software to, a platform. Porting is the
adaptation of software code written for one platform for use on another. For
example, software written for a coin-op arcade system must be ported so that it
can be played on PCs or home game consoles. Historically, porting has been
technically challenging, costly and time consuming. Even though the coin-op
arcade market is the proving ground for new game titles with hits in the arcade
market virtually guaranteeing success in the PC and home game console markets,
software developers often opt not to pursue these opportunities because of the
significant engineering effort required to port a title from one platform to
another. As a result, game developers and publishers have not been able to fully
capitalize on their investment in software content. Consumers have been
frustrated by the long delays between their first experience with a game in an
arcade and the availability of the game for home use and by the significant
decrease in game quality typically experienced when software titles migrate from
the arcade platform. Thus, content developers are demanding an entertainment
solution that facilitates virtually seamless porting across platforms and
consumers are demanding a cost-effective solution that enables a high quality
gaming experience on their choice of platform.
The 3D Dilemma
The growth of the interactive electronic entertainment market has been
constrained by the absence of a high performance, cost-effective 3D solution,
the lack of an architecture that facilitates virtually seamless porting across
the three primary platforms and the limited number of high quality 3D software
titles. The implementation of 3D graphics is extremely complex and
mathematically intensive and requires significant computing power. Consequently,
despite the desirability of 3D graphics, high quality 3D continues to remain a
niche technology not prevalent outside of high-end engineering workstation and
professional applications. To date, attempts to bring high quality, affordable
3D solutions to the entertainment market have required consumers to accept a
trade-off between visual realism, or fill rate, and gaming performance, or frame
rate. Today, the interactive electronic entertainment industry is demanding a
no-compromise 3D solution that will deliver both visual realism and performance
at a cost-effective price. The solution must also drive content development by
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enabling developers to create a new generation of high quality 3D software that
delivers a realistic and immersive experience.
THE 3DFX SOLUTION
3Dfx has developed hardware and software technology designed to deliver
superior 3D performance across multiple interactive electronic entertainment
platforms in a cost-effective manner. The Company's technology is optimized to
alleviate the traditional consumer trade-off between visual quality and gaming
performance by providing a 3D solution with both high fill rates and frame
rates. To that end, the Company's technology enables a highly immersive,
interactive 3D experience with compelling visual quality, realistic motion and
complex character and scene interaction at real time frame rates. Voodoo
Graphics, the Company's first product, and subsequent 3D media processors now
under development, are designed around a common architecture to be utilized as
the graphics engine for PCs and coin-op arcade systems. Voodoo Graphics
technology is also the graphics architecture for the Sega/3Dfx Chipset that the
Company is developing for license to Sega for use in the New Sega Game Console.
To promote the rapid adoption of its products, the Company's architecture
supports most industry standard APIs, including: Apple Computer Inc.'s Rave3D,
Argonaut Technologies Incorporated's BRender, Criterion Software Ltd.'s
Renderware, Intel's 3DR, Microsoft's D3D and SGI's OpenGL. The Company believes
that game titles using any of these APIs in conjunction with its 3D media
processor products offer compelling performance when compared to performance
achieved by competing hardware solutions. Additionally, the Company has
developed Glide, its proprietary, low-level 3D API. Glide was designed to
optimize the performance of software designed for any entertainment platform
powered by the Company's 3D media processors, and affords virtually seamless
portability of game content across multiple entertainment platforms. The content
provider's ability to rapidly port software titles to all three platforms
reduces the developer's time to market from the arcade to the high volume
platforms, significantly reduces the costs of porting across multiple platforms,
provides a successful title with enormous exposure and allows both the game
developer and the publisher to more effectively leverage their investment in a
given title. The Company believes that these are powerful incentives for the
leading PC OEMs, arcade and console hardware manufacturers, software content
developers and publishers to utilize and design applications for the 3Dfx
graphics engine.
STRATEGY
The Company's objective is to establish its products as the standard 3D
media processors in the interactive electronic entertainment market. Key
elements of the Company's business strategy include:
Focus on Interactive Electronic Entertainment Market. The interactive
electronic entertainment market is currently a multi-billion dollar industry
that is growing rapidly. The Company believes that the compelling visual quality
and high performance graphics enabled by its 3D media processors make its 3D
solution ideal for use in this market where users demand a high quality 3D
experience. The Company's strategy is to develop and introduce products that
cost-effectively deliver 3D performance levels that meet the demanding
requirements of the three major interactive electronic entertainment platforms.
Moreover, given the technical challenge of offering a high quality 3D solution
the Company believes that this market offers significant potential for continued
innovation of cost-effective, high performance 3D media processors.
Leverage Multi-Platform Architecture. The Company's 3D technology embodies
a single hardware/software architecture that can be deployed in each of the
three interactive electronic entertainment platforms. For PC applications,
Diamond and Orchid have each introduced consumer multimedia add-in cards
incorporating the Company's 3D media processor for sale in the retail channel
and for incorporation into PCs manufactured by Apricot/Mitsubishi, Falcon
Northwest, Hewlett-Packard and NEC, among others. In the coin-op arcade system
market, Voodoo Graphics is being utilized by Acclaim, Kaneko, Midway, and Taito,
among others. Voodoo Graphics technology is also the graphics
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architecture for the Sega/3Dfx Chipset that the Company is developing for
license to Sega for use in the New Sega Game Console.
Promote Content Development. The Company believes that the availability of
a sufficient number of high quality, commercially successful software game
titles and applications drives hardware sales. Therefore, to become the standard
in the 3D interactive electronic entertainment arena, the Company is
collaborating with content developers to create software entertainment titles
designed to work with the Company's hardware. The Company attracts these
developers by providing the opportunity to differentiate their software products
with high quality 3D graphics, feature rich special effects and real time frame
rates. With a solution that enables game content to be easily ported across the
major interactive entertainment platforms, the Company offers its software
partners easy access to multiple outlets for their products. To encourage
developers and publishers to develop content based on the Company's technology,
the Company has devoted significant resources to its developer relations program
which currently includes over 500 content developers, game publishers and ISVs.
Pursue Branding Strategy. The Company continues to devote substantial
marketing resources towards establishing 3Dfx as a recognizable brand. The
Company is initially focusing on establishing its brand identity in the coin-op
arcade market by promoting the use of a spinning version of the 3Dfx logo at the
start of games utilizing the Company's hardware. In addition, the Company has
been working with both software developers and publishers in the PC market to
prominently display the 3Dfx logo on their software product boxes to indicate
that the software is compatible with the Company's products. To further identify
the Company in the marketplace, several software products display a spinning
version of the 3Dfx logo on the screen while loading. The Company believes that
this strategy creates market awareness because publishers first release games to
arcades where consumers will first encounter the 3Dfx logo, and then port
successful games to PCs and home game consoles. The Company further believes
that consumer awareness of its products will speed adoption of the Company's
architecture in the mass market, lead to increasing availability of 3Dfx enabled
software content and help establish the Company as the standard 3D solution for
the interactive electronic entertainment market.
Extend Technical Leadership. The Company offers superior performance 3D
media processors targeted toward the high-end of the interactive electronic
entertainment market. The Company intends to continue to leverage its technology
at the high-end of the 3D interactive electronic entertainment market in order
to optimize and cost-reduce such solutions for applications in the volume
market. The Company believes this strategy will create an effective barrier to
entry to potential competitors.
Leverage Core Technology to Address New Market Opportunities. The Company
believes it can leverage its 3D processor technology in a variety of other 3D
multimedia applications. Within the electronic entertainment market, the Company
intends to extend its technology to location based entertainment ("LBE")
applications, which would be enhanced by the Company's technology. LBE sites are
typically dedicated to one type of game or experience and the environment
includes mechanical or other environmental elements that add significantly to
the immersion of the experience. The Company is investigating opportunities to
apply its 3D technology to other product applications such as Internet/intranet
exploration, including virtual reality mark-up language ("VRML") browsers, 3D
graphical user interface ("GUI"), visual simulation, education and training
applications and other 3D visualization applications.
PRODUCTS, PRODUCTS UNDER DEVELOPMENT AND TECHNOLOGY LICENSE
The Company's product strategy is to offer a complete high performance
solution. Voodoo Graphics, the Company's first product, began commercial
shipment in September 1996. Voodoo Rush, the Company's second product, began
sampling in November 1996 and limited commercial shipment is expected for the
second quarter of 1997. Both Voodoo Graphics and Voodoo Rush are being targeted
at price and performance points for the PC and coin-op arcade markets. Voodoo
Graphics and
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<PAGE> 36
subsequent 3D media processors under development are based on a common
architecture which offers developers a clear, compatible upgrade path. This
architecture is designed to scale with the PC's microprocessor. As a result, as
the processing power of the CPU increases, the Company's products will use that
additional processing power to improve the overall quality of the 3D. In
addition, Voodoo Graphics technology is the graphics architecture for the
Sega/3Dfx Chipset that the Company is developing for license to Sega for use in
the New Sega Game Console.
Voodoo Graphics. The Company believes that Voodoo Graphics offers a
cost-effective, high performance solution for 3D interactive electronic
entertainment applications. Voodoo Graphics is a stand-alone 3D media processor
designed to function as the primary display device in embedded applications,
such as coin-op arcade systems, or to work in conjunction with most standard 2D
processors in PC applications. Voodoo Graphics has seen initial acceptance in
both the PC and coin-op arcade markets. Diamond and Orchid have each introduced
multimedia add-in boards for PCs, Monster 3D and Righteous 3D, respectively,
that are currently supplied through retail, OEM and mail order channels in the
US, Europe and Asia. See "-- Sales and Marketing." Voodoo Graphics is being
utilized by Acclaim, Kaneko, Midway and Taito among others for coin-op arcade
systems and game applications. In addition, Voodoo Graphics is the basis for the
technology that the Company is developing and has licensed to Sega for use in
Sega's new home game console. See "-- Strategic Relationship with Sega." The
technological features found in the existing Voodoo Graphics product will be
incorporated into the Sega/3Dfx Chipset. There can be no assurance that the
Sega/3Dfx Chipset will be developed as anticipated, perform as required or be
incorporated into Sega's New Sega Game Console as planned. See "Risk
Factors -- Dependence on Relationship with Sega" and "-- Strategic Relationship
with Sega."
Voodoo Graphics is a two chip solution and has a 128-bit "dedicated texture
memory" architecture that provides over 800 megabytes per second of memory
bandwidth to deliver both the interactivity and the visual realism necessary for
the new generation of 3D games. Because Voodoo Graphics dedicates at least one
megabyte of memory to texture maps, interactive 3D games can now attain a level
of realism that was previously limited to pre-rendered games with limited
interactivity. Voodoo Graphics has scalable performance of 45 megapixels per
second sustained fill rate for bilinear or advanced filtered textures and one
million textured triangles per second polygon performance for filtered, level of
detail ("LOD") MIP-mapped, Z-buffered, alpha-blended, fogged, textured 50-pixel
triangles rendered on a Pentium-200 MMX system.
Voodoo Rush. Voodoo Rush began sampling in November 1996 and limited
commercial shipment is expected for the second quarter of 1997. There can be no
assurance that Voodoo Rush will be commercially shipped or will be accepted by
the market. Voodoo Rush is designed to offer a cost-effective solution for
implementing 3D graphics with 3D performance similar to that of Voodoo Graphics.
Based on the core 3D technology in Voodoo Graphics, Voodoo Rush was designed to
function with a partner's companion 2D or 2D/3D accelerator. Unlike Voodoo
Graphics, however, which requires independent 2D and 3D solutions, Voodoo Rush
is designed to incorporate a 3D/2D solution into a single PCI board. Alliance,
Macronix, MRT and Trident are the Company's partners for this program. The
Voodoo Rush solution is designed to increase system flexibility for the OEM, to
require less memory and to reduce the graphics system cost when compared to
Voodoo Graphics and stand-alone 2D graphics.
Voodoo Rush is designed to provide both full screen rendering and 3D in a
window, which permits the user to move easily between the 3D enabled
application, the desktop and other applications. Voodoo Rush has a sustained
fill rate of 45 megapixels per second for bilinear filtered textures with LOD
MIP-mapping, Z-buffering, alpha-blending and fogging enabled. The triangle rate
is one million triangles per second for filtered, LOD MIP-mapped, Z-buffered,
alpha-blended, fogged, textured triangles on a Pentium-200 MMX system.
Future Product Development. In connection with the Company's strategy of
developing a single-chip solution, the Company has commenced development of
Banshee, which is intended to be a high performance, fully-featured single chip
3D/2D media processor for the PC and coin-op arcade
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<PAGE> 37
markets. See "-- Strategy." The Company expects to begin commercial shipment of
Banshee by the first quarter of 1998. The Company is developing Banshee with the
intent of delivering quality 3D/2D to a broader portion of the interactive
electronic entertainment market. In addition, Banshee is designed to reduce
graphics system costs and to be compatible with applications designed for use
with Voodoo Graphics and Voodoo Rush. There can be no assurance that the Company
will be able to introduce Banshee as scheduled or, that if introduced, it will
perform as intended or be accepted by OEMs, coin-op board manufacturers and
coin-op arcade system manufacturers. In addition, the Company is in the early
stages of development of the second generation of its existing product. There
can be no assurance, however, that these second generation solutions will be
developed, or, if developed, that they will perform as expected or be accepted
by the market. See "Risk Factors -- Acceptance of the Company's 3D/2D Solution
for the PC Market; Dependence on the Development of a Single-Chip Solution" and
"-- Dependence on New Product Development; Rapid Technological Change."
Strategic Relationship with Sega
In March 1997, the Company entered into the Sega Agreement, under which the
Company will develop and license to Sega the Sega/3Dfx Chipset for use in the
New Sega Game Console. During the three months ended March 31, 1997, the Company
recognized development contract revenues of $750,000 under the Sega Agreement
representing a non-refundable amount due for the delivery of certain engineering
designs to Sega. Development contract revenues recognized under the Sega
Agreement represented 14.3% of total revenues, during the three months ended
March 31, 1997. Through the end of 1998, the Company may earn additional
development contract revenues and certain development bonuses provided that
certain milestones set forth in the Sega Agreement are met. The Company will
also derive royalty revenue for each Sega/3Dfx Chipset incorporated into
products sold by Sega.
Pursuant to the Sega Agreement, the Company shall maintain ownership of the
Sega/3Dfx Chipset intellectual property. The Company granted Sega a
royalty-bearing, worldwide license (i) to use the technology covered by the Sega
Agreement for the manufacture of the Sega/3Dfx Chipset, to perform engineering,
development, testing and integration of the Sega/3Dfx Chipset within the console
and to distribute the Sega/3Dfx Chipset as integrated into such console; and
(ii) to use the Sega/3Dfx Chipset solely for Sega's internal engineering,
development, testing, support and other purposes in connection with the
incorporation of the Sega/3Dfx Chipset into other potential Sega products. The
license rights to manufacture and distribute the Sega/3Dfx Chipset are exclusive
to Sega, solely with respect to home game consoles, for a period of three years
commencing on Sega's acceptance of the version of the Sega/3Dfx Chipset intended
for production in commercial volume. In addition to the chipset license, the
Company granted Sega a royalty-free license for certain software, including
Glide, subject to limitation.
The Sega Agreement will remain in full force and effect unless terminated
in accordance with its terms. Sega may terminate the Sega Agreement during the
development phase, if the Company defaults on the development schedule. Either
party may terminate the Sega Agreement, with limitations, upon the material
breach by the other party or in the event of the other party's bankruptcy,
dissolution or liquidation, assignment for the benefit of creditors, or the
appointment of a receiver or trustee or custodian for all or part of the assets
of such party.
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<TABLE>
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
3DFX PRODUCT DEVELOPMENT
- ----------------------------------------------------------------------------------------------------------
PRODUCT/LICENSE
COMMERCIAL AVAILABILITY
TARGET MARKET KEY FEATURES(1)
- ----------------------------------------------------------------------------------------------------------
Voodoo Graphics
September 1996 PCs, coin-op arcade Add-on 3D solution;
systems scalability; consistent
sustained performance with
all features enabled; fill
rate of 45 Mpixel/sec; fully
featured triangle rate of
1.0M/sec; texture streaming;
fully featured architecture
- ----------------------------------------------------------------------------------------------------------
Voodoo Rush
Expected second PCs Single-board 3D/2D solution;
quarter 1997 consistent sustained
performance with all features
enabled; fill rate of 45
Mpixel/sec; fully featured
triangle rate of 1.0M/sec;
texture streaming; fully
featured architecture; 3D in
a window
- ----------------------------------------------------------------------------------------------------------
Banshee
Expected first PCs, coin-op arcade Single chip 3D/2D solution;
quarter 1998 systems large feature set; fully
integrated architecture; high
sustained fill rate and
triangle rate with all
features enabled; compatible
3D architecture with Voodoo
Graphics
- ----------------------------------------------------------------------------------------------------------
Sega/3Dfx Chipset
License
To be announced Home game Key features based on Voodoo
consoles Graphics architecture
- ----------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
(1) "Fully featured" means textured, bilinear filtered with LOD MIP-mapping,
Z-buffered and fogged.
Graphics Subsystems and Development Boards. To address the coin-op arcade
market and to offer PC OEM customers development boards, the Company commenced
the design and manufacture of graphics boards immediately upon availability of
Voodoo Graphics. Branded "Obsidian," the Company also targeted these products to
address opportunities in the visual simulation, digital content creation and LBE
markets.
Because many of the Company's coin-op arcade OEM customers have implemented
embedded coin-op arcade systems as opposed to PC-based coin-op systems, the
principal demand for the Company's products in the coin-op arcade market is in
the form of components, rather than graphics boards or subsystems. Because the
graphics board business for the visual simulation, digital content creation and
LBE markets collectively comprise a significantly smaller volume market than the
embedded coin-op market, the Company does not intend to devote significant
resources to support the Obsidian product line. To maintain a presence in these
markets, while minimizing the associated support burdens, the Company has
recently entered into an agreement with Quantum3D, Inc. ("Quantum3D") pursuant
to which the Company will supply Obsidian graphics boards to Quantum3D for
resale into these and other markets. The Company anticipates that Quantum3D will
transition into a component customer in late 1997, and intends to support the
Obsidian product line on an opportunistic basis after such time.
CUSTOMERS
The Company markets its products to PC and graphics board OEMs and
manufacturers of coin-op arcade systems and home game consoles. The Company
works closely with its customers and software developers during the design
process of entertainment platforms and the development phase of
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<PAGE> 39
software titles and applications. The Company believes that this close technical
collaboration facilitates the integration of the Company's products into its
customers' entertainment platforms. There can be no assurance, however, that
design wins will ultimately result in orders or that the Company will retain
such customers through the ongoing and recurring design-in process. The
following is a list of the companies which are either direct or indirect
customers of the Company or companies with which the Company has design wins:
<TABLE>
<CAPTION>
PCS COIN-OP ARCADE SYSTEMS
---------------------------------------- ----------------------------------------
<S> <C>
Apricot/Mitsubishi Electric PC
Division(1) Acclaim Entertainment Inc.(2)
Deltron Precision, Inc. Eolith Co., Ltd.(2)
Diamond Multimedia Systems, Inc. IGS Taiwan(2)
Falcon Northwest Computer Systems(1) Interactive Light
Hercules Computer Technology, Inc. Kaneko Ltd.(2)
Hewlett-Packard Company(1) Konami Co. Ltd.
Intel Corporation LBE Technologies, Inc.
Micron Technology, Inc.(1) RealVision Corporation(2)
NEC Corp.(1) Taito Corporation(2)
Orchid Technology WMS Industries, Inc. (Williams)
Quantum3D, Inc.
</TABLE>
- ---------------
(1) Indirect customer that purchases products from the Company's board level
customers.
(2) Indicates design win only.
In addition to the design wins above, the Company has a design win with
Sega for the Sega/3Dfx Chipset which is being developed for use in the New Sega
Game Console. See "-- Products, Products Under Development and Technology
License -- Strategic Relationship with Sega."
Because of the Company's limited operating history and early stage of
development, it has only a limited number of customers. For these reasons, the
Company's sales are highly concentrated. Revenues derived from sales to Orchid,
Diamond and Williams accounted for 44%, 33% and 11% respectively, of product
revenues for 1996. Revenues derived from sales to Diamond and Williams accounted
for 59% and 15%, respectively of product revenues for the three months ended
March 31, 1997. Development contract revenues recognized under the Sega
Agreement represented 14.3% of total revenues during the three months ended
March 31, 1997. The Company expects that a small number of customers will
continue to account for a substantial portion of its revenues for the
foreseeable future. See "Risk Factors -- Customer Concentration."
SALES AND MARKETING
The Company sells its products to manufacturers of graphics and multimedia
accelerator subsystems for PCs and coin-op arcade systems and to PC OEMs through
a network of domestic and international independent sales representatives and
distributors. In the United States and Canada, the Company has 11 sales
representatives. The Company also sells its products directly to certain OEM
customers in each of the Company's target markets. Outside the United States and
Canada, primarily in the Far East and Europe, the Company's products are sold
through nine sales representatives. Sales outside of the United States were
insignificant during 1996 and the three months ended March 31, 1997. The Company
maintains a sales management organization which is primarily responsible for
supporting independent sales representatives and distributors and making direct
sales to customers that prefer to transact directly with the Company. As of
March 31, 1997, the Company employed 18 individuals in its sales, marketing and
customer support organization.
To meet customer requirements and achieve design wins, the Company's sales
and marketing personnel work closely with customers, potential customers and
leading industry software and hardware developers to define product features,
performance, price and market timing of new products. The Company provides
customers with early access to technical design information and
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<PAGE> 40
specifications, documentation, in-house engineering support, first chip product
samples and product development plans. This effort is coordinated by the
Company's sales management organization and is supported by in-house
applications engineers and marketing personnel. The Company's applications
engineers frequently work with existing and potential customers to assist them
with their design projects. The Company believes that these efforts contribute
to the Company's understanding of customer needs and assist the Company in
developing products that meet customer requirements.
To encourage software title developers and publishers to develop games
optimized for platforms utilizing the Company's products, the Company seeks to
establish and maintain strong relationships in the software development
community. The Company has branded a marketing effort named the "Buddy Program"
that employs the Company's expertise in software development to assist
developers through an on-site assistance program, sample source code and
electronic communication. As part of the Buddy Program, the Company has assigned
a software engineer to each strategic developer to assist with product
development. Generally the Company's assigned software engineer interacts with
the developer both remotely and through on-site visits and, by working closely
with the development team, attempts to ensure that the developer fully exploits
the 3D graphics capabilities of the Company's products. Another key element of
the Company's sales and marketing strategy has been the development of
manufacturing qualified reference design kits for the Company's 3D media
processors. The Company uses the reference design kits to seed important
developers before the commercial introduction of the Company's products to
ensure early software availability, and after commercial introduction to
encourage on-going support of the Company's products. The Company believes that
its close relationships with and attention to content developers encourages the
development of software for the Company's hardware, provides the Company with
information regarding the needs and concerns of the development community and
enables the Company to continually assess opportunities for future software
projects.
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The following table lists game titles for use with platforms utilizing the
Company's hardware that were commercially available as of March 31, 1997:
<TABLE>
<CAPTION>
TITLE PUBLISHER DEVELOPER API PLATFORM
- --------------------- ----------------------- ----------------------------- ---------- ---------------
<S> <C> <C> <C> <C>
Agile Warrior Virgin Interactive Black Ops Entertainment Inc. D3D PC
Entertainment Inc.
Cyberdome Microleague Above the Garage Production D3D PC
Multimedia, Inc.
CyberGladiators Sierra On-Line, Inc. Dynamix Inc. Glide/D3D PC
Descent 2: Interplay Productions Parallax Software Glide PC
The Infinite Abyss Corporation
Die Hard Trilogy Fox Interactive, Inc. Probe Entertainment D3D PC
The Divide Virgin Interactive Radical Entertainment D3D PC
Entertainment, Inc.
EF2000 Ocean Entertainment, Digital Image Design Glide PC
Inc.
Hellbender Microsoft Terminal Reality, Inc. D3D PC
Hyperblade Activision, Inc. Wizbang! Software D3D PC
Productions
Independence Day Fox Interactive, Inc. Radical Entertainment D3D PC
Mech Warrior 2 Activision, Inc. Activision, Inc. Glide PC
Monster Truck Madness Microsoft Terminal Reality D3D PC
pod UbiSoft Entertainment UbiSoft Entertainment Glide PC
Quake id Software, Inc. id Software OpenGL PC
Scorched Planet Virgin Interactive Criterion Studios Glide PC
Entertainment, Inc.
Scourge of Armagon Activision, Inc. Hypnotic OpenGL PC
(Quake Add On)
Shrak (Quake Add On) Quantum Access Quantum Access OpenGL PC
Starfighter The 3DO Company Krisalis Software Ltd. Glide PC
Terracide Eidos Interactive Simis D3D PC
TigerShark GT Interactive N-Space Glide PC
Software
Corporation
Tomb Raider Eidos Interactive Core Design Glide PC
Toshinden Playmates Interactive Digital Dialect Glide PC
Entertainment
Incorporated
VR Soccer '96 Interplay Productions Gremlin Glide PC
Whiplash Interplay Productions Gremlin Glide PC
Home Run Derby Interactive Light Interactive Light Glide Coin-Op Arcade
Mace Williams Atari Games Glide Coin-Op Arcade
Entertainment, Inc.
SF Rush Williams Atari Games Glide Coin-Op Arcade
Entertainment, Inc.
Wayne Gretzky Hockey Williams Atari Games Glide Coin-Op Arcade
Entertainment, Inc.
</TABLE>
To enhance awareness of the Company's 3D graphics solutions, the Company
has created several proprietary demonstrations that showcase the performance and
features made possible by the Company's products. These demonstrations, which
are often bundled with an OEM's product, are shown to software developers, OEMs,
VARs and tradeshow audiences. The Company believes that these demonstrations
effectively demonstrate the immediate potential for high quality 3D graphics in
interactive electronic entertainment and effectively differentiate the Company's
product offerings from competing products. The Company continues to devote
substantial marketing resources towards establishing 3Dfx as a recognizable
brand. The Company is initially focusing on establishing its brand
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<PAGE> 42
identity in the coin-op arcade market by promoting the use of a spinning version
of the 3Dfx logo at the start of games utilizing the Company's hardware. In
addition, the Company has been working with both software developers and
publishers in the PC market to prominently display the 3Dfx logo on their
software product boxes to indicate that the software is compatible with the
Company's products. To further identify the Company in the marketplace, several
software products display a spinning version of the 3Dfx logo on the screen
while loading. The Company believes that this strategy creates market awareness
because publishers first release games to arcades where consumers will first
encounter the 3Dfx logo, and then port successful games to PCs and home game
consoles. The Company further believes that consumer awareness of its products
will speed adoption of the Company's architecture in the mass market, lead to
increasing availability of 3Dfx enabled software content and help establish the
Company as the standard 3D solution for the interactive electronic entertainment
market.
The Company's marketing activities also consist of sponsorship of and
participation in industry tradeshows, marketing communications and market
development activities designed to generate awareness of the Company and its
products. Such activities include ongoing contact with industry press and
analysts and selective advertising in entertainment and game industry
publications. The Company is also active in the promotion of its products
through 3D graphics news groups on the Internet. The Company intends to promote
the 3Dfx name and trademarks to create a recognizable industry standard for high
quality 3D entertainment.
The Company has implemented a customer support program that enables end
users to contact the Company directly with questions or comments. The Company
offers free telephone customer support during normal business hours. The Company
also provides customer support via the Internet and maintains a page on the
World Wide Web to provide technical information to customers.
TECHNOLOGY
3D Technology
The technology necessary to create interactive, realistic and visually
engaging 3D in real time is extremely compute intensive, complex and technically
challenging. Historically, such technology has been extremely expensive and thus
3D has been prevalent only in high-end 3D workstations. Today, 3D graphics
companies face the challenge of designing affordable products that offer
realistic 3D graphics with full screen resolution in real time for the
mainstream PC market. The substantial complexity and technical demands of
achieving this level of 3D graphic performance requires compute and pixel
processing power and memory bandwidths well beyond what is available in typical
general purpose CPUs, such as Intel's Pentium Pro. Specialized 3D graphics
processors address this limitation by implementing all or part of what is
referred to as the "3D Pipeline" by providing dedicated 3D graphics processing
capability.
The 3D Pipeline is a sequence of operations, which, starting with three
dimensional model data, position and desired lighting models, results in 2D
pixels displayed on a computer monitor or television display. The creation of a
single 3D image from the numerical mode is comprised of three primary steps:
tessellation, geometry and rendering.
- Tessellation. Tessellation is the creation of a numerical description
(the "three dimensional model data") of an object and the conversion of
this model into a set of polygons. Polygons are often defined to be
triangles because triangles are simple geometric shapes which can be
easily defined by only a few data points and can be quickly modified by
mathematical operations. Each triangle requires a separate set of
calculations, which means that the more complex an object is, the more
compute intensive it is. As a result, triangles-per-second is one of the
essential performance metrics of 3D graphics.
- Geometry. The geometry phase of the 3D Pipeline includes three stages:
transformation, lighting and triangle setup, although triangle setup is
often considered a separate stage. The
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transformation stage converts the native three dimensional model data
from its native numerical representation into a viewer-dependent model
space by using 4x4 matrix operations. The triangle setup operation takes
in the transformed, lighted triangles and calculates the edge and slope
information required to paint each individual triangle on the screen.
- Rendering or Rasterization. The third primary phase of the 3D Pipeline,
called triangle rendering or triangle rasterization, is the most
important phase for creating a quality 3D image. During this phase, a
two-dimensional image, capable of being displayed on a PC monitor or
television set, is created from the discrete, three-dimensional model
that emerges from the geometry phase. Within each particular triangle,
pixels are computed, rendered and displayed according to a complex set of
rules. Final image quality depends on the number and types of techniques
applied to each particular pixel. Various techniques are applied in the
rendering phase to achieve photo-realistic images, including scan
conversion, shading, texture-mapping and various perspective
enhancements. More advanced techniques in rendering include MIP mapping,
texture filtering, anti-aliasing, subpixel correction, fogging,
alpha-blending, and depth cueing.
The rasterization stage of the 3D Pipeline permits a significant level of
quality improvements, which can be achieved by the application of many
techniques. While these techniques can make a qualitative difference in the
realism that a 3D image conveys to the viewer, many of these techniques are
highly compute intensive. As a result, if performance is not sufficient given
the number and type of techniques used, the overall experience of the user will
diminish. In order for a 3D image to achieve realistic animation on a monitor
screen in real-time and with excellent visual quality, as many as twenty billion
operations per second might be necessary, a performance level which is roughly
80-100 times that of Intel's high-end microprocessor, the Pentium Pro. Most PC
systems that are equipped with 3D hardware accelerators perform the
tessellation, transformation, lighting, and clipping operations on the CPU and
pass the results to the 3D acceleration hardware for triangle setup and
rendering to complete the 3D pipeline. As a result, the rasterization stages of
the 3D Pipeline is almost always handled by a graphics processor, which has a
focused range of operation.
3Dfx Architecture and Technology
The primary goal of Voodoo Graphics and the Company's subsequent 3D media
processsors under development is to provide workstation-quality 3D performance
at affordable price points. Furthermore, the scaleable nature of the 3Dfx
solution is applicable across different markets and different price targets
without re-engineering the core logic. The block diagram below is an outline of
the Company's Voodoo Graphics product:
[DIAGRAM]
In the above diagram, the pixelfx chip is responsible for managing the
frame buffer, while the texelfx chip accesses dedicated texture memory. The
pixelfx chip performs triangle setup, Gouraud
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shading, texture, fogging, alpha-blending and Z-buffering. The pixelfx chip is
also responsible for sending information to a low-cost external digital to
analog converter ("DAC") for display on a computer monitor or television set.
The texelfx chip is responsible for triangle setup of the texture coordinates,
texture address calculations, perspective-correction of the texture coordinates,
MIP Mapping calculations to properly select the appropriate texture map and
texture lookup. Subsequent to texture lookup, the texelfx chip formats the
incoming texture and decompresses the texture element if the texture map is
stored in a proprietary compressed format and performs bilinear blending.
Finally, the processed texel is sent to the pixelfx chip for final storage into
the frame buffer.
The performance benefits of having separate, dedicated frame buffer memory
distinct from texture memory is dramatic. While traditional consumer-oriented 3D
media processors have utilized a common pool of memory for both frame buffer and
texture storage, the 3Dfx solution allows for Z-buffering and alpha-blending
operations, performed in the frame buffer memory, to operate independently from
texture map lookup, performed in the dedicated texture memory. The result is an
architecture which maintains full performance when all of the advanced 3D
rendering features are enabled. And, since the memory technology utilized for
both the frame buffer and the dedicated texture memory is standard extended data
out dynamic random access memory instead of expensive video random access memory
solutions, OEMs realize significant cost savings by utilizing the Company's 3D
solution.
Due to the design's scaleability, multiple texelfx chips may be chained
together to form a "texture streaming" architecture, where multiple texture maps
may be accessed independently and blended together, a technique known as
"texture compositing" with no degradation in quality. In addition, multiple
complete pixelfx/texelfx subsystems may be chained together to double the raw
rendering capability for the high performance solutions.
To further reduce the solution cost of its products and to specifically
address PC motherboard designs, the Company has commenced development of
Banshee, which is designed to be a high performance, fully-featured single chip,
3D/2D media processor for the PC and coin-op arcade markets. In addition, the
Company offers Glide, its proprietary API, as a development tool to enable the
optimal performance and easy, low cost cross platform portability of software
content developed for the Company's 3D media processor products.
Research and development expenses were $2.9 million, $9.4 million and $2.0
million in 1995, 1996 and the three months ended March 31, 1997, respectively.
MANUFACTURING
The Company has adopted a "fabless" manufacturing strategy for both
semiconductors and printed circuit board assemblies ("PCBA") whereby the Company
employs world class suppliers for all phases of the manufacturing process,
including, manufacturing, assembly, testing, and packaging. This strategy
leverages the expertise of its industry leading, ISO Certified, suppliers in
such areas as fabrication, assembly, quality control and assurance, reliability,
and testing, and allows the Company to avoid the significant costs and risks
associated with owning and operating such operations. As a result, the Company
can focus its resources on product design, quality assurance, marketing and
customer support.
The Company's Voodoo Graphics and Voodoo Rush semiconductor products are
currently fabricated for the Company by TSMC, which is the largest independent
foundry in the world. TSMC currently produces the semiconductor die for the
Company using standard 0.5 micron Application Specific Integrated Circuit
("ASIC") Complimentary-symmetry Metal-Oxide Semiconductor ("CMOS") process
technology. The Company expects that, commencing in the second half of 1997,
TSMC will move to a 0.35 micron ASIC, CMOS process technology in connection with
production for the Company. After the wafer production process is completed, the
semiconductor die is shipped to ASE, which assembles and packages the
semiconductor die, tests the finished product, and ships the finished product to
the Company. Both suppliers have their manufacturing operations located in
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<PAGE> 45
Taiwan, R.O.C. The fabrication of semiconductors is a complex and precise
process. 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 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. Once production yield for a particular product stabilizes, the Company
pays an agreed price for wafers meeting certain acceptance criteria pursuant to
a "good die" only pricing structure for that particular product. Until
production yield for a particular product stabilizes, the Company must pay an
agreed price for wafers regardless of yield. Accordingly, in this circumstance,
the Company bears the risk of final yield of good die. Poor yields would
materially adversely affect the Company's revenues, gross margin and results of
operations. As the Company's relationships with TSMC and any additional
manufacturing partners develop, yields could be adversely affected due to
difficulties associated with adapting the Company's technology and product
design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's potentially 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 profit.
In April 1996, the Company entered into a Warrant Purchase Agreement with
TSMC pursuant to which TSMC purchased two warrants to purchase 100,000 and
180,000 shares of the Company's Series B Preferred Stock at $2.20 per share of
which the warrant to purchase 100,000 shares is fully exercisable. The purchase
right represented by the warrants was exercisable at a rate of 20 shares of
Series B Preferred Stock for each wafer above 2,000 wafers delivered to the
Company during 1996. TSMC delivered a total of 4,645 wafers in 1996, and
consequently the warrant to purchase 180,000 shares of the Company's Series B
Preferred Stock became exercisable with respect to 52,900 of such shares of
Series B Preferred Stock.
The Company's Obsidian PCBA products are assembled locally by ISIS Surface
Mounting ("ISIS"), an ISO 9002 certified assembler. The Company consigns kits of
the materials required for assembly of the PCBAs to ISIS, which performs all
assembly and test operations and returns the board product to the Company.
The Company receives both semiconductor and PCBA products from its
subcontractors, performs incoming quality assurance, packages the products, and
ships them to its customers from its location in San Jose.
With the exception of the TSMC warrant discussed above, all of the
Company's commerce is performed through purchase orders without additional or
supplementary agreements. Whereas there can be no assurance that the Company
will be able to secure sufficient manufacturing capacity to meet product demand
in the future, which could have material adverse effects on the Company's
business, the Company believes that it has developed strong relationships with
its suppliers, and has experienced no material manufacturing concerns to date.
Although the Company is confident in its suppliers' abilities to fulfill product
requirements, the Company has initiated actions to select and to qualify
additional suppliers in an effort to further diversify its supplier
manufacturing base.
In the event of production difficulties, shortages, or delays experienced
by any one of its suppliers, the Company's business, financial condition, or
results of operation may be adversely impacted. Furthermore, although quality
assurance measures have been taken, there can be no guarantee against defects
affecting the quality, performance or reliability of the Company's products. Any
such defects could require costly product recalls or cessation of shipments,
adversely affecting the Company's business, financial condition and results of
operations, and resulting in a decline of revenues, increased costs (associated
with return, repair, replacement and shrinkage associated with such defects),
44
<PAGE> 46
cancellations or reschedulings of customer orders and shipments. See "Risk
Factors -- Dependence on Independent Manufacturers and Other Third Parties,
Absence of Manufacturing Capacity; Manufacturing Risks."
COMPETITION
The Company's strategy of targeting the electronic entertainment market
across the PC, coin-op arcade and home game console platforms requires the
Company to compete against different companies in each of these market segments,
all of which are intensely competitive.
PC Segment. The largest area of competition for the Company is in the PC
market. Within the entertainment segment of this market, the Company competes
primarily against companies that typically have operated in the PC 2D graphics
market and that now offer 3D capability as an enhancement to their 2D solutions,
such as ATI, Cirrus, Oak Technology, S3 and Trident. Many of these competitors
have introduced 3D functionality on new iterations of existing graphics chips.
The Company also competes with companies that have recently entered the market
with an integrated 3D/2D solution, but which have not traditionally manufactured
2D solutions such as Chromatic, nVidia and Rendition. In addition, the Company
competes with NEC/Videologic which has focused exclusively on developing a 3D
solution for the 3D interactive electronic entertainment market.
In addition to competition from companies in the entertainment segment of
the PC market, the Company also faces potential competition from companies that
have focused on the high-end of the 3D market and the production of 3D systems
targeted for the professional market, such as 3Dlabs, Integraph, Real 3D and
SGI. While these companies produce high-performance 3D systems, they do so at a
significantly higher price point than the Company and have historically focused
on the professional and engineering market. These companies are developing lower
cost versions of their 3D technology to bring workstation-like 3D graphics to
mainstream applications, but the Company believes that these companies are not
focused on interactive electronic entertainment applications. There can be no
assurance that these companies will not enter the interactive electronics
entertainment market. The Company believes that it would have a strong
competitive position against such high-end competitors due to the favorable
price/performance ratio of its Voodoo Graphics architecture and its proprietary
Glide API. However, there can be no assurance that the Company would be able to
compete successfully against them.
Recently, a substantial number of companies have announced plans to release
3D graphics chips in 1997 and 1998 that promise to provide low cost 3D
functionality for PCs and workstations. Intel and Lockheed have recently formed
a licensing and development arrangement under which Intel has indicated that it
will exploit certain 3D technologies originally developed by Lockheed for use in
flight simulators to provide 3D graphics functionality on the PC. In August
1996, Microsoft announced that it was developing Talisman, a reference
architecture with an alternative method of providing high performance 3D
functionality on the PC. Microsoft is working with certain third parties
including Cirrus, Fujitsu, Inc., Philips N.V. and Samsung Electronics Co., Ltd.,
to implement this architecture. If successful, products based on either the
Microsoft or Intel initiatives would be directly competitive with the Company's
processors and could materially adversely affect the Company's competitive
position and results of operations.
Coin-op Arcade and Console Segments. The market for electronic arcade
entertainment is comprised of a small number of companies, including Acclaim,
Midway, Namco, Sega, Taito and Williams. The home game console segment is
dominated by three companies, Nintendo, Sega and Sony. In each of the coin-op
and home game console segments, the Company primarily faces competition from
in-house divisions of the companies which currently comprise such markets. The
Company has formed a strategic relationship with Sega in order to compete
effectively in the console segment but there can be no assurance that Sega will
manufacture its next generation of home game consoles or, that if it does, that
it will be able to compete against Nintendo and Sony successfully. See
"Products, Products Under Development and Technology License -- Strategic
Relationship with
45
<PAGE> 47
Sega." In addition, there can be no assurance that any of the companies which
currently compete in the 3D PC market will not enter the coin-op arcade market,
or if they do, that the Company will be able to compete against them
successfully.
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less costly
than the Company's 3D media processors accelerators or provide better
performance or additional features not currently provided by the Company. The
Company believes that the principal competitive factors for 3D graphics
solutions are product performance measured in terms of both processing power and
image quality, conformity to industry standard APIs, software support, access to
customers and distribution channels, manufacturing capabilities and price. The
Company believes that it competes most favorably with respect to product price
performance, support of industry standard APIs and software expertise. The
Company seeks to use strategic relationships to augment its capabilities, but
there can be no assurance that the benefits of these relationships will be
realized or be sufficient to overcome the entrenched positions of the Company's
largest competitors as incumbent suppliers to the large PC OEMs. Regardless of
the relative qualities of the Company's products, the market power, product
breadth and customer relationships of its larger competitors, including Intel
and Microsoft, can be expected to provide such competitors with substantial
competitive advantages. The Company does not seek to compete on the basis of
price alone.
Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since they maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages. The Company's ability to compete successfully in
the rapidly evolving market for 3D media processors will depend upon certain
factors, many of which are beyond the Company's control, including, but not
limited to, success in designing and subcontracting the manufacture of new
products, implementing new technologies, access to adequate sources of raw
materials and foundry capacity, the price, quality and timing of new product
introductions by the Company and its competitors, the emergence of new
multimedia and PC standards, the widespread development of 3D applications by
ISVs, the ability of the Company to protect its intellectual property, market
acceptance of the Company's 3D solution and API, success of the competitors'
products and industry and general economic conditions. There can be no assurance
that the Company will be able to compete successfully in the emerging 3D
graphics market. See "Risk Factors -- Competition."
PATENTS AND PROPRIETARY RIGHTS
The Company relies primarily on a combination of patent, mask work
protection, trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. The Company has five patent applications pending in the United States
Patent and Trademark Office. There can be no assurance that the Company's
pending patent application or any future applications will be approved, 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. In addition, 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.
46
<PAGE> 48
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is currently no
pending intellectual property litigation against the Company. However, the
Company may from time to time receive notice of claims that the Company has
infringed patents or other intellectual property rights owned by others. The
Company may seek licenses under such patents or other intellectual property
rights. However, there can be no assurance that licenses will be offered or that
the terms of any offered licenses will be acceptable to the Company. The failure
to obtain a license from a third party for technology used by the Company could
cause the Company to incur substantial liabilities and to suspend the
manufacture of products. Furthermore, the Company may initiate claims or
litigation against third parties for infringement of the Company's proprietary
rights or to establish the validity of the Company's proprietary rights.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses for the infringing technology. There can be no assurance that the
Company would be successful in such development or that such licenses would be
available on reasonable terms, or at all, and any such development or license
could require expenditures by the Company of substantial time and other
resources. Although patent disputes in the semiconductor industry have often
been settled through cross-licensing arrangements, there can be no assurance
that, in the event that any third party makes a successful claim against the
Company or its customers, a cross-licensing arrangement could be reached. If a
license is not made available to the Company on commercially reasonable terms,
the Company's business, financial condition and results of operations could be
materially adversely affected. See "Risk Factors -- Risks Relating to
Intellectual Property."
There can be no assurance that 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.
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.
EMPLOYEES
As of March 31, 1997, the Company had 87 employees, 47 of whom were engaged
in engineering, and 40 of whom were engaged in marketing, sales, operations and
administrative positions. As of March 31, 1997, all of the Company's employees
were located in the United States. No employee of the Company is covered by
collective bargaining agreements, and the Company believes that its relationship
with its employees is good.
The Company's ability to operate successfully depends in significant part
upon the continued service of certain key technical and managerial personnel,
and its continuing ability to attract and retain additional highly qualified
technical and managerial personnel. Competition for such personnel is intense,
and there can be no assurance that the Company can retain such personnel or that
it can attract or retain other highly qualified technical and managerial
personnel in the future, including key sales and marketing personnel. The loss
of key personnel or the inability to hire and retain qualified personnel could
have a material adverse effect upon the Company's business, financial condition
and results of operations. See "Risk Factors -- Dependence Upon Key Personnel."
47
<PAGE> 49
FACILITIES
The Company sub-leases approximately 31,572 square feet in one building in
San Jose, California pursuant to a lease that expires on April 30, 1997.
Effective May 1, 1997, the Company will assume another additional 46,233 square
feet in the same building under a lease that expires in 2007, with an option to
extend the lease for an additional five-year term. Of the total 77,805 square
feet subject to such new lease, the Company initially intends to sub-lease
37,261 square feet. The Company also leases approximately 900 square feet in
Dresher, Pennsylvania for its regional sales office. The Company believes that
in general its facilities are adequate for its current needs and that additional
space will be available as needed. The Company believes that these facilities
will be adequate to meet its needs for the foreseeable future.
LEGAL PROCEEDINGS
There are no material pending or threatened legal proceedings against the
Company.
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<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of the date of this Prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- --------------------------------------------
<S> <C> <C>
L. Gregory Ballard........................ 43 President, Chief Executive Officer and
Director
Gordon A. Campbell(1)..................... 53 Chairman of the Board of Directors
Gary P. Martin............................ 49 Chief Financial Officer and Vice President,
Administration
David Bowman.............................. 53 Vice President, Sales
Karl Chicca............................... 39 Vice President, Operations
Andy Keane................................ 35 Vice President, Marketing
Scott D. Sellers.......................... 28 Vice President, Research and Development and
Director
Gary Tarolli.............................. 40 Vice President and Chief Scientist
George J. Still, Jr.(2)................... 39 Director
Anthony Sun(1)............................ 44 Director
Philip M. Young(1)........................ 57 Director
James Whims(2)............................ 42 Director
</TABLE>
- ------------
(1) Member of Audit Committee
(2) Member of Compensation Committee.
L. Gregory Ballard has served as President, Chief Executive Officer and a
director of the Company since December 1996. Prior to joining the Company, Mr.
Ballard was President at Capcom Entertainment, Inc., a video game and multimedia
entertainment company, from June 1995 through November 1996. Prior to that, Mr.
Ballard served as Chief Operating Officer and Chief Financial Officer of Digital
Pictures, Inc., a video game company, from May 1994 to June 1995. Mr. Ballard
was President and Chief Executive Officer of Warner Custom Music Corporation, a
multimedia marketing division of Time Warner, Inc., from October 1992 to May
1994, and he was President and Chief Operating Officer of Personics Corporation,
a predecessor to Warner Music, from January 1991 to October 1992. Mr. Ballard
also worked for Boston Consulting Group and as a practicing attorney in
Washington, D.C. Mr. Ballard received his BA in Political Science from the
University of Redlands and his JD from Harvard Law School.
Gordon A. Campbell has served as the Chairman of the Board of Directors of
the Company since August 1994 when he co-founded the Company. Mr. Campbell also
served as President and Chief Executive Officer of the Company from January 1995
to December 1996. Prior to joining the Company, Mr. Campbell founded Techfarm,
Inc., a venture capital investment firm, and has served as President since
September 1993. In 1985, Mr. Campbell founded Chips and Technologies, Inc.
("CHIPS"), a semiconductor and related device company, and served as Chairman,
Chief Executive Officer and President of CHIPS until July 1993. Mr. Campbell
founded SEEQ Technology, Inc. ("SEEQ"), a semiconductor and related device
company, in 1981. He served as President and Chief Executive Officer of SEEQ
from 1981 to 1985. Mr. Campbell currently serves as a director of 3Com
Corporation and Bell Microproducts, Inc. He is also a director of several
private companies.
Gary P. Martin has served as Chief Financial Officer and Vice President,
Administration of the Company since June 1995. Prior to joining the Company, Mr.
Martin was Vice President, Finance and Corporate Secretary of MiniStor
Peripherals International, Limited ("MiniStor"), a disk drive company, from
October 1993 until May 1995. MiniStor filed a petition for relief under Chapter
11 of the Federal bankruptcy laws on April 14, 1995. From 1985 to April 1993,
Mr. Martin served as Senior Vice
49
<PAGE> 51
President of Finance and Administration and Corporate Secretary of CHIPS from
1985 to April 1993. Mr. Martin is a director of Essex Property Trust, Inc. Mr.
Martin received a BS in Accounting from San Jose State University.
David M. Bowman has served as Vice President, Sales of the Company since
March 1996. Prior to joining the Company, he was Vice President of Worldwide
Sales at CHIPS from September 1985 to March 1995. He was a director of North
American Sales for Apple from October 1979 to September 1985.
Karl Chicca has served as Vice President, Operations of the Company since
June 1996. Prior to joining the Company, Mr. Chicca was Vice President of
Strategic Commodity Management of Maxtor Corporation, a disk drive company, from
May 1995 to May 1996. He was Vice President, Materials at MiniStor from March
1994 to April 1995. MiniStor filed a petition for relief under Chapter 11 of the
Federal bankruptcy laws on April 14, 1995. From 1979 to March 1994, Mr. Chicca
held various materials and manufacturing positions with International Business
Machine Corporation ("IBM"), most recently as Manager of Worldwide Procurement
of IBM's Storage Systems Division. Mr. Chicca received a BS in Business
Administration from San Jose State University.
Andy Keane has served as Vice President, Marketing of the Company since
March 1996. Prior to joining the Company, he was Marketing Manager of
Microprocessor Marketing for MIPS Computer Systems, Inc., subsequently SGI, each
of which is a computer system and workstation company, from 1990 to September
1994. Mr. Keane was a Design Engineer at Intel from 1986 to 1988. He received
his BS in Physics from Rensselaer Polytechnic Institute and an MBA from the
University of California at Berkeley.
Scott D. Sellers has served as Vice President, Research and Development of
the Company since January 1995. He co-founded the Company in August 1994 and has
served as a director of the Company since March 1995. Mr. Sellers was Principal
Engineer at MediaVision Technology, Inc. ("MediaVision"), a multimedia computer
products company, from June 1993 to June 1994. Prior to that, Mr. Sellers was a
Microprocessor Engineer at Pellucid, Inc. ("Pellucid"), a developer of chip and
board products, from January 1993 to June 1993. Mr. Sellers was also a Member of
the Technical Staff at SGI from October 1990 to January 1993. Mr. Sellers
received a BSEE from Princeton University.
Gary Tarolli has served as Vice President and Chief Scientist of the
Company since January 1995. Prior to co-founding the Company in August 1994, Mr.
Tarolli was an Engineering Fellow at MediaVision from 1993 to 1994. Before
joining MediaVision, Mr. Tarolli was a self-employed consultant to the 3D
graphics industry from 1992 to 1993. Mr. Tarolli was a Principal Scientist at
SGI from 1983 to 1992. Prior to joining SGI, he was a Principal Engineer at
Digital Equipment Corp. for four years. Mr. Tarolli received a BS in Mathematics
from Rensselaer Polytechnic Institute and an MS in computer science from
California Institute of Technology.
George J. Still, Jr. has served as a director of the Company since February
1996. Mr. Still is Vice President and Managing Partner of Norwest Venture
Capital, Inc. ("Norwest"), a venture capital investment firm, where he has been
employed since 1989. Prior to joining Norwest, Mr. Still was General Partner of
The Centennial Funds, Ltd., a venture capital investment firm, from 1984 to
1989. He currently serves on the Board of Directors of PeopleSoft, Inc. Mr.
Still is also a director of several private companies. Mr. Still has a BA from
Pennsylvania State University and an MBA from the Amos Tuck School at Dartmouth
College.
Anthony Sun has served as a director of the Company since March 1995. Mr.
Sun has been a General Partner at Venrock Associates, a venture capital
investment firm, since 1979. He is currently director of Award Software
International, Inc., Centura Software Corporation, Cognex Corporation,
Conductus, Inc., Fractal Design Corporation, Inference Corporation, Komag, Inc.
and Worldtalk Communications Corporation. He is also a director of several
private companies. Mr. Sun received SBEE, SMEE and Engineering degrees from the
Massachusetts Institute of Technology and an MBA from Harvard University.
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<PAGE> 52
Philip M. Young has served as a director of the Company since March 1995.
Mr. Young has been a general partner at U.S. Venture Partners, a venture capital
firm, since April 1990. He was a managing director of Dillon, Read and Co.,
Inc., and general partner of Dillon Read's Concord Partners venture capital
activity in Palo Alto from January 1986 to April 1990. He currently serves on
the Boards of Directors of Vical, Inc., CardioThoracic Systems, Inc., FemRx,
Inc., Immune Response Corporation and Zoran Corporation. Mr. Young is also a
director of several private companies. Mr. Young received a BME in nuclear
engineering from Cornell University, an MS in Engineering Physics from George
Washington University and an MBA from Harvard University.
James Whims has served as a director of the Company since November 1996.
Mr. Whims has been a Partner at Techfarm since December 1996. From November 1994
until March 1996, Mr. Whims was an Executive Vice President of Sony Computer
Entertainment, a video game software development company. From 1990 until
October 1994, Mr. Whims was Executive Vice President of the Computer Division of
The Software Toolworks, Inc., a diversified software company. From 1985 to 1990,
Mr. Whims served as Vice President of Sales of Worlds of Wonder, Inc., a toy
products company which he co-founded. Mr. Whims received a BA from Northwestern
University in Economics and Communications and an MBA in Finance and Marketing
from the University of Arizona.
All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the discretion
of the Board of Directors.
DIRECTOR COMPENSATION
Members of the Company's Board of Directors do not receive compensation for
their services as directors. The Company's 1997 Director Option Plan provides
that options shall be granted to non-employee directors of the Company pursuant
to an automatic nondiscretionary grant mechanism. See "Stock Plans -- 1997
Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company and administers various incentive compensation and
benefit plans. The Compensation Committee consists of directors Still and Whims.
See "Certain Transactions -- Transactions with Executive Officers and
Directors".
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<PAGE> 53
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the year ended December 31, 1996, by the Company's Chief
Executive Officer and the Company's next four most highly compensated executive
officers whose salary and bonus for such fiscal year exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
-------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION OPTIONS(#)(1)
- ------------------------------------------ -------- -------- ------------ -------------
<S> <C> <C> <C> <C>
L. Gregory Ballard(2)..................... $ 11,538 $ -- $ -- 700,000
President, Chief Executive Officer and
Director
Karl Chicca(3)............................ 75,385 -- 110,003 150,000
Vice President, Operations
Scott D. Sellers.......................... 116,667 1,400 -- 50,000
Vice President, Research and Development
and Director
Gary Tarolli.............................. 130,000 1,400 -- 50,000
Vice President and Chief Scientist
Ross Q. Smith(4).......................... 111,666 350 -- 50,000
Vice President and General Manager,
Systems Product Division
</TABLE>
- ------------
(1) These shares are subject to exercise under stock options granted under the
Company's 1995 Employee Stock Plan.
(2) Mr. Ballard joined the Company in December 1996.
(3) Other annual compensation amount relates to relocation expenses paid.
(4) Mr. Smith resigned as a full time employee of the Company in April 1997, but
will serve as a part-time employee until July 1997. Mr. Smith has
subsequently founded Quantum3D, Inc., a supplier of advanced graphics
subsystems based on 3Dfx technology. See "Business -- Products, Products
Under Development and Technology License -- Graphics Subsystems and
Development Boards."
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<PAGE> 54
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1996.
All such options were awarded under the Company's 1995 Employee Stock Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTIONS TERM(1)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION --------------------
NAME GRANTED(1) IN FISCAL 1996 SHARE(2)(3) DATE(4) 5%($) 10%($)
- ------------------------- --------- -------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard....... 700,000 26% $0.45 12/02/06 $198,102 $502,029
Karl Chicca.............. 150,000 5 0.22 06/27/06 20,754 52,594
Scott D. Sellers......... 50,000 2 0.22 07/25/06 6,918 17,531
Gary Tarolli............. 50,000 2 0.22 07/25/06 6,918 17,531
Ross Q. Smith............ 50,000 2 0.22 07/25/06 6,918 17,531
</TABLE>
- ------------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the exercise price per share are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future common stock price. Actual
gains, if any, on stock option exercises are dependent on the future
financial performance of the Company, overall market conditions and the
option holders' continued employment through the vesting period. This table
does not take into account any appreciation in the fair market value of the
Common Stock from the date of grant to the date of this Prospectus, other
than the columns reflecting assumed rates of appreciation of 5% and 10%.
(2) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock on the date of grant, as determined by the Board
of Directors.
(3) Exercise price may be paid in cash, check, promissory note, delivery of
already-owned shares of the Company's Common Stock subject to certain
conditions, authorization to the Company to retain from the total number of
shares for which the option is exercised that number of shares having a fair
market value on the date of exercise equal to the exercise price for the
total number of shares as to which the option is exercised, delivery of a
properly executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company the amount of sale or loan
proceeds required to pay the exercise price, or any combination of the
foregoing methods of payment or such other consideration or method of
payment to the extent permitted under applicable law.
(4) Options become exercisable as to 25% of the option shares on the first
anniversary of the date of grant and as to 1/48th of the option shares each
month thereafter, with full vesting occurring on the fourth anniversary of
the date of grant.
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<PAGE> 55
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
There were no exercises of stock options by Named Executive Officers during
the year ended December 31, 1996. The following table sets forth certain
information regarding stock options held as of December 31, 1996 by the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(#)(1) DECEMBER 31, 1996($)(2)
--------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
L. Gregory Ballard....... -- 700,000 -- --
Karl Chicca.............. -- 150,000 -- --
Scott D. Sellers......... -- 50,000 -- --
Gary Tarolli............. -- 50,000 -- --
Ross Q. Smith............ -- 50,000 -- --
</TABLE>
- ------------
(1) Options granted under the Company's 1995 Employee Stock Plan may be
exercised by the holder thereof prior to vesting with the shares purchased
thereby subject to repurchase by the Company until fully vested. The table
presents options as exercisable according to the vesting schedule of the
option.
(2) Based upon an assumed initial public offering price of $ per share
minus the exercise price.
STOCK PLANS
Stock Option Plan. The Company's 1995 Employee Stock Plan (the "1995
Plan") was adopted by the Board of Directors in April 1995 and approved by the
shareholders in May 1995. A total of 5,350,000 shares of Common Stock has been
reserved for issuance under the 1995 Plan. The 1995 Plan, as amended, provides
for grants of incentive stock options to employees (including officers and
employee directors) and nonstatutory stock options to consultants of the
Company. The purpose of the 1995 Plan is to attract and retain the best
available personnel for positions of substantial responsibility and to provide
additional incentive to employees and consultants to promote the success of the
Company's business. The 1995 Plan is presently being administered by the Board
of Directors, which determines the optionees and the terms of options granted,
including the exercise price, number of shares subject to the option and the
exercisability thereof.
The term of options granted under the 1995 Plan is stated in the option
agreement. However, the term of an incentive stock option may not exceed 10
years and, in the case of an option granted to an optionee who, at the time of
grant, owns stock representing more than 10% of the Company's outstanding
capital stock, the term of such option may not exceed five years. Options
granted under the 1995 Plan vest and become exercisable as set forth in each
option agreement. In general, no option may be transferred by the optionee other
than by will or the laws of descent or distribution, and each option may be
exercised, during the lifetime of the optionee, only by such optionee. An
optionee whose relationship with the Company or any related corporation ceases
for any reason (other than by death or total and permanent disability) may
exercise options in the three-month period following such cessation, unless such
options terminate or expire sooner (or for nonstatutory stock options, later),
by their terms. The three-month period is extended to twelve months for
terminations due to death or permanent total disability. In the event of a
merger of the Company with or into another corporation, all outstanding options
may either by assumed or an equivalent option may be substituted by the
surviving entity or, if such options are not assumed or substituted, such
options shall become exercisable as to all of the shares subject to the options,
including shares as to which they would not otherwise be exercisable. In the
event that options become exercisable in lieu of assumption or substitution, the
Board of Directors shall notify optionees that all options shall be fully
exercisable for
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<PAGE> 56
a period of 15 days, after which such options shall terminate. The Board of
Directors determines the exercise price of options granted under the 1995 Plan
at the time of grant, provided that the exercise price of all incentive stock
options must be at least equal to the fair market value of the shares on the
date of grant unless the grant is pursuant to a merger or other corporate
transaction. With respect to any participant who owns stock possessing more than
10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any incentive stock option granted must equal at least 110% of
the fair market value on the grant date. The consideration for exercising any
incentive stock option or any nonstatutory stock option may consist of cash,
check, delivery of already-owned shares of the Company's Common Stock subject to
certain conditions, authorization to the Company to retain from the total number
of shares for which the option is exercised that number of shares having a fair
market value on the date of exercise equal to the exercise price for the total
number of shares as to which the option is exercised, delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds required to
pay the exercise price, or any combination of the foregoing methods of payment
or such other consideration or method of payment to the extent permitted under
applicable law. No incentive stock options may be granted to a participant,
which, when aggregated with all other incentive stock options granted to such
participant, would have an aggregate fair market value in excess of $100,000
becoming exercisable in any calendar year. No employee may be granted, in any
fiscal year of the Company, options to purchase more than 300,000 shares (or
500,000 shares in the case of a new employee's initial employment with the
Company). The 1995 Plan will terminate in April 2005, unless sooner terminated
by the Board of Directors.
As of March 31, 1997, 750,450 shares of Common Stock, net of repurchases,
had been issued upon the exercise of options granted under the 1995 Plan,
options to purchase 3,750,943 shares of Common Stock at a weighted average
exercise price of $1.36 per share were outstanding and 848,607 shares remain
available for future option grants under the 1995 Plan.
Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase
Plan (the "Purchase Plan") was adopted by the Board of Directors in March 1997
and approved by the shareholders in April 1997. A total of 1,100,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan. The
Purchase Plan, which is intended to qualify under Section 423 of the Internal
Revenue Code of 1986, as amended, is administered by the Board of Directors or
by a committee appointed by the Board. Employees (including officers and
employee directors of the Company) are eligible to participate if they are
customarily employed for at least 20 hours per week and for more than five
months in any calendar year, provided that no Employee shall be granted an
option (i) to the extent that immediately after the grant such Employee owns
more than 5% of the voting power of outstanding capital stock of the Company or
(ii) to the extent such Employee's rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds $25,000
worth of stock for each calendar year in which such option is outstanding at any
time. The Purchase Plan permits eligible employees to purchase Common Stock
through payroll deductions, which may not exceed 15% of an employee's
compensation. The Purchase Plan will be implemented in a series of overlapping
offering periods, each to be of approximately 24 months duration. The initial
offering period under the Purchase Plan will begin on the effective date of this
offering and subsequent offering periods will begin on the first trading day on
or after May 1 and November 1 of each year. Each participant will be granted an
option on the first day of the offering period and such option will be
automatically exercised on the last date of each semi-annual period throughout
the offering period. If the fair market value of the Common Stock on any
purchase date is lower than such fair market value on the start date of that
offering period, then all participants in that offering period will be
automatically withdrawn from such offering period and re-enrolled in the
immediately following offering period. The purchase price of the Common Stock
under the Purchase Plan will be equal to 85% of the lesser of the fair market
value per share of Common Stock on the start date of the offering period or on
the date on which the option is exercised. Employees may end their participation
in an offering period at any time during that period, and participation ends
automatically on termination of employment with the Company. In the event of a
proposed dissolution or liquidation of the Company,
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<PAGE> 57
the offering periods then in progress shall terminate immediately prior to the
consummation of the proposed dissolution or liquidation, unless otherwise
provided by the Board. In the event of a proposed sale of all or substantially
all of the Company's assets or the merger of the Company with or into another
corporation, each outstanding option shall be assumed or an equivalent option
substituted by the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, then the offering
period in progress will be shortened by setting a new exercise date that is
before the sale or merger and the offering period in progress shall end on the
new exercise date. Each participant shall be notified at least ten business days
prior to the new exercise date, and unless such participant ends his or her
participation, the option will be exercised automatically on the new exercise
date. The Purchase Plan will terminate in March 2007, unless sooner terminated
by the Board of Directors.
Director Option Plan. The Company's 1997 Director Option Plan (the
"Director Plan") was adopted by the Board of Directors in March 1997 and
approved by the shareholders of the Company in April 1997. A total of 300,000
shares of Common Stock has been reserved for issuance under the Director Plan.
The option grants under the Director Plan are automatic and non-discretionary,
and the exercise price of the options is 100% of the fair market value of the
Common Stock on the grant date. The Director Plan provides for an initial grant
of options to purchase 25,000 shares of Common Stock to each new non-employee
director of the Company who is neither affiliated with or nominated by a
shareholder that owns one percent or more of the outstanding capital stock of
the Company on the later of the effective date of the Director Plan or the date
he or she first becomes a director. In addition, each non-employee director will
automatically be granted an additional option to purchase 10,000 shares of
Common Stock at the next meeting of the Board of Directors following the annual
meeting of shareholders in each year beginning with the 1998 annual meeting of
shareholders, if on such date, such director has served on the Board of
Directors for at least six months; provided, however, if such director is
elected as Chairman of the Board of Directors, such option grant shall be 20,000
shares. In addition to these grants, each director shall automatically be
granted an option to purchase 2,000 shares at the next meeting of the Board of
Directors following the annual meeting of shareholders in each year beginning
with the 1997 annual meeting of shareholders, if such director serves on either
the Audit Committee or Compensation Committee of the Board of Directors. If such
Director serves on both such Committees, this grant shall be 4,000 shares. The
term of such options is ten years, provided that such options shall terminate
three months following the termination of the optionee's status as a director
(or twelve months if the termination is due to death or disability). 25,000
share options granted to a director vest at a rate of 1/48th of the shares
subject to the option per month following the date of grant. 10,000 or 20,000
share options granted to a director vest at a rate of 1/12th of the shares
subject to the option per month following the date of grant. 2,000 share options
granted to a director vest at a rate of 1/12th of the shares subject to the
option per month following the date of grant. In the event of a merger of the
Company with or into another corporation, all outstanding options may either be
assumed or an equivalent option may be substituted by the surviving entity or,
if such options are not assumed or substituted, such options shall become
exercisable as to all of the shares subject to the options, including shares as
to which they would not otherwise be exercisable. In the event that options
become exercisable in lieu of assumption or substitution, the Board of Directors
shall notify optionees that all options shall be fully exercisable for a period
of 30 days, after which such options shall terminate. The Director Plan will
terminate in March 2007, unless sooner terminated by the Board of Directors.
401(k) Plan. Substantially all full-time employees of the Company
participate in the 3Dfx Interactive 401(k) Plan (the "401(k) Plan"), a plan
intended to qualify under Section 401 of the Internal Revenue Code of 1986, as
amended. Employees may begin to participate in the 401(k) Plan the first of the
month following their hire date provided they have reached the age of 18.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the lesser of 15% of eligible compensation or the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require,
additional matching contributions to the 401(k) Plan by the Company on behalf of
the participants. Contribu-
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<PAGE> 58
tions by employees or by the Company to the 401(k) Plan, and income earned on
plan contributions, are generally not taxable to employees until withdrawn, and
contributions by the Company, if any, should be deductible by the Company when
made. The trustee under the 401(k) Plan, at the direction of each participant,
invests the assets of the 401(k) Plan in selected investment options.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Pursuant to letter agreements entered into with each of L. Gregory Ballard,
Karl Chicca, Scott Sellers and Gary Tarolli, in the event there is a change of
control of the Company and such executive is terminated other than for cause
within one year following the effective date of such change of control, (i) in
the case of Messrs. Ballard and Chicca, 25% (or, in the event that less than 25%
of such executive's options remain unvested, all) of such executive's options
will be accelerated and become fully vested and (ii) in the cases of Messrs.
Sellers and Tarolli, 25% of the executive's stock subject to the Company's
repurchase option under a restricted stock purchase agreement shall be released
from such repurchase option (or all of such stock if less than 25% of the
executive's stock remains subject to the Company's repurchase option). For
purposes of these letter agreements a "change of control" means the (i) the sale
of all or substantially all of the Company's assets, or (ii) a consolidation or
merger of the Company with or into any other corporation (other than a
wholly-owned subsidiary of the Company) or engagement in a transaction or series
of transactions in which more than 50% of the voting power of the Company is
disposed. Termination other than for cause includes constructive termination
resulting from (i) the reduction of such employee's rate of compensation, (ii)
the reduction of such employee's scope of engagement or (iii) the requirement
that such employee provide services at a location more than 50 miles from the
employee's office location as of the date of the letter agreement.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Articles of Incorporation that
eliminate to the fullest extent permissible under California law the liability
of its directors to the Company for monetary damages. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. The Company's Bylaws provide that the Company
shall indemnify its directors and officers to the fullest extent permitted by
California law, including in circumstances in which indemnification is otherwise
discretionary under California law. The Company has entered into indemnification
agreements with its officers and directors containing provisions which may
require the Company, among other things, to indemnify the officers and directors
against certain liabilities that may arise by reason of their status or service
as directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), and to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
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<PAGE> 59
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT OF SECURITIES
Between January 12 and May 18, 1995, the Company sold an aggregate of
3,292,500 shares of its Common Stock at prices ranging from $.0125 to $.05 per
share. Between March 13, 1995 and January 17, 1997 the Company sold the
following shares of its Preferred Stock in private placement transactions:
5,501,979 shares of Series A Preferred Stock at a price of $1.00 per share;
5,300,000 shares of Series B Preferred Stock at a price of $2.20 per share and
3,241,718 shares of Series C Preferred Stock at a price of $3.75 per share. In
addition, the Company issued warrants to purchase the following shares of
Preferred Stock: 87,500 shares of Series A Preferred Stock at an exercise price
of $1.00 per share; 209,717 shares of Series B Preferred Stock at an exercise
price of $2.20 per share and 70,000 shares of Series C Preferred Stock at an
exercise price of $3.75 per share.
The purchasers of Common Stock and Preferred Stock described above
included, among others, the following officers, directors and holders of more
than five percent of the Company's voting securities:
<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK (1)
COMMON --------------------------------------
STOCK SERIES A SERIES B SERIES C
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
OFFICERS
Scott D. Sellers............................ 600,000 -- -- --
Greg Tarolli................................ 600,000 -- -- --
Ross Q. Smith(2)............................ 600,000 -- -- --
DIRECTORS
Gordon A. Campbell.......................... 181,750 89,616 463,063 --
ENTITIES AFFILIATED WITH DIRECTORS
Venture capital funds affiliated with U.S.
Venture Partners (Philip M. Young)....... -- 1,950,000 681,800 266,667
Venture capital funds affiliated with
Venrock Associates (Anthony Sun)......... -- 1,950,000 681,800 266,667
Norwest Equity Partners V (George J. Still,
Jr.)..................................... -- 1,591,000 266,667
Techfarm, Inc. (Gordon A. Campbell)......... 925,000 -- -- --
OTHER 5% SHAREHOLDERS
Chase Capital Partners...................... -- -- 1,477,273 266,667
Intel Corporation........................... -- -- -- 1,333,334
</TABLE>
- ------------
(1) The purchasers of these securities are entitled to registration rights. See
"Description of Capital Stock -- Registration Rights."
(2) Mr. Smith resigned as a full time employee of the Company in April 1997, but
will serve as a part-time employee until July 1997. Mr. Smith has
subsequently founded Quantum3D, Inc., a supplier of advanced graphics
subsystems based on 3Dfx technology.
TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
Techfarm provides management services to the Company for which the Company
pays a fee of $5,000 per month. Gordon Campbell, the Chairman of the Board of
Directors of the Company, and James Whims, a director of the Company, are each
officers of Techfarm. The Company made total payments to Techfarm under the
consulting agreement during 1995 and 1996 of $45,000 and $60,000, respectively.
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions, including loans, between
the Company and its officers, directors, principal shareholders and their
affiliates will be approved by a majority of the Board of Directors, including a
majority of the independent and disinterested outside directors, and will
continue to be on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.
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<PAGE> 60
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 31, 1997 and as adjusted to
reflect the sale of the 4,200,000 shares of Common Stock offered hereby: (i) by
each person or entity who is known by the Company to own beneficially more than
5% of the Common Stock; (ii) by each director of the Company, (iii) by the Named
Executive Officers, and (iv) by all directors and executive officers of the
Company as a group. Except as otherwise noted, the shareholders named in the
table have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them, subject to applicable community
property laws.
<TABLE>
<CAPTION>
SHARES PERCENT BENEFICIALLY OWNED(1)
BENEFICIALLY ----------------------------------
BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING
- ------------------------------------------------ ------------ --------------- --------------
<S> <C> <C> <C>
Entities affiliated with U.S. Venture
Partners...................................... 2,898,467 15.9% 12.9%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Entities affiliated with Venrock Associates..... 2,898,467 15.9 12.9
755 Page Mill Road, A-230
Palo Alto, CA 94304
Norwest Equity Partners V....................... 1,857,667 10.2 8.3
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301-1426
Entities affiliated with Chase Capital
Partners...................................... 1,743,940 9.6 7.8
380 Madison Avenue, 12th Flr.
New York, NY 10017
Techfarm, Inc.(2)............................... 1,759,429 9.7 7.8
111 West Evelyn Avenue, #101
Sunnyvale, CA 94086
Intel Corporation, SC-4-210..................... 1,333,334 7.3 6.0
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Tony Sun(3)..................................... 2,898,467 15.9 12.9
Philip M. Young(4).............................. 2,898,467 15.9 12.9
George J. Still, Jr.(5)......................... 1,857,667 10.2 8.3
Gordon A. Campbell(6)........................... 1,759,429 9.7 7.8
L. Gregory Ballard.............................. 5,000 * *
James Whims..................................... -- -- --
Scott D. Sellers................................ 600,000 3.3 2.7
Gary Tarolli.................................... 600,000 3.3 2.7
Ross Q. Smith................................... 600,000 3.3 2.7
Karl Chicca..................................... 46,875 * *
All executive officers and directors as a group
(12 persons)(7)............................... 11,022,947 60.1 48.9
</TABLE>
- ------------
* Less than 1%.
(1) Applicable percentage ownership is based on 18,195,199 shares of Common
Stock outstanding as of March 31, 1997, and 22,395,199 shares of Common
Stock outstanding after completion of this offering, in each case together
with applicable options for such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, based on factors including voting and investment power with
respect to shares, subject to the applicable community property laws.
Shares of Common Stock subject to options or warrants currently
exercisable, or exercisable within 60 days after March 31, 1997, are deemed
outstanding for the
59
<PAGE> 61
purpose of computing the percentage ownership of the person holding such options
or warrants, but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Includes 634,429 shares and 100,000 shares issuable upon exercise of stock
options exercisable within 60 days of March 31, 1997 held by Gordon A.
Campbell. Mr. Campbell is President of Techfarm, Inc. Techfarm, Inc.
disclaims beneficial ownership of the shares held by Mr. Campbell.
(3) Represents 2,898,467 shares held by entities affiliated with Venrock
Associates. Mr. Sun is a general partner of Venrock Associates and disclaims
beneficial ownership of the shares held by the venture capital funds except
to the extent of his proportionate partnership interest therein.
(4) Represents 2,898,467 shares held by entities affiliated with U.S. Venture
Partners. Mr. Young is a general partner of U.S. Venture Partners and
disclaims beneficial ownership of the shares held by the venture capital
funds except to the extent of his proportionate partnership interest
therein.
(5) Represents 1,857,667 shares held by Norwest Equity Partners V. Mr. Still is
a general partner of Norwest Equity Partners V and disclaims beneficial
ownership of the shares held by the venture capital funds except to the
extent of his proportionate partnership interest therein.
(6) Includes 100,000 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1997. Also includes 925,000 shares held by
Techfarm, Inc. Mr. Campbell disclaims beneficial ownership of the shares
held by Techfarm, Inc.
(7) Includes 139,062 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of March 31, 1997.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, the Company will be authorized to
issue 50,000,000 shares of Common Stock, no par value, and 5,000,000 shares of
undesignated Preferred Stock, no par value.
COMMON STOCK
As of March 31, 1997, there were 18,195,199 shares of Common Stock
outstanding held of record by approximately 125 shareholders. As of March 31,
1997, options to purchase an aggregate of 3,750,943 shares of Common Stock were
also outstanding. See "Management -- Stock Plans".
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders of
Preferred Stock, if any, the holders of Common Stock are entitled to receive
such dividends, if any, as may be declared from time to time by the Board of
Directors in its discretion from funds legally available therefor. Upon
liquidation or dissolution of the Company, the remainder of the assets of the
Company will be distributed ratably among the holders of Common Stock after
payment of liabilities and the liquidation preferences of any outstanding shares
of Preferred Stock. The Common Stock has no preemptive or other subscription
rights and there are no conversion rights or redemption or sinking fund
provisions with respect to such shares. All of the outstanding shares of Common
Stock are, and the shares to be sold in this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Effective upon the closing of this offering, the Company will be authorized
to issue 5,000,000 shares of undesignated Preferred Stock. The Board of
Directors has the authority to issue the Preferred Stock in one or more series
and to fix the price, rights, preferences, privileges and restrictions thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting a series or the designation of such series, without any
further vote or action by the Company's shareholders. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of delaying,
deferring or preventing a change in control of the Company without further
action by the shareholders and may adversely affect the market price of, and the
voting and other rights of, the holders of Common Stock. The Company has no
current plans to issue any shares of Preferred Stock.
WARRANTS
As of March 31, 1997, there were outstanding warrants to purchase an
aggregate of 87,500 shares of Common Stock at an exercise price of $1.00 per
share, an aggregate of 56,817 shares of Common Stock at an exercise price of
$2.20 per share and an aggregate of 10,000 shares of Common Stock at $3.75 per
share. Warrants to purchase 212,900 shares of Common Stock will expire
automatically upon the closing of this offering if not exercised. The remaining
warrants expire between December 31, 2001 and January 1, 2003.
REGISTRATION RIGHTS
The holders of approximately 14,043,697 shares of Common Stock and rights
to acquire 154,317 shares of Common Stock and their permitted transferees (the
"Holders") are entitled to certain rights with respect to the registration of
such shares ("Registrable Securities") under the Securities Act. Under the terms
of an agreement between the Company and the Holders, the holders of at least 40%
of the Registrable Securities may require, on two occasions after nine months
from the effective date of this offering, that the Company use its best efforts
to register the Registrable Securities for public resale. In addition, if the
Company proposes to register any of its securities under
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<PAGE> 63
the Securities Act, either for its own account or for the account of other
security holders exercising registration rights, the Holders are entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. The holders of Registrable Securities may also require the
Company on no more than two occasions to register all or a portion of their
Registrable Securities on Form S-3 under the Securities Act when use of such
form becomes available to the Company. All such registration rights are subject
to certain conditions and limitations, including the right of the underwriters
of an offering to limit the number of shares to be included in such
registration. In addition, the Company need not effect a registration within six
months following a previous registration, or within six months following any
offering of securities for the account of the Company made subsequent to this
offering, or after such time as all Holders may sell under Rule 144 in a three
month period all shares of Common Stock to which such registration rights apply.
TRANSFER AGENT
The transfer agent for the Common Stock is First National Bank of Boston.
Its telephone number is (617) 575-3120.
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<PAGE> 64
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of
the Company. Sales of a substantial number of shares of Common Stock in the
public market following this offering could adversely affect the market price of
the Common Stock prevailing from time to time.
Upon completion of this offering, the Company will have approximately
22,395,199 shares of Common Stock outstanding (assuming no exercise of the
Underwriters' over-allotment option.) Of these shares, the 4,200,000 shares sold
in this offering will be freely transferable without restriction or registration
under the Securities Act, except for any shares purchased by an existing
"affiliate" of the Company, as that term is defined by the Securities Act (an
"Affiliate"), which shares will be subject to the resale limitations of Rule 144
adopted under the Act. On the date of this Prospectus, 18,195,199 "restricted
shares" as defined in Rule 144 promulgated under the Securities Act will be
outstanding.
All officers, directors and all other shareholders of the Company have
agreed not to offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock, or enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of ownership of
the Common Stock, until the later of 180 days after the date of this Prospectus
or the open of market on the third trading day following the date of public
disclosure of the Company's financial results for the fiscal year ending
December 31, 1997, without the prior written consent of Robertson, Stephens &
Company. Robertson, Stephens & Company may, in its sole discretion and at any
time without notice, release all or any portion of the securities subject to
lock-up agreements. Robertson, Stephens & Company currently has no plans to
release any portion of the securities subject to lock-up agreements. As a result
of these contractual restrictions and the provisions of Rules 144(k), 144 and
701, the restricted shares will be available for sale in the public market as
follows: (i) no shares will be eligible for immediate sale on the date of this
Prospectus, (ii) no shares will be eligible for sale 90 days after the date of
this Prospectus, (iii) approximately 6,600 shares will be eligible for sale 120
days after the date of this Prospectus, (iv) approximately 17,975,699 shares
will be eligible for sale on the later of 180 days after the date of this
Prospectus or the open of market on the third trading day following the date of
public disclosure of the Company's financial results for the fiscal year ending
December 31, 1997 upon expiration of lock-up agreements and (v) approximately
212,900 shares will be eligible for sale approximately one year from the date of
this Prospectus.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year
(including the holding period of any prior owner except an affiliate of the
Company) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) one percent of the number of
shares of Common Stock then outstanding (which will equal approximately 224,000
shares immediately after this offering); or (ii) the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an Affiliate at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an Affiliate), is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. Subject to the contractual restrictions described above, "144(k)
shares" may therefore be sold immediately upon the completion of this offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended
63
<PAGE> 65
(the "Exchange Act"), pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
typical stock options granted by an issuer before it becomes subject to the
reporting requirements of the Exchange Act, along with the shares acquired upon
exercise of such options (including exercises after the date of this
Prospectus). Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 90 days
after the date of this Prospectus, may be sold by persons other than Affiliates
subject only to the manner of sale provisions of Rule 144 and by Affiliates
under Rule 144 without compliance with its two-year minimum holding period
requirements.
At March 31, 1997, options to purchase 3,750,943 shares of Common Stock
were outstanding, of which options to purchase approximately 370,253 shares were
then vested and exercisable. Shortly after this offering, the Company intends to
file a registration statement on Form S-8 under the Securities Act covering
shares of Common Stock reserved for issuance under the Company's stock plans.
See "Management -- Stock Plans." Shares of Common Stock issued upon exercise of
options under the Form S-8 will be available for sale in the public market,
subject to Rule 144 volume limitations applicable to Affiliates and subject to
the contractual restrictions described above. Beginning 180 days after the
Effective Date, approximately 1,188,000 shares issuable upon the exercise of
vested stock options will become eligible for sale in the public market, if such
options are exercised.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
64
<PAGE> 66
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC, Montgomery Securities and UBS Securities LLC
(the "Representatives"), have severally agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company the
number of shares of Common Stock set forth opposite their names below. The
Underwriters are committed to purchase and pay for all such shares, if any are
purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------------------------------------------------------------------- ----------
<S> <C>
Robertson, Stephens & Company LLC......................................
Montgomery Securities..................................................
UBS Securities LLC.....................................................
---------
Total........................................................ 4,200,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not more than $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the Representatives. No such reduction shall change the amount of proceeds to
be received by the Company as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to 630,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 4,200,000 shares that the Underwriters have agreed to
purchase. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
630,000 shares offered hereby. If purchased, such additional shares will be sold
by the Underwriters on the same terms as those on which the 4,200,000 shares are
being sold.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the Underwriting Agreement.
Each executive officer and director and certain other shareholders of the
Company have agreed with the Representatives until the later of 180 days after
the effective date of the Registration Statement or the open of market on the
third trading day following the date of public disclosure of the Company's
financial results for the fiscal year ending December 31, 1997 (the "Lock-Up
Period") not to offer to sell, contract to sell, or otherwise sell, dispose of,
loan, pledge or grant any rights with respect to any shares of Common Stock, any
options or warrants to purchase any shares of Common Stock, or any securities
convertible into or exchangeable for shares of Common Stock owned as of the date
of this Prospectus or thereafter acquired directly by such holders or with
respect to which they have or hereinafter acquire the power of disposition,
without the prior written consent of Robertson, Stephens & Company LLC. However,
Robertson, Stephens & Company LLC may, in its sole discretion at any time or
from time to time, without notice, release all or any portion of the securities
subject to the lock-up agreements. Approximately 17,975,699 of such shares will
be eligible for immediate public sale following expiration of the Lock-Up
Period, subject to the provisions of Rule 144. In addition, the Company has
agreed that during the Lock-Up Period, it will not, without the prior written
consent of Robertson, Stephens & Company LLC, issue, sell, contract to sell or
otherwise dispose of any shares of
65
<PAGE> 67
Common Stock, any options or warrants to purchase any shares of Common Stock or
any securities convertible into, exercisable for or exchangeable for shares of
Common Stock other than the issuance of Common Stock upon the exercise of
outstanding options and under the existing employee stock purchase plan and the
Company's issuance of options under existing stock option plans. See "Shares
Eligible For Future Sale."
The Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority in excess of 5% of the number of shares of
Common Stock offered hereby.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock offered hereby was determined through negotiations among the
Company and the Representatives. Among the factors considered in such
negotiations were prevailing market conditions, certain financial information of
the Company, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company; estimates of the
business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
Of the 4,200,000 shares of Common Stock offered hereby, it is currently
anticipated that 700,000 shares will be purchased by Sega at the price per share
set forth under "Proceeds to the Company" on the cover of this Prospectus. See
"Investment by Sega."
The Representatives have advised the Company that, pursuant to rules
promulgated by the Commission, certain persons participating in the offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with the offering
of the Common Stock originally sold by such Underwriter or syndicate member is
repurchased by the representatives in syndicate covering transactions, in
stabilizing transactions or otherwise. The Representatives have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
66
<PAGE> 68
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996
and March 31, 1997, and for each of the two years in the period ended December
31, 1996, and the three month period ended March 31, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act,
with respect to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and such Common Stock, reference is made to the Registration Statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or any other document
referred to are not necessarily complete. In each instance, reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. Copies of the Registration Statement, including exhibits and
schedules thereto, may be inspected without charge at the Commission's principal
office in Washington, D.C., or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. The Commission maintains a world wide web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of the site is
http://www.sec.gov.
67
<PAGE> 69
3DFX INTERACTIVE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants.................................................... F-2
Balance Sheets as of December 31, 1995, December 31 1996 and March 31, 1997.......... F-3
Statements of Operations for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997............................. F-4
Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 and
for the three months ended March 31, 1997.......................................... F-5
Statement of Cash Flows for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997............................. F-6
Notes to Financial Statements........................................................ F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
3Dfx Interactive, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of 3Dfx Interactive, Inc. at December
31, 1995 and 1996 and March 31, 1997, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 1996 and
the three month period ended March 31, 1997 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Jose, California
April 11, 1997
F-2
<PAGE> 71
3DFX INTERACTIVE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH MARCH 31,
------------------ 31, 1997
1995 1996 1997 (NOTE 1)
------ ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 865 $ 5,291 $ 4,141 $ 4,369
Accounts receivable less allowance for doubtful
accounts of $0, $78 and $128................ -- 1,393 3,985 3,985
Inventory...................................... 37 4,960 2,999 2,999
Other current assets........................... 135 321 896 896
------ ------- ------- -------
Total current assets................... 1,037 11,965 12,021 12,249
Property and equipment, net...................... 1,369 3,482 3,431 3,431
Other assets..................................... 34 134 134 134
------ ------- ------- -------
$2,440 $15,581 $15,586 $15,814
====== ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit................................. $ -- $ 1,076 $ 1,649 $ 1,649
Accounts payable............................... 471 2,236 1,394 1,394
Accrued liabilities............................ 440 1,061 937 937
Deferred revenue............................... -- -- 800 800
Accrued salaries, wages and benefits........... 124 354 577 577
Current portion of capitalized lease
obligations................................. 309 601 615 615
------ ------- ------- -------
Total current liabilities.............. 1,344 5,328 5,972 5,972
Capitalized lease obligations, less current
portion........................................ 544 632 468 468
------ ------- ------- -------
Commitments (Note 8)
Shareholders' equity:
Preferred Stock, no par value, 14,633,000
shares authorized, 5,501,979, 13,903,697 and
14,043,697 shares issued and outstanding;
5,000,000 shares authorized pro forma, none
issued and outstanding pro forma............ 5,474 28,701 29,222 --
Common Stock, no par value, 25,033,000 shares
authorized; 50,000,000 shares authorized pro
forma; 3,542,500, 3,780,027 and 3,938,602
shares issued and outstanding and 18,195,199
shares issued and outstanding pro forma..... 310 1,626 2,078 31,861
Warrants....................................... -- 353 353 20
Notes receivable............................... (25) (19) (12) (12)
Deferred compensation.......................... (168) (1,250) (1,544) (1,544)
Accumulated deficit............................ (5,039) (19,790) (20,951) (20,951)
------ ------- ------- -------
Total shareholders' equity............. 552 9,621 9,146 9,374
------ ------- ------- -------
$2,440 $15,581 $15,586 $15,814
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 72
3DFX INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
-------------------- -----------------------
1995 1996 1996 1997
------- -------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product....................................... $-- ... $ 6,390 $ -- $ 4,497
Development contract.......................... -- -- -- 750
------- -------- ------- -------
Total revenues........................ -- 6,390 -- 5,247
Cost of product revenues........................ -- 5,123 -- 2,582
------- -------- ------- -------
Gross profit.................................... -- 1,267 -- 2,665
------- -------- ------- -------
Operating expenses:
Research and development...................... 2,940 9,435 1,659 1,953
Selling, general and administrative........... 2,166 6,642 1,028 1,846
------- -------- ------- -------
Total operating expenses.............. 5,106 16,077 2,687 3,799
------- -------- ------- -------
Loss from operations............................ (5,106) (14,810) (2,687) (1,134)
Interest and other income (expense), net........ 67 59 35 (27)
------- -------- ------- -------
Net loss........................................ $(5,039) $(14,751) $(2,652) $(1,161)
======= ======== ======= =======
Pro forma net loss per share (unaudited) (Note
1)............................................ $ (0.75) $ (0.06)
-------- -------
Shares used in pro forma net loss per share
calculations (unaudited) (Note 1)............. 19,661 20,621
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 73
3DFX INTERACTIVE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- ------------------ NOTES DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION DEFICIT TOTAL
---------- ------- --------- ------ -------- ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock to founders,
investors and
employees at $0.0125
per share........... -- $ -- 2,728,000 $ 34 $ -- $(19) $ -- $ -- $ 15
Issuance of Common
Stock to founders,
investors and
employees at $0.0375
per share........... -- -- 146,000 6 -- (6) -- -- --
Issuance of Common
Stock to founders,
investors and
employees at $0.05
per share........... -- -- 418,500 21 -- (21) -- -- --
Issuance of Series A
Convertible
Preferred Stock in
March 1995 at $1.00
per share, net of
issuance costs...... 5,501,979 5,474 -- -- -- -- -- -- 5,474
Common Stock options
exercised........... -- -- 250,000 25 -- -- -- -- 25
Forgiveness of notes
receivable from
shareholders........ -- -- -- -- -- 21 -- -- 21
Deferred
compensation........ -- -- -- 224 -- -- (224) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 56 -- 56
Net loss.............. -- -- -- -- -- -- -- (5,039) (5,039)
---------- ------ --------- ----- --- --- ------ ------- -------
Balance at December
31, 1995............ 5,501,979 5,474 3,542,500 310 -- (25) (168) (5,039) 552
Issuance of Series B
Convertible
Preferred Stock in
March 1996 at $2.20
per share, net of
issuance costs...... 5,300,000 11,634 -- -- -- -- -- -- 11,634
Issuance of Series C
Convertible
Preferred Stock in
November 1996 at
$3.75 per share, net
of issuance costs... 3,101,718 11,593 -- -- -- -- -- -- 11,593
Common Stock options
exercised........... -- -- 370,417 42 -- -- -- -- 42
Forgiveness of notes
receivable from
shareholders........ -- -- -- -- -- 6 -- -- 6
Repurchased Common
Stock............... -- -- (132,890) (4) -- -- -- -- (4)
Issuance of Series B
and C Convertible
>Preferred Stock
warrants............ -- -- -- -- 353 -- -- -- 353
Deferred
compensation........ -- -- -- 1,278 -- -- (1,278) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 196 -- 196
Net loss.............. -- -- -- -- -- -- -- (14,751) (14,751)
---------- ------ --------- ----- --- --- ------ ------- -------
Balance at December
31, 1996............ 13,903,697 28,701 3,780,027 1,626 353 (19) (1,250) (19,790) 9,621
Issuance of Series C
Convertible
Preferred Stock in
January 1997 at
$3.75 per share, net
of issuance costs... 140,000 521 -- -- -- -- -- -- 521
Common Stock options
exercised........... -- -- 168,002 38 -- -- -- -- 38
Common Stock
repurchased......... -- -- (9,427) (1) -- -- -- -- (1)
Repayment of notes
receivable from
shareholders........ -- -- -- -- -- 7 -- -- 7
Deferred
compensation........ -- -- -- 415 -- -- (415) -- --
Amortization of
deferred
compensation........ -- -- -- -- -- -- 121 -- 121
Net loss.............. -- -- -- -- -- -- -- (1,161) (1,161)
---------- ------ --------- ----- --- --- ------ ------- -------
Balance at March 31,
1997................ 14,043,697 $29,222 3,938,602 $2,078 $353 $(12) $ (1,544) $ (20,951) $ 9,146
========== ====== ========= ===== === === ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 74
3DFX INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED MARCH
31, 31,
---------------------- -------------------------
1995 1996 1997
-------- --------- 1996 ---------
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (5,039) $ (14,751) $ (2,652) $ (1,161)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation......................... 227 1,017 146 385
Warrant valuation.................... -- 353 138 --
Stock compensation................... 56 196 14 121
Increase in allowance for doubtful
accounts.......................... -- 78 -- 50
Changes in assets and liabilities:
Accounts receivable............... -- (1,471) (92) (2,642)
Inventory......................... (37) (4,923) -- 1,961
Other assets...................... (169) (286) 21 (575)
Accounts payable.................. 471 1,765 533 (842)
Accrued liabilities............... 564 851 (205) 99
Deferred revenue.................. -- -- -- 800
-------- --------- -------- --------
Net cash used in operating
activities................... (3,927) (17,171) (2,097) (1,804)
-------- --------- -------- --------
Cash flows from investing activities for the
purchase of property and equipment........ (589) (2,210) (877) (334)
-------- --------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Convertible
Preferred Stock, net................... 5,474 23,227 11,650 521
Proceeds from issuance of Common
Stock, net............................. 61 44 18 44
Principal payments of capitalized lease
obligations............................ (154) (540) (228) (150)
Proceeds from drawdown on line of
credit................................. -- 1,076 152 573
-------- --------- -------- --------
Net cash provided by financing
activities................... 5,381 23,807 11,592 988
-------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... 865 4,426 8,618 (1,150)
Cash and cash equivalents at beginning
of period................................. -- 865 865 5,291
-------- --------- -------- --------
Cash and cash equivalents at end
of period.................... $ 865 $ 5,291 $ 9,483 $ 4,141
======== ========= ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for
interest............................... $ 45 $ 96 $ 26 $ 63
Acquisition of property and equipment
under capitalized lease obligations.... 1,007 920 160 --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-6
<PAGE> 75
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the design, development
and marketing of 3D media processors specifically designed for interactive
electronic entertainment applications in the PC, home game console and coin-op
arcade markets. The Company did not incur any expenses from the period of
inception (August 24, 1994) through December 31, 1994.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Revenue from product sales is recognized upon product shipment. Revenue
resulting from development contracts is recognized under the percentage of
completion method based upon costs incurred relative to total contract costs or
when the related contractual obligations have been fulfilled and fees are
billable. Costs associated with development contracts are included in research
and development. Royalty revenue is recognized upon the sale of products subject
to royalties.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. At December 31, 1996
and March 31, 1997, approximately $3,137,000 and $2,908,000, respectively, of
money market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
accounts receivable.
3Dfx invests primarily in money market accounts and commercial paper
instruments. Cash equivalents are maintained with high quality institutions and
their composition and maturities are regularly monitored by management.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable. One customer
accounted for 21% of accounts receivable at December 31, 1996. Three customers
accounted for 38%, 31% and 13% of accounts receivable at March 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Customers comprising 10% or more of the Company's
product revenues for the periods indicated:
A..................................................... 44% 4%
B..................................................... 33% 59%
C..................................................... 11% 15%
</TABLE>
F-7
<PAGE> 76
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Inventory
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years or less. Assets held under
capital leases are amortized using the straight-line method over the term of the
lease or estimated useful lives, whichever is shorter.
Income Taxes
The Company accounts for income taxes using an asset and liability approach
and recognizes deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns.
Research and Software Development Costs
Research and development costs are charged to operations as incurred.
Software development costs incurred prior to the establishment of technological
feasibility are included in research and development and are expensed as
incurred. The Company defines establishment of technological feasibility as the
completion of a working model. Software development costs incurred subsequent to
the establishment of technological feasibility through the period of general
market availability of the product are capitalized, if material. To date, all
software development costs incurred subsequent to the establishment of
technological feasibility have been expensed as incurred due to their
immateriality.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." In January 1996, the Company adopted the disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" (see Note 6).
Interim Results (unaudited)
The accompanying statements of operations and cash flows for the three
month period ended March 31, 1996 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting solely of normal recurring
adjustments, necessary for the fair statement of results for the interim
periods. The results of operations and cash flows for the interim period are not
necessarily indicative of the results to be expected for any other interim
future period.
Pro Forma Balance Sheet (unaudited)
If the offering contemplated by this Prospectus (the "offering") is
consummated, all shares of Convertible Preferred Stock outstanding will
automatically convert into an aggregate of 14,043,697 shares of Common Stock.
The pro forma effect of this conversion has been reflected in the accompanying
unaudited balance sheet as of March 31, 1997. In addition, the pro forma balance
sheet gives effect to the assumed exercise of warrants to purchase 212,900
shares of Common Stock that otherwise expire automatically upon the closing of
this offering.
F-8
<PAGE> 77
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share is computed using the weighted average number
of common and common equivalent shares outstanding during the periods. Common
equivalent shares for the year ended December 31, 1996 and the three month
period ended March 31, 1997 consist of Common Stock issuable upon the conversion
of the Company's Series A, B, and C Convertible Preferred Stock using the
if-converted method. Pursuant to the requirements of the Securities and Exchange
Commission, common stock equivalent shares relating to the stock options and
warrants issued subsequent to April 15, 1996, using the treasury stock method
are included in the computation of pro forma net loss per share for all periods
presented, as if they were outstanding for the entire period. Prior period
earnings per share data have not been presented since such amounts are not
deemed meaningful.
Recent Accounting Pronouncements (unaudited)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This statement
is effective for the Company's fiscal year ending December 31, 1997. The
Statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share and fully diluted earnings per share is replaced by
diluted earnings per share. If the Company had adopted this Statement for the
year ended December 31, 1996 and for the three month period ended March 31,
1997, the Company's loss per share would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- ------------------
<S> <C> <C>
Basic loss per share............. ($ 3.91) ($0.30)
Diluted loss per share........... ($ 1.56) ($0.12)
</TABLE>
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
------ ------- ---------
<S> <C> <C> <C>
Inventory:
Raw material............................... $ 37 $ 424 $ 428
Work in process............................ -- 231 260
Finished goods............................. -- 4,305 2,311
------ ------- -------
$ 37 $ 4,960 $ 2,999
====== ======= =======
Property and equipment:
Computer equipment......................... $ 995 $ 3,122 $ 3,328
Computer software.......................... 521 1,047 1,160
Furniture and equipment.................... 80 557 572
------ ------- -------
1,596 4,726 5,060
Less: accumulated depreciation and
amortization............................ (227) (1,244) (1,629)
------ ------- -------
$1,369 $ 3,482 $ 3,431
====== ======= =======
</TABLE>
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $1,007,000, $1,927,000 and $1,927,000 with
related accumulated amortization of $181,000, $602,000 and $909,000 at December
31, 1995 and 1996 and March 31, 1997, respectively.
F-9
<PAGE> 78
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- DEBT:
The Company has a line of credit agreement with a bank, which provides for
maximum borrowings in an amount up to the lesser of 75% of eligible accounts
receivable plus 100% of cash and cash equivalents or $4,000,000. Borrowings
under the line are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 1.50% per annum (10.0% as of March 31,
1997). The agreement requires that the Company maintain certain financial ratios
and levels of tangible net worth, profitability and liquidity. As of March 31,
1997, the Company was in compliance with its covenants. The line of credit
expires in August 1997. At March 31, 1997, there were no borrowings outstanding
under this line of credit.
The Company has an equipment line of credit with a bank, which provides for
the purchase of up to $2,000,000 of property and equipment. Borrowings under
this line are secured by all of the Company's owned assets and bear interest at
the bank's prime rate plus 1.50% per annum. The agreement requires that the
Company maintain certain financial ratios and levels of tangible net worth,
profitability and liquidity. As of March 31, 1997, the Company was in compliance
with its covenants. The equipment line of credit expires in August 1998. At
March 31, 1997, approximately $1,649,000 was outstanding under this equipment
line of credit.
NOTE 4 -- DEVELOPMENT CONTRACT:
In March 1997, the Company entered into a development and license agreement
with Sega Enterprises, Ltd., under which the Company is entitled to receive
development contract revenues and royalties for units sold by Sega which include
the Company's product. The Company recognized development contract revenues of
$750,000 in the three months ended March 31, 1997, representing a non-refundable
amount due for the delivery of certain engineering designs. Costs incurred
relating to this contract are included in research and development expense.
NOTE 5 -- SHAREHOLDERS' EQUITY:
Common Stock
The Company has issued 3,292,500 shares of its Common Stock to founders and
investors. The shares either vested immediately or will vest on various dates
through 1999. The Company can buy back unvested shares at the original price
paid by the purchasers in the event the purchasers' employment with the Company
is terminated for any reason. During the year ended December 31, 1996 and the
three month period ended March 31, 1997, 99,140 and 5,208 shares, respectively,
of Common Stock were repurchased.
In addition, during the two year period ended December 31, 1996 and the
three month period ended March 31, 1997, certain employees exercised options to
purchase 620,417 and 168,002 shares, respectively, of Common Stock which are
subject to a right of repurchase by the Company at the original share issuance
price. The repurchase right lapses over a period generally ranging from two to
four years. During the year ended December 31, 1996 and the three month period
ended March 31, 1997, 33,750 and 4,219 shares, respectively, of Common Stock
were repurchased.
As of December 31, 1996 and March 31, 1997, approximately 1,670,260 and
1,489,442 shares, respectively, of Common Stock were subject to these repurchase
rights.
The holders of Common Stock, voting as a class, are entitled to elect three
members of the Board of Directors.
F-10
<PAGE> 79
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Convertible Preferred Stock
The aggregate authorized number of preferred shares is 14,633,000, of which
5,600,000, 5,700,000 and 3,333,000 are designated as Series A Convertible
Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible
Preferred Stock, respectively.
Each share of Series A, B and C Convertible Preferred Stock outstanding is
convertible at the option of the holder into one share of Common Stock, subject
to certain adjustments, and automatically converts upon the completion of an
underwritten public offering of Common Stock with gross proceeds of at least $15
million and a public offering price of not less than $6.60 per share or in the
event of the vote of a majority of each of the holders of Series A, B and C
Convertible Preferred Stock outstanding at the time of such a vote.
The holders of Series A, B and C Convertible Preferred Stock are entitled
to elect two members, one member, and one member, respectively, to the Board of
Directors and have voting rights equal to Common Stock on an if-converted basis.
Dividends at the rate of $0.10, $0.22 and $0.375 per share for Preferred Series
A, B and C Convertible Preferred Stock, respectively, as declared by the Board
of Directors, are payable to the preferred stockholders in preference to any
dividends for Common Stock declared by the Board of Directors. Dividends are
noncumulative. No dividends have been declared by the Board of Directors through
March 31, 1997.
The holders of the Series A, B and C Convertible Preferred Stock are
entitled to receive their original issuance prices of $1.00, $2.20 and $3.75 per
share, respectively, in liquidation, plus an amount equal to all declared but
unpaid dividends, prior and in preference to any distribution to the holders of
Common Stock. As of December 31, 1996 and March 31, 1997, the aggregate
liquidation preference of the Series A, B and C Convertible Preferred Stock was
approximately $28,795,000 and $29,319,000, respectively.
At December 31, 1996 and March 31, 1997, 13,903,697 and 14,043,697 shares,
respectively, of Common Stock were reserved for issuance upon conversion of the
preferred stock.
Warrants
In March 1995, the Company issued a warrant to a vendor to purchase 87,500
shares of Series A Convertible Preferred Stock at $1.00 per share. The warrant
expires on March 31, 2002. The warrant was deemed by management to have a
nominal value at the date of grant. The Company has reserved 87,500 shares of
Series A Convertible Preferred Stock for the exercise of this warrant.
In January 1996, the Company entered into a line of credit. To secure the
line , the Company issued to the lessor a warrant to purchase 39,772 shares of
Series B Convertible Preferred Stock at an exercise price of $2.20. The warrant
expires on January 1, 2003. The warrant was deemed by management to have a
nominal value at the date of grant. The Company has reserved 39,772 shares of
Series B Convertible Preferred Stock for the exercise of this warrant.
In February 1996, the Company issued to a financial institution in
accordance with a bridge loan agreement a warrant to purchase 17,045 shares of
Series B Convertible Preferred Stock at $2.20 per share. The warrant expires on
December 31, 2001. The warrant was deemed by management to have a nominal value
at the date of grant. The Company has reserved 17,045 shares of Series B
Convertible Preferred Stock for the exercise of this warrant.
In February 1996, the Company entered into an agreement to issue warrants
to TSMC to purchase 280,000 shares of Series B Convertible Preferred Stock at an
exercise price of $2.20 per share. The purchase right of 100,000 warrants is
exercisable, in whole or in part, at any time on or before December 31, 2001.
These warrants will expire, if not previously exercised, immediately upon the
closing of an underwritten public offering in which the proceeds received by the
Company equal at
F-11
<PAGE> 80
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
least $7,500,000 and the public offering price is not less than $3.00 per share.
The purchase right of 180,000 warrants became exercisable at the rate of 20
shares of Series B Convertible Preferred Stock for each wafer above 2,000 wafers
purchased from TSMC by the Company during fiscal 1996 and became exercisable for
52,900 shares of Series B Convertible Preferred Stock in conjunction with wafer
purchases in 1996. These warrants expire on December 31, 2001. The warrant was
deemed to have a total value of approximately $211,000 and was recognized as a
cost of revenues and research and development expense during 1996. The Company
has reserved 152,900 shares of Series B Convertible Preferred Stock for the
exercise of this warrant.
In 1996, the Company issued to a university and consultants warrants to
purchase 10,000 and 60,000 shares, respectively, of Series C Convertible
Preferred Stock at an exercise price of $3.75 per share. These warrants were
deemed to have a total value of approximately $142,000 at the date of grant and
the related cost was recognized as other expense and research and development
expense, respectively, during 1996. The Company has reserved 70,000 shares of
Series C Convertible Preferred Stock for the exercise of these warrants.
At March 31, 1997, the Company had reserved 367,217 shares of Common Stock
for the exercise of warrants and the subsequent conversion to Common Stock.
NOTE 6 -- STOCK OPTION PLANS:
The Option Plan
In May 1995, the Company adopted a Stock Plan, (the Option Plan) which
provides for granting of incentive and nonqualified stock options to employees
and consultants and directors of the Company. Under the Option Plan, 4,249,500
shares of Common Stock have been reserved for issuance at March 31, 1997.
Options granted under the Option Plan are generally for periods not to
exceed ten years, and are granted at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market value
of the stock determined by the Board of Directors on the date of grant.
Incentive stock options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years, and must be issued
at prices not less than 110% of the fair market value of the stock on the date
of grant. Options granted under the Option Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.
F-12
<PAGE> 81
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of activity under the Option Plan during the
years ended December 31, 1995 and 1996 and the three months ended March 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
----------- ----------- --------
<S> <C> <C> <C>
Balance at May 1, 1995 (date of plan
adoption)............................. 1,707,500 -- --
Granted................................. (1,281,500) 1,281,500 $ 0.10
Exercised............................... -- (250,000) $ 0.10
Canceled................................ 5,000 (5,000) $ 0.10
----------- ----------
Balance at December 31, 1995............ 431,000 1,026,500 $ 0.10
Additional shares authorized............ 2,392,500 -- --
Granted................................. (2,738,276) 2,738,276 $ 0.29
Exercised............................... -- (370,417) $ 0.12
Canceled................................ 317,335 (317,335) $ 0.21
Repurchased............................. 33,750 $ 0.10
----------- ----------
Balance at December 31, 1996............ 436,309 3,077,024 $ 0.26
Additional shares authorized............ 1,250,000 -- --
Granted................................. (900,838) 900,838 $ 4.81
Exercised............................... -- (168,002) $ 0.23
Canceled................................ 58,917 (58,917) $ 0.28
Repurchased............................. 4,219 -- $ 0.10
----------- ----------
Balance at March 31, 1997............... 848,607 3,750,943 $ 1.36
=========== ==========
</TABLE>
At December 31, 1996 and March 31, 1997, 272,343 and 370,253, respectively,
Common Stock options were vested.
During the years ended December 31, 1995 and 1996 and the three month
period ended March 31, 1997, the Company granted options for the purchase of
4,920,614 shares of Common Stock to employees at exercise prices ranging from
$0.10 to $6.00 per share. Management has calculated deferred compensation of
approximately $1,900,000 related to options granted during 1995 and 1996 and the
three month period ended March 31, 1997. Such deferred compensation will be
amortized over the vesting period relating to these options, of which $56,000,
$196,000 and $121,000 has been amortized during the years ended December 31,
1995 and 1996 and the three month period ended March 31, 1997.
Employee Stock Purchase Plan
In March 1997, the Company's Board of Directors approved an Employee Stock
Purchase Plan. Under this plan, employees of the Company can purchase Common
Stock through payroll deductions. A total of 1,100,000 shares have been reserved
for issuance under this plan. The plan was approved by the Company's
shareholders on April 1997.
Directors' Stock Option Plan
In March 1997, the Company adopted a 1997 Directors' Stock Option Plan.
Under this plan options to purchase 300,000 shares of Common Stock may be
granted. The plan provides that options may be
F-13
<PAGE> 82
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
granted at a price not less than fair value of a share at the date of grant. The
plan was approved by the Company's shareholders in April 1997.
Information relating to stock options outstanding under the Option Plan at
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------------------
WEIGHTED
AVERAGE WEIGHTED
NUMBER REMAINING AVERAGE
OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
----------- ---------------- --------------
<S> <C> <C> <C>
Range of exercise prices:
$0.10 - $0.15................... 677,000 8.4 years $ 0.10
$0.22 - $0.375.................. 1,360,105 9.3 years $ 0.24
$0.45........................... 896,500 9.7 years $ 0.45
$1.00 - $6.00................... 817,338 10.0 years $ 5.25
</TABLE>
<TABLE>
<CAPTION>
OPTIONS VESTED
--------------------------
WEIGHTED
NUMBER AVERAGE
VESTED EXERCISE PRICE
------- --------------
<S> <C> <C>
Range of exercise prices:
$0.10 - $0.15...................................... 242,232 $ 0.10
$0.22 - $0.375..................................... 128,021 $ 0.22
$0.45.............................................. -- --
$1.00 - $6.00...................................... -- --
</TABLE>
Certain Pro Forma Disclosures
The Company accounts for its employee stock options plans in accordance
with the provisions of Accounting Principles Board Opinion No. 25. In October
1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation" which established a fair value based method of accounting for
employee stock option plans and shares issued to founders which are subject to
repurchase. Compensation cost for the Company's option plans determined based on
the fair value of the options at their grant dates, as prescribed in FAS 123,
were not materially different than compensation expense recorded by the Company
for the years ended December 31, 1995 and 1996 and the three month period ended
March 31, 1997. The weighted average fair value of stock options granted in the
years ended December 31, 1995 and 1996 and the three month period ended March
31, 1997, was $0.09, $0.30 and $4.81, respectively.
Because the determination of the fair value of all options granted after
the Company becomes a public entity will include an expected volatility factor
in addition to the factors described in the preceding paragraph and, because
options granted prior to 1995 are not taken into consideration, the above
results are not representative of future years.
Benefit Plan
Effective January 1, 1995, the Company adopted a 401(k) Savings Plan which
allows all employees to participate by making salary deferral contributions to
the 401(k) Savings Plan ranging from 1% to 20% of their eligible earnings. The
Company may make discretionary contributions to the 401(k) Savings Plan upon
approval by the Board of Directors. The Company has not contributed to the
401(k) Savings Plan to date.
F-14
<PAGE> 83
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES:
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1995 and 1996 and the three months ended March 31, 1997
as the Company incurred net operating losses.
Deferred tax assets related to the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
------------------- 31,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net operating loss and credit carryforwards... $ 1,994 $ 7,278 $ 7,665
Expenses not currently deductible............. -- 357 429
Capitalized research and development.......... 100 134 141
------- ------- -------
2,094 7,769 8,235
Less: valuation allowance..................... (2,094) (7,769) (8,235)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that a full valuation allowance has been recorded.
These factors include the Company's history of losses, recent increases in
expense levels, the fact that the market in which the Company competes is
intensely competitive and characterized by rapidly changing technology, the lack
of carryback capacity to realize deferred tax assets, and the uncertainty
regarding market acceptance of the Company's products. The Company will continue
to assess the realizability of the deferred tax assets in future periods.
At December 31, 1995 and 1996 and March 31, 1997, the Company had net
operating loss carryforwards for federal income tax purposes of approximately
$5,100,000, $18,162,000 and $19,127,000, respectively, which expire beginning in
2010.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. The issuance of Series A Convertible Preferred Stock
resulted in an annual limitation of the Company's ability to utilize net
operating losses incurred prior to that date. The limitation is insignificant.
Net operating losses incurred between the time of the Series A Convertible
Preferred Stock issuance and March 31, 1997, had not been subject to any annual
limitations through March 31, 1997.
NOTE 8 -- COMMITMENTS:
The Company is obligated under noncancelable operating leases for its
facilities and certain equipment and capital leases for certain equipment. Rent
expense on the operating leases for the year ended December 31, 1995 and 1996
and the three month period ended March 31, 1997, was approximately $192,000,
$305,000 and $74,000, respectively.
F-15
<PAGE> 84
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under the operating and capitalized leases
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
April 1, 1997 through December 31, 1997............. $ 716 $ 548
1998................................................ 1,034 508
1999................................................ 1,033 119
2000................................................ 1,027 --
2001................................................ 1,027 --
Thereafter.......................................... 5,479 --
------- ------
Total minimum lease payments........................ $10,316 1,175
=======
Less: amount representing interest.................. (92)
------
Present value of minimum lease payments............. 1,083
Less: current portion............................... (615)
------
Noncurrent portion of capitalized lease
obligations....................................... $ 468
======
</TABLE>
Purchase Commitments
The Company's manufacturing relationship with Taiwan Semiconductor
Manufacturing Corporation ("TSMC") allows for the cancellation of all
outstanding purchase orders, but requires the repayment of all expenses incurred
to date. As of March 31, 1997, TSMC had incurred approximately $626,000 of
manufacturing expenses on the Company's outstanding purchase orders.
F-16
<PAGE> 85
APPENDIX -- DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
Graphic: Illustration of 3D image from computer game containing starfighter and
planets.
Caption: The Company's technology enables a highly immersive, interactive 3D
experience with compelling graphics, realistic motion and complex character and
scene interaction at real time frame rates.
GATEFOLD
Graphic: Illustrations of characters and scenes from 3D video games and
software applications designed to or utilizing the Company's 3D hardware.
Caption: 3Dfx Technology is designed to perform on a variety of
platforms . . . . and support a multitude of third-party PC titles.
Credits: Images courtesy of Criterion Studios, Eidos Entertainment, Shiny
Entertainment and Ubisoft. All other trademarks are the property of their
respective owners. Copyright (C)1996 3Dfx Interactive, Inc.
PAGE 42
Graphic: Block diagram depicting the Company's Voodoo Graphics product.
INSIDE BACK COVER
Graphic: Depiction of the steps required to create a 3D image, starting with a
wireframe model and moving into shading, mapping and additional techniques, flat
shading (addition of color), texture mapping and final techniques to complete
the image in a realistic manner.
PHOTO:
Caption: ONE. A wireframe model is created that forms the basis of the three
dimensional objects. This image shows the vertices and the outline of the set
and characters before the coloring techniques have been applied.
PHOTO:
Caption: TWO. Flat shading has been added to the wireframe. One color is
assigned to all the pixels in a given triangle. This demonstrates the simplest
of the shading techniques available.
PHOTO:
Caption: THREE. Basic point-sampled texture mapping has been added to the
image. Texture mapping is said to have the greatest impact in adding realism to
a 3D image. A fixed pattern or texture is transferred to a polygon on the
surface of a 3D object. The texture is warped to simulate the perspective of a
3D object.
PHOTO:
Caption: FOUR. Bilinear filtering and MIP mapping added to the scene further
enhance the image quality -- a subtle improvement in a static image. These
techniques more accurately simulate smoothness of color changes and the behavior
of detail as the objects grow more distant.
PHOTO:
Caption: FIVE. The final enhancement comes from lighting effects added to the
characters and set. First pass texture maps on the set are made either lighter
or darker through shadow maps that simulate the effect of lights. The lighting
effect on character texture maps is produced with Gouraud color shading during
rendering.
<PAGE> 86
BACK OUTSIDE COVER
3Dfx Interactive, Inc. logo.
<PAGE> 87
LOGO
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee..................................................... $ 12,441
NASD Filing Fee.......................................................... 4,606
The Nasdaq Stock Market Listing Fee...................................... 40,000
Blue Sky Qualification Fees and Expenses................................. 15,000
Printing and Engraving Expenses.......................................... 150,000
Legal Fees and Expenses.................................................. 300,000
Accounting Fees and Expenses............................................. 150,000
Transfer Agent and Registrar Fees........................................ 5,000
Miscellaneous............................................................ 22,953
--------
Total.......................................................... $700,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
from a breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, (ii) acts or omissions that
a director believes to be contrary to the best interests of the Registrant or
its shareholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the Registrant or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Registrant or
its shareholders, (v) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest, and (vii) liability for improper distributions, loans or guarantees.
This provision does not eliminate the directors' duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under California law.
Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Articles of Incorporation and Bylaws contain provisions covering indemnification
to the maximum extent permitted by the California General Corporation Law of
corporate directors, officers and other agents against certain liabilities and
expenses incurred as a result of proceedings involving such persons in their
capacities as directors, officers employees or agents, including proceedings
under the Securities Act or the Securities Exchange Act of 1934, as amended. The
Company has entered into Indemnification Agreements with its directors and
executive officers.
II-1
<PAGE> 89
In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the several Underwriters, against certain
liabilities, including liabilities arising under the Securities Act.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since August 24, 1994, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities.
1. On January 12, 1995, the Registrant issued and sold 2,728,000 shares of
Common Stock to investors at a price of $.0125 per share.
2. From March 3, 1995 to May 18, 1995, the Registrant issued and sold
564,500 shares of Common Stock to employees at $.0375 to $.05 price per
share.
3. From May 1995 to March 31, 1997, the Registrant issued and sold 788,419
shares of Common Stock to employees and consultants at prices ranging
from $.01 to $.45 per share, upon exercise of stock options and stock
purchase rights, pursuant to the Registrant's 1995 Employee Stock Plan.
4. On March 13, 1995, the Registrant issued and sold 5,501,979 shares of
Series A Preferred Stock to a total of 43 investors for an aggregate
purchase price of $5,501,979.
5. On March 31, 1995, the Registrant issued a warrant to purchase an
aggregate of 87,500 shares of Series A Preferred Stock to one investor
with an exercise price of $1.00 per share.
6. From November 2, 1995 to December 31, 1996, the Registrant issued
warrants to purchase an aggregate of 209,717 shares of Series B
Preferred Stock to a total of 3 investors with an exercise price of
$2.20 per share.
7. From February 14, 1996 to February 28, 1996, the Registrant issued and
sold 5,300,000 shares of Series B Preferred Stock to a total of 33
investors for an aggregate purchase price of $11,660,000.
8. From September 12, 1996 to January 17, 1997, the Registrant issued and
sold 3,241,718 shares of Series C Preferred Stock to a total of 39
investors for an aggregate purchase price of $12,156,443.
9. From June 1, 1996 to September 1996, the Registrant issued warrants to
purchase an aggregate of 70,000 shares of Series C Preferred Stock to 1
university and 2 consultants with an exercise price of $3.75 per share.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationship
with the Company or otherwise, to information about the Registrant.
II-2
<PAGE> 90
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement (draft dated , 1997).
3.1 Articles of Incorporation of the Registrant, as currently in effect.
3.2 Form of Restated Articles of Incorporation of the Registrant, to be filed prior to
the effective date of the offering made under this Registration Statement.
3.3 Form of Restated Articles of Incorporation of the Registrant, to be filed
immediately following the closing of the offering made under this Registration
Statement.
3.4 Bylaws of the Registrant.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement between the Registrant and each of its directors
and officers.
10.2* 1995 Employee Stock Plan and form of Stock Option Agreement thereunder.
10.3* 1997 Director Option Plan and form of Director Stock Option Agreement thereunder.
10.4* 1997 Employee Stock Purchase Plan and forms of agreement thereunder.
10.5 Lease Agreement dated August 7, 1996 between Registrant and South Bay/Fortran, and
Tenant Estoppel Certificate dated March 25, 1997 between Registrant and CarrAmerica
Realty Corporation for San Jose, California office.
10.6 Investors' Rights Agreement dated September 12, 1996, Amendment No. 1 to Investors'
Rights Agreement dated November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to Investors' Rights
Agreement dated March 27, 1997 by and among the Registrant and holders of the
Registrant's Series A, Series B and Series C Preferred Stock.
10.7* Warrants to purchase shares of Common Stock issued by the Registrant.
10.8 Form of Restricted Stock Purchase Agreement between the Registrant and certain
shareholders.
10.9+ Technology Development and License Agreement dated as of February 28, 1997 by and
between Registrant and Sega Enterprises, Ltd.
10.10 Master Equipment Lease Agreement dated January 1, 1996 by and between the
Registrant and MMC/GATX Partnership No. 1.
10.11 Master Equipment Lease dated March 31, 1995 by and between the Registrant and
Lighthouse Capital Partners, L.P.
10.12 Loan Commitment Agreement dated July 1, 1996 by and between the Registrant and
Silicon Valley Bank.
10.13.1 Change of Control Letter Agreement between the Registrant and L. Gregory Ballard.
10.13.2 Change of Control Letter Agreement between the Registrant and Karl Chicca.
10.13.3 Change of Control Letter Agreement between the Registrant and Scott D. Sellers.
10.13.4 Change of Control Letter Agreement between the Registrant and Gary Tarolli.
11.1 Calculation of pro forma net loss per share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
II-3
<PAGE> 91
- ---------------
* To be supplied by amendment.
+ Confidential treatment requested for portions of these agreements.
(b) Financial Statement Schedules:
None.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California General Corporation Law, the Articles of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer of controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 92
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on the 17th day of April, 1996.
3DFX INTERACTIVE, INC.
By /s/ L. GREGORY BALLARD
------------------------------------
L. Gregory Ballard
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints L. Gregory Ballard and Gary P.
Martin, and each one of them, acting individually and without the other, as his
or her attorney-in-fact, each with full power of substitution, for him and her
in any and all capacities, to sign any and all amendments to this Registration
Statement (including post-effective amendments), and to sign any registration
statement for the same offering covered by this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) promulgated under the
Securities Act of 1933, and all post-effective amendments thereto, and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorneys-in-fact, or his substitute or substitutes may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- ---------------
<C> <S> <C>
/s/ L. GREGORY BALLARD President and Chief Executive Officer April 17, 1997
- ---------------------------------------- (Principal Executive Officer)
L. Gregory Ballard
/s/ GARY P. MARTIN Vice President, Administration and April 17, 1997
- ---------------------------------------- Chief Financial Officer (Principal
Gary P. Martin Financial and Accounting Officer)
/s/ GORDON A. CAMPBELL Chairman of the Board of Directors April 17, 1997
- ----------------------------------------
Gordon A. Campbell
/s/ ANTHONY SUN Director April 17, 1997
- ----------------------------------------
Anthony Sun
/s/ PHILIP M. YOUNG Director April 17, 1997
- ----------------------------------------
Philip M. Young
/s/ SCOTT D. SELLERS Director April 17, 1997
- ----------------------------------------
Scott D. Sellers
/s/ JAMES WHIMS Director April 17, 1997
- ----------------------------------------
James Whims
/s/ GEORGE J. STILL, JR. Director April 17, 1997
- ----------------------------------------
George J. Still, Jr.
</TABLE>
II-5
<PAGE> 93
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- -------
<S> <C> <C>
1.1* Form of Underwriting Agreement (draft dated , 1997).
3.1 Articles of Incorporation of the Registrant, as currently in effect.
3.2 Form of Restated Articles of Incorporation of the Registrant, to be
filed prior to the effective date of the offering made under this
Registration Statement.
3.3 Form of Restated Articles of Incorporation of the Registrant, to be
filed immediately following the closing of the offering made under this
Registration Statement.
3.4 Bylaws of the Registrant.
4.1* Specimen Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of Indemnification Agreement between the Registrant and each of
its directors and officers.
10.2* 1995 Employee Stock Plan and form of Stock Option Agreement thereunder.
10.3* 1997 Director Option Plan and form of Director Stock Option Agreement
thereunder.
10.4* 1997 Employee Stock Purchase Plan and forms of agreement thereunder.
10.5 Lease Agreement dated August 7, 1996 between Registrant and South Bay/
Fortran, and Tenant Estoppel Certificate dated March 25, 1997 between
Registrant and CarrAmerica Realty Corporation for San Jose, California
office.
10.6 Investors' Rights Agreement dated September 12, 1996, Amendment No. 1
to Investors' Rights Agreement dated November 25, 1996, Amendment No. 2
to Investors' Rights Agreement dated December 18, 1996 and Amendment
No. 3 to Investors' Rights Agreement dated March 27, 1997 by and among
the Registrant and holders of the Registrant's Series A, Series B and
Series C Preferred Stock.
10.7* Warrants to purchase shares of Common Stock issued by the Registrant.
10.8 Form of Restricted Stock Purchase Agreement between the Registrant and
certain shareholders.
10.9+ Technology Development and License Agreement dated as of February 28,
1997 by and between Registrant and Sega Enterprises, Ltd.
10.10 Master Equipment Lease Agreement dated January 1, 1996 by and between
the Registrant and MMC/GATX Partnership No. 1.
10.11 Master Equipment Lease dated March 31, 1995 by and between the
Registrant and Lighthouse Capital Partners, L.P.
10.12 Loan Commitment Agreement dated July 1, 1996 by and between the
Registrant and Silicon Valley Bank.
10.13.1 Change of Control Letter Agreement between the Registrant and L.
Gregory Ballard.
10.13.2 Change of Control Letter Agreement between the Registrant and Karl
Chicca.
10.13.3 Change of Control Letter Agreement between the Registrant and Scott D.
Sellers.
10.13.4 Change of Control Letter Agreement between the Registrant and Gary
Tarolli.
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- -------
<S> <C> <C>
11.1 Calculation of pro forma net loss per share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* To be supplied by amendment.
+ Confidential treatment requested for portions of these agreements.
<PAGE> 1
EXHIBIT 3.1
RESTATED ARTICLES OF INCORPORATION
OF
3DFX INTERACTIVE, INC.
a California Corporation
The undersigned, Gary Martin and John B. Montgomery, hereby certify
that:
1. They are the duly elected and acting Vice President and Assistant
Secretary, respectively, of 3Dfx Interactive, Inc., a California corporation
(the "Corporation").
2. The Articles of Incorporation of the Corporation are amended and
restated in their entirety as in Appendix I attached hereto.
3. The amendments and restatements herein set forth have been duly
approved by the Board of Directors of the Corporation.
4. The amendments herein set forth have been duly approved by the
required vote of the shareholders of the Corporation in accordance with Sections
902 and 903 of the California Corporations Code. The total number of shares of
Common Stock entitled to vote is 3,753,360, the total number of shares of Series
A Preferred Stock entitled to vote is 5,501,979 shares, the total number of
shares of Series B Preferred Stock entitled to vote is 5,300,000 shares and the
total number of shares of Series C Preferred Stock entitled to vote is
2,514,085. The number of shares voting in favor of the amendments equalled or
exceeded the vote required. The percentage vote required was more than 50% of
the outstanding shares of Common Stock, more than 50% of the outstanding shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock voting together as a single class, more than 50% of the Common Stock,
Series A Preferred Stock and Series B Preferred Stock voting together as a
single class, and more than 50% of the outstanding shares each of the Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, each
voting as a separate class.
We further declare under penalty of perjury under the laws of the State
of California that the matters set forth in this certificate are true and
correct of our own knowledge.
Executed on November __ 1996.
________________________________
Gary Martin, Vice President
_______________________________________
John B. Montgomery, Assistant Secretary
<PAGE> 2
Appendix I
RESTATED ARTICLES OF INCORPORATION
OF
3DFX INTERACTIVE, INC.
a California Corporation
ARTICLE I
NAME
The name of this corporation is 3Dfx Interactive, Inc. (the
"Corporation").
ARTICLE II
PURPOSES
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
CAPITAL STOCK
The total number of shares of all classes of stock which the
Corporation is authorized to issue is 39,666,666, consisting of 25,033,333
shares of Common Stock, no par value, and 14,633,333 shares of Preferred Stock,
no par value. The Preferred Stock consists of three series, of which 5,600,000
shares have been designated as Series A Preferred Stock (the "Series A Preferred
Stock"), 5,700,000 shares have been designated as Series B Preferred Stock (the
"Series B Preferred Stock") and of which 3,333,333 have been designated as
Series C Preferred Stock (the "Series C Preferred Stock").
The relative rights, preferences, privileges and restrictions granted
to or imposed on the respective series or classes of capital stock or the
holders thereof are as follows:
<PAGE> 3
Section 1. Dividends.
1.1 Dividend Rights. The holders of the Preferred Stock shall
be entitled to receive, when and as declared by the Board of Directors, out of
funds legally available therefor, dividends at an annual rate of $0.10 per share
of Series A Preferred Stock (the "Series A Dividend Rate"), $0.22 per share of
Series B Preferred Stock (the "Series B Dividend Rate") and $0.375 per share of
Series C Preferred Stock (the "Series C Dividend Rate") payable in preference
and priority to any payment of any dividend on Common Stock of the Corporation.
Such dividends shall not be cumulative and no right to such dividends shall
accrue to holders of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock unless declared by the Board of Directors.
Without limiting the foregoing, no distribution shall be made
in respect of the Common Stock unless the holders of the Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock shall receive a
proportionate share of any such distribution as though the holders of the Series
A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were
the holders of the number of shares of Common Stock of the Corporation into
which such shares of Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock are then convertible.
1.2 Definition of Distribution. For purposes of this Section
1, unless the context otherwise requires, a "distribution" shall mean the
transfer of cash or other property without consideration whether by way of
dividend or otherwise or the purchase or redemption of shares of the Corporation
(other than repurchases of Common Stock issued to or held by employees,
officers, directors or consultants of the Corporation or its subsidiaries upon
termination of their employment or services pursuant to agreements providing for
the right of said repurchase) for cash or property.
1.3 Certain Repurchases not Distributions. As authorized by
Section 402.5(c) of the California Corporations Code, the provisions of Sections
502 and 503 of the California Corporations Code shall not apply with respect to
repurchases by the Corporation of shares of Common Stock issued to or held by
employees, officers, directors or consultants of the Corporation or its
subsidiaries upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase.
-2-
<PAGE> 4
Section 2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, distributions to
the shareholders of the Corporation shall be made in the following manner:
(i) Each series of Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of the Common Stock by reason of their
ownership thereof, an amount per share as may be fixed for such series (the
"Preferential Amount"). The Preferential Amount shall be $1.00 for each share of
Series A Preferred Stock, $2.20 for each share of Series B Preferred Stock and
$3.75 for each share of Series C Preferred Stock, adjusted for any stock split,
combination, consolidation, or stock distributions or stock dividends with
respect to such shares, plus an amount equal to all declared but unpaid
dividends on the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock as provided in Section 1 above. If the assets and funds thus
distributed among the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid Preferential Amount, then the
entire assets and funds of the Corporation legally available for distribution
shall be distributed among the holders of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock in proportion to the respective
Preferential Amounts which each such holder is entitled to receive pursuant to
this Section 2(a)(i).
(ii) After payment has been made to the
holders of the Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock of the full amounts to which they shall be entitled as set forth
in Section 2(a)(i) above, then the holders of the Common Stock shall be entitled
to receive an amount per share equal to (as such amount shall be adjusted to
reflect subdivisions and combinations of shares and stock dividends), $0.10 with
respect to each outstanding share of Common Stock, plus an amount equal to all
declared and unpaid dividends with respect to such share. If the assets and
funds legally available for distribution among the holders of Common Stock shall
be insufficient to permit the payment to such holders of the full preferential
amount, then such assets and funds shall be distributed ratably among the
holders of Common Stock in proportion to the total preferential amount which
each such holder is entitled to receive pursuant to this Section 2(a)(ii).
(iii) Any assets remaining after the
distributions pursuant to Sections 2(a)(i) and (ii) shall be distributed on a
pro rata basis to the holders of Common Stock and Preferred Stock based on the
number of shares (assuming conversion of each holder's shares of Preferred Stock
into the number of shares of Common Stock into which such holder's Preferred
Stock is then convertible, as
-3-
<PAGE> 5
adjusted from time to time pursuant to Section 4 hereof) then held by each
holder of Common Stock and Preferred Stock.
(b) (i) If the Corporation should sell all
or substantially all of its assets, or should consolidate or merge with or into
any other corporation or corporations (other than wholly-owned subsidiaries of
the Corporation), or should engage in a transaction or series of related
transactions after the Series A Original Issue Date, as hereinafter defined, in
which more than 50% of the voting power of the Corporation is disposed, then
such sale, merger or other transaction shall be treated as a liquidation subject
to this Section 2.
(ii) In any of such events, if the
consideration received by the Corporation is other than cash or indebtedness,
its value will be deemed to be its fair market value. In the case of securities,
fair market value shall be determined as follows:
(A) Securities not subject to
investment letter or other similar restrictions on free marketability:
(I) If traded on a
securities exchange, or over-the-counter as a NASDAQ National Market System
security, the value shall be deemed to be the average of the closing prices of
the securities on such exchange or NASDAQ National Market System over the 30-day
period ending three (3) days prior to the closing;
(II) If actively traded
over-the-counter (but not on the National Market System), the value shall be
deemed to be the average of the closing bid prices over the 30-day period ending
three (3) days prior to the closing; and
(III) If there is no active
public market, the value shall be the fair market value thereof, as determined
by the unanimous consent or vote of the Board of Directors and such
determination shall be binding upon the holders of the Preferred Stock; and
(B) The method of valuation of
securities subject to investment letter or other restrictions on free
marketability shall be to make an appropriate discount from the market value
determined as above in subparagraphs (A) (I), (II) or (III) to reflect the
approximate fair market value thereof, as determined by the unanimous consent or
vote of the Board of Directors and such determination shall be binding upon the
shareholders.
-4-
<PAGE> 6
(c) The liquidation preference of holders of
Preferred Stock provided herein shall not be deemed to be impaired by
distributions made by the Corporation in connection with the repurchase of
Reserved Shares, as hereinafter defined, from former employees or consultants
upon termination of their employment or services pursuant to stock restriction
agreements between the Corporation and such persons approved by the
Corporation's Board of Directors, and such holders shall be deemed to have
consented to such repurchases.
Section 3. Voting Rights.
(a) General. Except with respect to the election of
directors of the Corporation as set forth below, the holder of each share of
Common Stock issued and outstanding shall have one vote and each holder of
Preferred Stock issued and outstanding shall have the number of votes equal to
the number of shares of Common Stock into which such holder's shares of
Preferred Stock are then convertible, as adjusted from time to time pursuant to
Section 4 hereof, at the record date for determination of the shareholders
entitled to vote on such matters or, if no record date is established, at the
date such vote is taken or any written consent of shareholders is first
solicited. The holders of Preferred Stock shall be entitled to receive notice,
together with the holders of Common Stock, of all shareholder meetings even if
only the holders of Common Stock are entitled to vote on the issues addressed at
such meeting.
(b) Board of Directors. The authorized number of
directors shall be set forth in the Bylaws of the Corporation and may be
increased or decreased by an amendment to such Bylaws in accordance with their
provisions. As long as there are at least 2,000,000 shares of Preferred Stock
issued and outstanding, of the authorized number of members of the Corporation's
Board of Directors:
(i) the holders of Series A Preferred Stock
voting separately as a class shall be entitled to elect two (2) directors (and
to fill any vacancies with respect thereto), with each holder of Series A
Preferred Stock entitled to the number of votes determined as provided in
Section 3(a) above;
(ii) the holders of Series B Preferred Stock
voting separately as a class shall be entitled to elect one (1) director (and to
fill any vacancies with respect thereto), with each holder of Series B Preferred
Stock entitled to the number of votes determined as provided in Section 3(a)
above;
(iii) the holders of Series C Preferred
Stock voting separately as a class shall be entitled to elect one (1) director
(and to fill any vacancies with respect thereto), with each holder of Series C
Preferred Stock entitled to the number of votes determined as provided in
Section 3(a) above; and
-5-
<PAGE> 7
(iv) the holders of Common Stock voting
separately as a class shall be entitled to elect three (3) directors to be
elected (and to fill any vacancies with respect thereto).
Subject to Section 302 and Section 303 of the California Corporations Code, any
director who shall have been elected by a specified group of shareholders may be
removed during the aforesaid term of office, either for or without cause, by and
only by, the affirmative vote of the holders of a majority of the shares of such
specified group, given at a special meeting of such shareholders duly called or
by an action by written consent for that purpose.
Section 4. Conversion. The holders of Preferred Stock shall
have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert.
(i) Optional Conversion. Each share of
Preferred Stock shall be convertible at the option of the holder thereof at any
time after the date of issuance of such share, at the office of the Corporation
or any transfer agent for Preferred Stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined in the case of the Series
A Preferred Stock, by dividing $1.00 by the Series A Conversion Price at the
time in effect, as is determined in the case of the Series B Preferred Stock, by
dividing $2.20 by the Series B Conversion Price at the time in effect and as is
determined in the case of the Series C Preferred Stock, by dividing $3.75 by the
Series C Conversion Price at the time in effect. As of the effective date of
these Restated Articles of Incorporation, the Series A Conversion Price shall be
$1.00, the Series B Conversion Price shall be $2.20 and the Series C Conversion
Price shall be $3.75. Such initial Series A Conversion Price, Series B
Conversion Price and Series C Conversion Price shall be subject to adjustment as
set forth below.
(ii) Series A Preferred Stock. Each share of
Series A Preferred Stock shall automatically be converted into shares of Common
Stock at the Series A Conversion Price then in effect upon the earlier of (1)
the affirmative vote of holders of 66 2/3 percent of the Series A Preferred, (2)
the date on which fewer than 50,000 shares of Series A Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations, or
stock distributions or dividends with respect to such shares) remain outstanding
or (3) the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public at a price per share (before deduction of underwriter discounts and
commissions and offering expenses) of not less than $6.60 per share (as adjusted
for any stock
-6-
<PAGE> 8
splits, combinations, consolidations, or stock distributions or dividends with
respect to such shares) and an aggregate offering price to the public of not
less than $15,000,000.
(iii) Series B Preferred Stock. Each share
of Series B Preferred Stock shall automatically be converted into shares of
Common Stock at the Series B Conversion Price then in effect upon the earlier of
(1) the affirmative vote of holders of 66 2/3 percent of the Series B Preferred
(2) the date on which fewer than 50,000 shares of Series B Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations, or
stock distributions or dividends with respect to such shares) remain outstanding
or (3) the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public at a price per share (before deduction of underwriter discounts and
commissions and offering expenses) of not less than $6.60 per share
(appropriately adjusted for any stock splits, combinations, consolidations, or
stock distributions or dividends with respect to such shares) and an aggregate
offering price to the public of not less than $15,000,000.
(iv) Series C Preferred Stock. Each share of
Series C Preferred Stock shall automatically be converted into shares of Common
Stock at the Series C Conversion Price then in effect upon the earlier of (1)
the affirmative vote of holders of 66 2/3 percent of the Series C Preferred (2)
the date on which fewer than 50,000 shares of Series C Preferred Stock
(appropriately adjusted for any stock splits, combinations, consolidations, or
stock distributions or dividends with respect to such shares) remain outstanding
or (3) the closing of an underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of Common Stock for the account of the Corporation to the
public at a price per share (before deduction of underwriter discounts and
commissions and offering expenses) of not less than $6.60 per share
(appropriately adjusted for any stock splits, combinations, consolidations, or
stock distributions or dividends with respect to such shares) and an aggregate
offering price to the public of not less than $15,000,000.
(v) In the event of the automatic conversion
of the Series A, Series B or Series C Preferred Stock as set forth in Sections 4
(a)(ii)(3), 4(a)(iii)(3) and 4(a)(iv)(3) above, the person(s) entitled to
receive the Common Stock issuable upon such conversion shall not be deemed to
have converted such shares until immediately prior to the closing of such sale
of securities causing the conversion, at which time the Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent; provided, however, that the
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<PAGE> 9
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such conversion unless certificates evidencing
such shares of the Preferred Stock being converted are either delivered to the
Corporation or its transfer agent, as hereinafter provided, or the holder
notifies the Corporation or its transfer agent, as hereinafter provided, that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection therewith. Upon the automatic conversion of the
Preferred Stock, the holders of the Preferred Stock shall surrender the
certificates representing such shares at the office of the Corporation or of any
transfer agent for the Preferred Stock. Thereupon, there shall be issued and
delivered to such holder, promptly at such office and in his name as shown on
such surrendered certificate or certificates, a certificate or certificates for
the number of shares of Common Stock into which the shares of the Preferred
Stock surrendered were convertible on the date on which such automatic
conversion occurred.
(vi) Upon conversion of the Preferred Stock,
the Common Stock so issued shall be duly and validly issued, fully paid and
nonassessable shares of the Corporation.
(b) Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the
then-effective conversion price for a particular series of Preferred Stock (a
"Conversion Price"). Except as provided in Sections 4(a)(ii), 4 (a)(iii) and
4(a)(iv), before any holder of Preferred Stock shall be entitled to convert the
same into full shares of Common Stock, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Preferred Stock, and shall give written notice by mail,
postage prepaid, to the Corporation at its principal corporate office, of the
election to convert the same. The Corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Preferred Stock,
a certificate or certificates for the number of shares of Common Stock to which
he shall be entitled as aforesaid and a check payable to the holder in the
amount of any cash payable in lieu of fractional shares of Common Stock (after
aggregating all shares of Common Stock issuable to such holder of Preferred
Stock upon conversion of the number of shares of Preferred Stock at the time
being converted). In addition, if less than all of the shares represented by
such certificates are surrendered for conversion pursuant to Section 4(a)(i),
the Corporation shall issue and deliver to such holder a new certificate for the
balance of the shares of Preferred Stock not so converted. Except as provided in
Sections 4(a)(ii), 4(a)(iii) and 4(a)(iv), such conversion shall be deemed to
have been made immediately prior to the close of business on the date of the
surrender of the shares of such Preferred Stock to be converted, and the person
or persons entitled to receive the shares of Common
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<PAGE> 10
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock as of such date. If the
conversion is in connection with an underwritten offer of securities registered
pursuant to the Securities Act of 1933, the conversion may, at the option of any
holder tendering such Preferred Stock for conversion, be conditioned upon the
closing with the underwriter of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive Common Stock issuable
upon such conversion of such Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.
(c) Adjustment to Conversion Price for Diluting
Issues.
(i) Special Definitions. For purposes of
this Section 4(c), the following definitions shall apply:
(1) "Convertible Securities" shall
mean any evidences of indebtedness, shares (other than Common Stock, Series A
Preferred Stock, Series B Preferred Stock or Series C Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(2) "Options" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities, except for those issued to officers or
employees of, or consultants to, the Corporation as provided in Section
4(c)(i)(6)(B).
(3) "Series A Original Issue Date"
shall mean March 13, 1995.
(4) "Dilutive Financing" means any
issuance or deemed issuance of Additional Shares of Common Stock after the
Series A Original Issue Date for a consideration per share less than the
applicable Conversion Price in effect on the date of and immediately prior to
such sale.
(5) "New Securities" means shares
of Common Stock, Preferred Stock or any other class of capital stock of the
Company, whether or not now authorized, securities of any type that are
convertible into shares of such capital stock, and options, warrants or rights
to acquire shares of such capital stock. Notwithstanding the foregoing, the term
"New Securities" will not include: (A) securities issued in connection with bona
fide equipment lease or working capital debt financings with lending
institutions; (B) securities offered to the public pursuant to a registration
statement filed under the Securities Act; (C) securities issued pursuant to the
acquisition of another corporation by the Company by merger, purchase of
substantially
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<PAGE> 11
all of the assets, or other reorganization whereby the Company owns not less
than fifty-one percent (51%) of the voting power of such corporation; (D)
securities issued upon exercise or conversion of options, warrants and other
convertible securities outstanding on the date of filing of these Amended and
Restated Articles of Incorporation, excluding Reserved Shares; and (E) shares of
Common Stock or Preferred Stock issued in connection with any stock split, stock
dividend or recapitalization by the Company in which all classes and series of
capital stock are adjusted equally.
(6) "Additional Shares of Common
Stock" shall mean all shares of Common Stock issued (or, pursuant to Section
4(c)(iii), deemed to be issued) by the Corporation after the Series A Original
Issue Date including New Securities, other than shares of Common Stock issued or
issuable:
(A) upon conversion of
shares of Preferred Stock;
(B) to officers or
employees of, or consultants to, the Corporation pursuant to a stock grant,
stock option plan, stock purchase plan or other stock incentive agreement
(collectively, the "Plans"), (collectively, the "Reserved Shares") up to an
aggregate of 3,500,000 shares;
(C) as a dividend or
distribution on Preferred Stock;
(D) as securities excluded
from the definition of New Securities in Section 4(c)(i)(5);
(E) following a vote of the
holders of 66 2/3% of the Preferred Stock voting on the basis of the number of
shares of Common Stock into which each holder's shares of Preferred Stock are
then convertible, as adjusted from time to time pursuant to Section 4 hereof,
that designated shares of Common Stock issued or deemed to be issued shall not
constitute Additional Shares of Common Stock; and
(F) in connection with any
transaction for which adjustment is made pursuant to Section 4(d) hereof.
(ii) No Adjustment of Conversion Price. No
adjustment in the Conversion Price of a share of
Preferred Stock shall be made in respect of the
issuance of Additional Shares of Common Stock unless
the consideration per share for an Additional Share
of Common Stock issued or deemed to be issued by
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<PAGE> 12
the Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to, such issuance, for such share of Preferred Stock.
(iii) Deemed Issue of Additional Shares of
Common Stock.
(1) Options and Convertible
Securities. In the event the Corporation at any time or from time to time after
the Series A Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date; provided, however, that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 4(c)(vi) hereof) of such Additional Shares of
Common Stock would be less than the applicable Conversion Price in effect on the
date of and immediately prior to such issue, or such record date, as the case
may be; and, provided, further, that in any such case in which Additional Shares
of Common Stock are deemed to be issued:
(A) no further adjustment
in the Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) if such Options or
Convertible Securities by their terms provide, with the passage of time or
otherwise, for any increase or decrease in the consideration payable to the
Corporation, or increase or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be recomputed to
reflect such increase or decrease, insofar as it affects such Conversion Price,
but no further change in the Conversion Price shall be made upon the exercise,
conversion or exchange of such Options or Convertible Securities, and no such
adjustment of the Conversion Price shall affect Common Stock previously issued
upon conversion of the Preferred Stock;
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<PAGE> 13
(C) if any such Options or
Convertible Securities shall expire or be cancelled without having been
exercised or converted, the Conversion Price as adjusted upon the original
issuance thereof (or upon the occurrence of a record date with respect thereto)
shall be readjusted as if
(I) in the case of
Convertible Securities or Options for Common Stock, the only Additional Shares
of Common Stock so issued were shares of Common Stock, if any, actually issued
or sold on the exercise of such Options or the conversion or exchange of such
Convertible Securities, and such Additional Shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Corporation upon
such exercise, plus the consideration, if any, actually received by the
Corporation for the granting of all such Options, whether or not exercised, plus
the consideration received for issuing or selling the Convertible Securities
actually converted plus the consideration, if any, actually received by the
Corporation (other than by cancellation of liabilities or obligations evidenced
by such Convertible Securities) on the conversion or exchange of such
Convertible Securities; and
(II) in the case
of Options for Convertible Securities, only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such Options, and the consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been then issued was the
consideration actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration deemed to have been
received by the Corporation upon the issue of the Convertible Securities with
respect to which such Options were actually exercised;
(D) no readjustment
pursuant to clauses (B) or (C) above shall have the effect of increasing the
Conversion Price to an amount which exceeds the lower of (i) the Conversion
Price on the original adjustment date (immediately prior to the adjustment), or
(ii) the Conversion Price that would have resulted from any actual issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(iv) Adjustment of Conversion Price Upon
Issuance of Additional Shares of Common Stock. Subject to Section 4(c)(ii), the
Conversion Price of each series of Preferred Stock shall be subject to
adjustment under this Section 4(c)(iv) as follows:
(1) In the event the Corporation
shall at any time after the Series A Original Issue Date issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant Section
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<PAGE> 14
4(c)(iii)), without consideration or for a consideration per share less than a
particular Conversion Price in effect on the date of and immediately prior to
such issue, then and in such event, any such Conversion Price shall be reduced,
concurrently with such issue, to the price (calculated to the nearest cent)
determined by multiplying such Conversion Price by a fraction (x) the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued would purchase at such Conversion
Price, and (y) the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to such issue plus the number of such
Additional Shares of Common Stock so issued; provided, however, that, for the
purposes of this Section 4(c)(iv), all shares of Common Stock issuable upon
conversion of outstanding shares of Preferred Stock shall be deemed to be
outstanding; and, further provided, that any Additional Shares of Common Stock
deemed issued pursuant to Section 4(c)(iii) shall be deemed to be outstanding.
(v) Adjustment of Conversion Price of Series
C Preferred Stock Upon Certain Financings. The Conversion Price of the Series C
Preferred Stock shall be subject to adjustment under this Section 4(c)(v) as
follows:
(1) In the event the Corporation
shall issue shares of equity securities other than shares of Series C Preferred
Stock in an equity financing resulting in gross cash proceeds to the Company of
at least $1,000,000 (a "Financing"), for a consideration per share that is less
than 125% of the Series C Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event, the Series C Conversion
Price shall be reduced, concurrently with such issue, to the price (calculated
to the nearest cent) determined by multiplying such Conversion Price by a
fraction (x) the numerator of which shall be 80% of the consideration per share
in the Financing and (y) the denominator of which shall be such Conversion
Price.
(vi) Determination of Consideration. For
purposes of this Section 4(c), the consideration received by the Corporation for
the issuance of any Additional Shares of Common Stock shall be computed as
follows:
(1) Cash and Property. Such
consideration shall:
(A) insofar as it consists
of cash, be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
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<PAGE> 15
(B) insofar as it consists
of property other than cash, be computed at the fair value thereof at the time
of such issue, as determined in good faith by the Board of Directors; and
(C) in the event Additional
Shares of Common Stock are issued together with other shares or securities or
other assets of the Corporation for consideration which covers both, by the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Board of Directors.
(2) Options and Convertible
Securities. The consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued pursuant to Section
4(c)(iii)(1), relating to Options and Convertible Securities, shall be
determined by dividing:
(A) the total amount, if
any, received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provisions contained therein for a subsequent adjustment
of such consideration) payable to the Corporation upon the exercise of such
Options or the conversion or exchange of such Convertible Securities, or in the
case of Options for Convertible Securities, the exercise of such Options for
Convertible Securities and the conversion or exchange of such Convertible
Securities, by
(B) the maximum number of
shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provisions contained therein for a subsequent adjustment
of such number) issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
(d) Adjustments for Stock Dividends, Distributions,
Subdivisions, Combinations or Consolidations of Common Stock.
(i) Stock Dividends, Distributions or
Subdivisions. In the event the Corporation shall issue shares of Common Stock
pursuant to a stock dividend, stock distribution or subdivision, the Conversion
Price in effect immediately prior to such stock dividend, stock distribution or
subdivision shall concurrently with such stock dividend, stock distribution or
subdivision, be proportionately decreased.
(ii) Combinations or Consolidations. In the
event the outstanding shares of Common Stock shall be combined or consolidated,
by
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<PAGE> 16
reclassification or otherwise, into a lesser number of shares of Common Stock,
the Conversion Price in effect immediately prior to such combination or
consolidation shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(iii) Adjustments for Other Distributions.
In the event the Corporation at any time or from time to time makes, or fixes a
record date for the determination of holders of Common Stock entitled to receive
any distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in this Section 4(c) or (d) or
as otherwise provided in Section 1, then, and in each such event, provision
shall be made so that the holders of Preferred Stock shall receive upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Corporation which they
would have received had their Preferred Stock been converted into Common Stock
on the date of such event and had they thereafter, during the period from the
date of such event to and including the date of conversion, retained such
securities receivable by them as aforesaid during such period, subject to all
other adjustments called for during such period under this Section 4(c) or (d)
with respect to the rights of the holders of the Preferred Stock.
(iv) Adjustments for Reclassification,
Exchange, and Substitution. If the Common Stock issuable upon conversion of the
Preferred Stock shall be changed into the same or a different number of shares
of any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
provided for above), the applicable Conversion Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the Preferred Stock shall be convertible
into, in lieu of the number of shares of Common Stock which the holders would
otherwise have been entitled to receive, a number of shares of such other class
or classes of stock equivalent to the number of shares of Common Stock that
would have been subject to receipt by the holders upon conversion of their
Prefer red Stock immediately before that change.
(e) No Impairment. The Corporation will not, by
amendment of its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any other terms to be observed or performed hereunder by the
Corporation but will at all times in good faith assist in the carrying out of
all the provisions of this Section 4 and in the taking of all such action as may
be necessary or appropriate in order to protect the Conversion Rights of the
holders of the Preferred Stock against impairment.
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<PAGE> 17
(f) Reservation of Stock Issuable Upon Conversion.
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock solely for the purpose of
effecting the conversion of the Preferred Stock, such number of shares of its
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then-outstanding shares of Preferred Stock, in addition to
such other remedies as shall be available to the holders of Preferred Stock, the
Corporation will take such corporate actions as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purposes.
(g) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Conversion Price pursuant
to this Section 4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) all such adjustments and
readjustments, (ii) the Conversion Price at the time in effect, and (iii) the
number of shares of Common Stock and the amount, if any, of other property which
at the time would be received upon the conversion of such Preferred Stock.
(h) Notices of Record Date. In the event that the
Corporation shall propose at any time:
(i) to declare any dividend or distribution
upon the Common Stock, whether in cash, property, stock or other securities,
whether or not a regular cash dividend and whether or not out of earnings or
earned surplus, other than distributions to shareholders in connection with the
repurchase of Reserved Shares of former employees or consultants, to which the
holders of Preferred Stock have consented in Section 2(c) hereof; or
(ii) to offer for subscription to the
holders of any class or series of its capital stock any additional shares of
stock of any class or series or any other rights; or
(iii) to effect any reclassification or
recapitalization; or
(iv) to merge or consolidate with or into
any other corporation, or sell, lease or convey all or substantially all its
property or business, or to
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<PAGE> 18
liquidate, dissolve or wind up, or to effect any other transaction subject to
the provisions of Section 2 of these Amended and Restated Articles of
Incorporation;
then, in connection with each such event, the Corporation shall send to the
holders of the Preferred Stock:
(1) at least 20 days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining the rights
to vote in respect of the matters referred to in (iii) and (iv) above; and
(2) in the case of the matters
referred to in (iii) and (iv) above, at least 20 days' prior written notice of
the date of a shareholders meeting at which a vote on such matters shall take
place or the effective date of any written consent (and specifying the material
terms and conditions of the proposed transaction or event and the date on which
the holders of Preferred Stock and Common Stock shall be entitled to exchange
their Preferred Stock and Common Stock for securities or other property
deliverable upon the occurrence of such event and the amount of securities or
other property deliverable upon such event).
Each such written notice shall be given
personally or by first class mail, postage prepaid, addressed to the holders of
Preferred Stock at the address for each such holder as shown on the books of the
Corporation.
Section 5. No Reissuance of Preferred Stock. No share or
shares of Preferred Stock acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and all such shares shall
be cancelled, retired and eliminated from the shares which the Corporation shall
be authorized to issue.
Section 6. Protective Provisions.
(a) Series A Preferred Stock. In addition to any
other rights provided by law and without limiting Section 6(d) below, so long as
at least 50,000 shares of Series A Preferred Stock (as such number may be
adjusted for stock splits, combinations, consolidations and stock distributions
or dividends) shall be outstanding, the Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of a majority
of the outstanding shares of Series A Preferred Stock voting as a separate class
(based on the number of shares of Common Stock into which each holder's Series A
Preferred Stock is then convertible, as adjusted from time to time pursuant to
Section 4 hereof):
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<PAGE> 19
(i) amend or repeal any provision of, or add
any provision to, this Corporation's Articles of Incorporation or bylaws if such
action would alter or change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the Series A Preferred Stock in
a material and adverse manner or alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of the
Series B or Series C Preferred Stock if such alteration or change would affect
the Series A Preferred Stock in a material and adverse manner;
(ii) increase the authorized number of
shares of Series A Preferred Stock; and
(iii) authorize or issue any new shares or
reclassify any Common Stock into shares of any class or series of stock senior
to or on parity with the Series A Preferred Stock as to dividends, redemption
rights, liquidation preferences, conversion rights, voting rights or otherwise.
(b) Series B Preferred Stock. In addition to any
other rights provided by law and without limiting Section 6(d) below, so long as
at least 50,000 shares of Series B Preferred Stock (as such number may be
adjusted for stock splits, combinations, consolidations and stock distributions
or dividends) shall be outstanding, the Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of a majority
of the outstanding shares of Series B Preferred Stock voting as a separate class
(based on the number of shares of Common Stock into which each holder's Series B
Preferred Stock is then convertible, as adjusted from time to time pursuant to
Section 4 hereof):
(i) amend or repeal any provision of, or add
any provision to, this Corporation's Articles of Incorporation or bylaws if such
action would alter or change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the Series B Preferred Stock in
a material and adverse manner or alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of the
Series A or Series C Preferred Stock if such alteration or change would affect
the Series B Preferred Stock in a material and adverse manner;
(ii) increase the authorized number of
shares of Series B Preferred Stock; and
(iii) authorize or issue any new shares or
reclassify any Common Stock into shares of any class or series of stock senior
to or on parity with the Series B Preferred Stock as to dividends, redemption
rights, liquidation preferences, conversion rights, voting rights or otherwise.
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<PAGE> 20
(c) Series C Preferred Stock. In addition to any
other rights provided by law and without limiting Section 6(d) below, so long as
at least 50,000 shares of Series C Preferred Stock (as such number may be
adjusted for stock splits, combinations, consolidations and stock distributions
or dividends) shall be outstanding, the Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of a majority
of the outstanding shares of Series C Preferred Stock voting as a separate class
(based on the number of shares of Common Stock into which each holder's Series C
Preferred Stock is then convertible, as adjusted from time to time pursuant to
Section 4 hereof):
(i) amend or repeal any provision of, or add
any provision to, this Corporation's Articles of Incorporation or bylaws if such
action would alter or change the preferences, rights, privileges or powers of,
or the restrictions provided for the benefit of, the Series C Preferred Stock in
a material and adverse manner or alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of the
Series A or Series B Preferred Stock if such alteration or change would affect
the Series C Preferred Stock in a material and adverse manner;
(ii) increase the authorized number of
shares of Series C Preferred Stock; and
(iii) authorize or issue any new shares or
reclassify any Common Stock into shares of any class or series of stock senior
to or on parity with the Series C Preferred Stock as to dividends, redemption
rights, liquidation preferences, conversion rights, voting rights or otherwise.
(d) In addition to any other rights provided by law
and without limiting the foregoing, so long as any shares of any series of
Preferred Stock shall be outstanding, the Corporation shall not, without first
obtaining the affirmative vote or written consent of the holders of a majority
of the outstanding shares of such series of Preferred Stock voting as a separate
class (based on the number of shares of Common Stock into which each holder's
Preferred Stock is then convertible, as adjusted from time to time pursuant to
Section 4 hereof), take any action to amend the Articles of Incorporation in
which the dividend, liquidation preference, conversion, voting, redemption or
other rights of such series of Preferred Stock will be adversely affected. In
addition to any other rights provided by law and without limiting the foregoing,
so long as any shares of any series of Preferred Stock shall be outstanding, the
Corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of a majority of the outstanding shares of the Preferred
Stock voting as a separate class (based on the number of shares of Common Stock
into which each holder's Preferred Stock is then convertible, as adjusted from
time to time pursuant to Section 4 hereof), take any action to:
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(i) sell or otherwise dispose of all or
substantially all of the assets or business of the Corporation;
(ii) effect a consolidation, reorganization
or merger of the Corporation with or into any other corporation, or any other
transaction in which ownership of a majority of the Corporation's capital stock
is transferred;
(iii) authorize or issue any new shares or
reclassify any Common Stock into shares of any class or series of stock senior
to or on parity with the Series A, Series B and/or C Preferred Stock as to
dividends, redemption rights, liquidation preferences, conversion rights, voting
rights or otherwise;
(iv) increase the authorized number of
directors of this Corporation to more than seven (7), without the unanimous
approval (by vote or written consent) of all of the directors then in office
(including, without limitation, the directors elected by the holders of
Preferred Stock).
ARTICLE IV
LIMITATION OF LIABILITY
The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law. Any
repeal or modification of this Article IV, or the adoption of any provision of
the Articles of Incorporation inconsistent with this Article IV, shall only be
prospective and shall not adversely affect the rights under this Article IV in
effect at the time of the alleged occurrence of any act or omission to act
giving rise to liability.
ARTICLE V
INDEMNIFICATION
The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through By-law
provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits on indemnification set forth in Section 204 of the California
Corporations Code with respect to actions for breach of duty to the Corporation
or its shareholders. Any repeal or modification of this Article V, or the
adoption of any provision of the Articles of Incorporation inconsistent with
this Article V, shall only be prospective and shall not adversely affect the
rights under this Article V in effect at the time of the alleged occurrence of
any action or omission to act giving rise to indemnification.
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<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT OF
RESTATED ARTICLES OF INCORPORATION OF
3Dfx INTERACTIVE, INC.
The undersigned, Gary P. Martin and John B. Montgomery, hereby certify
that:
1. They are the Vice President and Assistant Secretary,
respectively, of 3Dfx Interactive, Inc., a California
corporation.
2. So much of Article III of the Restated Articles of
Incorporation of this corporation which currently reads as
follows:
"The total number of shares of all classes of stock which the
Corporation is authorized to issue is 39,666,666, consisting of
25,033,333 shares of Common Stock, no par value, and 14,633,333 shares
of Preferred Stock, no par value. The Preferred Stock consists of
three series, of which 5,600,000 shares have been designated as Series
A Preferred Stock (the "Series A Preferred Stock"), 5,700,000 shares
have been designated as Series B Preferred Stock (the "Series B
Preferred Stock") and of which 3,333,333 have been designated as
Series C Preferred Stock (the "Series C Preferred Stock")."
is hereby amended to read in its entirety as follows:
"The total number of shares of all classes of stock which the
Corporation is authorized to issue is 64,633,333, consisting of
50,000,000 shares of Common Stock, no par value, and 14,633,333 shares
of Preferred Stock, no par value. The Preferred Stock consists of
three series, of which 5,600,000 shares have been designated as Series
A Preferred Stock (the "Series A Preferred Stock"), 5,700,000 shares
have been designated as Series B Preferred Stock (the "Series B
Preferred Stock") and of which 3,333,333 have been designated as
Series C Preferred Stock (the "Series C Preferred Stock")."
3. Section 4(c)(i)(6)(B) of Article III of the Restated Articles
of Incorporation of this corporation shall be amended to read in its entirety as
follows:
"(B) to officers, directors or employees of, or consultants
to, the Corporation pursuant to a stock grant, stock option plan,
stock purchase plan or other stock incentive agreement (collectively,
the "Plans"), (collectively, the "Reserved Shares") up to an aggregate
of 5,650,000 shares;"
4. The foregoing Certificate of Amendment of Restated Articles of
Incorporation has been duly approved by the Board of Directors.
5. The foregoing Certificate of Amendment of Restated Articles of
Incorporation has been duly approved by the required vote of shareholders in
accordance with Section 902 and 903 of the
<PAGE> 2
California Corporations Code. The authorized number of shares of Common Stock
is 25,033,333, of which 3,921,679 shares are issued and outstanding. The
authorized number of shares of Preferred Stock is 14,633,333, 5,600,000 shares
have been designated as Series A Preferred Stock, 5,501,979 of which are issued
and outstanding, 5,700,000 shares have been designated as Series B Preferred
Stock, 5,300,000 of which are issued and outstanding, and 3,333,333 have been
designated as Series C Preferred Stock, 3,241,718 of which are issued and
outstanding. The number of shares voting in favor of the amendment equaled or
exceeded the vote required. The percentage vote required was more than 50% of
the Common Stock and more than 50% of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock, each voting as a separate class.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in the foregoing Certificate are
true and correct or our own knowledge.
Date: April __, 1997
________________________________________
Gary P. Martin, Vice President
________________________________________
John B. Montgomery, Assistant Secretary
<PAGE> 1
EXHIBIT 3.3
RESTATED ARTICLES OF INCORPORATION
OF
3Dfx INTERACTIVE, INC.
Gary P. Martin and John B. Montgomery hereby certify that:
1. They are the duly elected Vice President and Assistant
Secretary, respectively, of 3Dfx Interactive, Inc., a California corporation.
2. The Articles of Incorporation of this corporation, as amended
to the date of the filing of these Restated Articles of Incorporation, and with
the omissions required by Section 910 of the Corporations Code, are hereby
amended and restated to read as follows:
First: The name of this corporation is: 3Dfx Interactive,
Inc.
Second: The purpose of this corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of California other than the banking business, the trust
company business or the practice of a profession permitted to be incorporated by
the California Corporations Code.
Third: (A) This corporation is authorized to issue
55,000,000 shares of its capital stock, which shall be divided into two classes
known as "Common Stock" and "Preferred Stock."
(B) The total number shares of Common Stock which
this corporation is authorized to issue is 50,000,000 and the total number of
shares of Preferred Stock which this corporation is authorized to issue is
5,000,000.
(C) The Preferred Stock may be issued from time to
time in one or more series. The Board of Directors of this corporation is
authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Shares, and within the limitations or restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, to increase or decrease (but not below the number of
shares of any such series then outstanding) the number of shares of any such
series subsequent to the issue of shares of that series, to determine the
designation and par value of any series and to fix the number of shares of any
series.
<PAGE> 2
Fourth: (A) Limitation of Directors' Liability. The
liability of the directors of this corporation for monetary damages shall be
eliminated to the fullest extent permissible under California law.
(B) Indemnification of Corporate Agents. This
corporation is authorized to provide indemnification of agents (as defined in
Section 317 of the California Corporations Code) through bylaw provisions,
agreements with agents, vote of shareholders or disinterested directors or
otherwise, in excess of the indemnification otherwise permitted by Section 317
of the California Corporations Code, subject only to the applicable limits set
forth in Section 204 of the California Corporations Code with respect to actions
for breach of duty to the corporation and its shareholders.
(C) Repeal or Modification. Any repeal or
modification of the foregoing provisions of this Article Fourth by the
shareholders of this corporation shall not adversely affect any right of
indemnification or limitation of liability of a director or officer of this
corporation relating to acts or omissions occurring prior to such repeal or
modification.
3. The foregoing Restated Articles of Incorporation have been
duly approved by the Board of Directors of said corporation.
4. The foregoing Restated Articles of Incorporation were approved
by the required vote of the shareholders of said corporation in accordance with
Sections 902 and 903 of the California General Corporations Code at an Annual
Meeting of Shareholders, the record date for which was March 27, 1997. The
total number of outstanding shares of the corporation entitled to vote as of
the record date for said meeting was 3,921,679 shares of Common Stock,
5,501,979 shares of Series A Preferred Stock, 5,300,000 shares of Series B
Preferred Stock, and 3,241,178 shares of Series C Preferred Stock. The number
of shares of stock voting in favor of the foregoing Restated Articles of
Incorporation equalled or exceeded the vote required. The vote required was
more than 50% of the outstanding shares of Common Stock and more than 50% of
the outstanding shares of the Series A, Series B and Series C Preferred Stock,
each voting as a separate class. The Restated Articles are necessary as a
result of the automatic conversion of all outstanding Preferred Shares upon the
effectiveness of the corporation's initial public offering.
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<PAGE> 3
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in the foregoing Restated
Articles of Incorporation are true and correct of our own knowledge.
Executed at San Jose, California, on June __, 1997.
_______________________________________
Gary P. Martin, Vice President
_______________________________________
John B. Montgomery, Assistant Secretary
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<PAGE> 1
EXHIBIT 3.4
BYLAWS
OF
3DFX INTERACTIVE, INC.
<PAGE> 2
BY-LAWS
OF
3DFX INTERACTIVE, INC.
ARTICLE I
Principal Office
Section 1. Location of Principal Office. The principal
executive office for the transaction of the business of the corporation shall be
established and maintained by the board of directors at any place within or
without the State of California. The board of directors may change said
principal executive office from one location to another.
Section 2. Other Business Offices. The board of directors may
at any time establish other business offices within or without the State of
California.
ARTICLE II
Meetings of Shareholders
Section 1. Location of Meetings. All meetings of the
shareholders shall be held at any place within or without the State of
California which may be designated either by the board of directors or by the
written consent of all shareholders entitled to vote thereat and not present at
the meeting given either before or after the meeting and filed with the
secretary of the corporation. In the absence of any such designation,
shareholders' meetings shall be held at the principal executive office of the
corporation.
Section 2. Annual Meetings. The annual meeting of the
shareholders of the corporation shall be held on such date and at such time as
shall be determined by the board of directors, not more than fifteen (15) months
after the date of the preceding annual meeting or, in the case of the first
annual meeting, not more than fifteen (15) months after the organization of the
corporation. At such meeting, directors shall be elected and any other proper
business may be transacted which is within the powers of the shareholders.
Written notice of each annual meeting shall be given to each shareholder
entitled to vote either personally or by first-class mail or other means of
written communications (which includes, without limitation and wherever used in
these bylaws, telegraphic and facsimile communication), charges prepaid,
addressed to each shareholder at the address appearing on the books of the
corporation, or given by the shareholder to the corporation for the purpose of
notice. If any notice or report addressed to the shareholder at
<PAGE> 3
the address of such shareholder appearing on the books of the corporation is
returned to the corporation by the United States Postal Service marked to
indicate that the United States Postal Service is unable to deliver the notice
or report to the shareholder at such address, all future notices or reports
shall be deemed to have been duly given without further mailing if the same
shall be available for the shareholder upon written demand of the shareholder at
the principal executive office of the corporation for a period of one year from
the date of the giving of the notice or report to all other shareholders. If no
address of a shareholder appears on the books of the corporation or is given by
the shareholder to the corporation, notice is duly given to him if sent by mail
or other means of written communication addressed to the place where the
principal executive office of the corporation is located or if published at
least once in a newspaper of general circulation in the county in which said
principal executive office is located.
All such notices shall be given to each shareholder entitled
thereto not less than ten (10) days nor more than sixty (60) days before each
annual meeting. Any such notice shall be deemed to have been given at the time
when delivered personally or deposited in the United States mail or delivered to
a common carrier for transmission to the recipient or actually transmitted by
the person giving the notice by electronic means to the recipient or sent by
other means of written communication. An affidavit of mailing of any such notice
in accordance with the foregoing provisions, executed by the secretary,
assistant secretary or transfer agent of the corporation shall be prima facie
evidence of the giving of the notice.
Such notices shall state:
(a) The place, date and hour of the meeting;
(b) Those matters which the board, at the time of the mailing
of the notice, intends to present for action by the shareholders;
(c) If directors are to be elected, the names of nominees
intended at the time of the notice to be presented by management for
election;
(d) The general nature of a proposal, if any, to take action
with respect to the approval of (i) a contract or other transaction
with an interested director, (ii) an amendment of the articles of
incorporation, (iii) a reorganization of the corporation as defined in
section 181 of the California General Corporation Law (the "General
Corporation Law"), (iv) a voluntary dissolution of the corporation, or
(v) a distribution in dissolution other than in accordance with the
rights of outstanding preferred shares, if any; and
(e) Such other matters, if any, as may properly come before
the meeting or may be expressly required by statute.
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<PAGE> 4
Section 3. Special Meetings. Special meetings of the
shareholders for the purpose of taking any action permitted to be taken by the
shareholders under the General Corporation Law and the articles of incorporation
of this corporation, may be called by the chairman of the board or the
president, or by the board of directors, or by the holders of shares entitled to
cast not less than ten percent (10%) of the votes at the meeting. Upon request
in writing that a special meeting of shareholders be called for any proper
purpose, directed to the chairman of the board, president, vice president or
secretary by any person (other than the board of directors) entitled to call a
special meeting of shareholders, the officer forthwith shall cause notice to be
given to the shareholders entitled to vote that a meeting will be held at a time
requested by the person or persons calling the meeting, not less than
thirty-five (35) nor more than sixty (60) days after receipt of the request.
Except in special cases where other express provision is made by statute, notice
of such special meetings shall be given in the same manner and contain the same
statements as required for annual meetings of shareholders. Notice of any
special meeting shall also specify the general nature of the business to be
transacted, and no other business may be transacted at such meeting.
Section 4. Quorum. The presence in person or by proxy of the
holders of a majority of the shares entitled to vote at any meeting shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
Section 5. Adjournment. Any shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of a majority of the shares, the holders of which are either present
in person or represented by proxy thereat, but in the absence of a quorum no
other business may be transacted at such meeting, except as provided in Section
4 above.
When any meeting of shareholders, either annual or special, is
adjourned to another time or place, notice need not be given of the adjourned
meeting if the time and place thereof are announced at the meeting at which the
adjournment is taken, except that notice of the adjourned meeting shall be given
to each shareholder of record entitled to vote at an adjourned meeting in
accordance with Section 2 of this Article 11 if a new record date for the
adjourned meeting is fixed by the board of directors, or if the adjournment is
for more than forty-five (45) days from the date set for the original meeting.
At any adjourned meeting the corporation may transact any business which might
have been transacted at the original meeting.
Section 6. Record Date: Cumulative Voting. Unless a record
date for voting purposes be fixed as provided in Section 1 of Article VI of
these bylaws, then, subject to the provisions of sections 702 to 704, inclusive,
of the General Corporation Law, only persons in whose names shares entitled to
vote stand on the stock records of the corporation at the close of
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<PAGE> 5
business on the business day next preceding the day on which notice of the
meeting is given or if such notice is waived, at the close of business on the
business day next preceding the day on which the meeting of shareholders is held
(except that the record date for shareholders entitled to give consent to
corporate action without a meeting shall be determined in accordance with
Section 8 of this Article 11) shall be entitled to receive notice of and to vote
at such meeting, and such day shall be the record date for such meeting. Any
shareholder entitled to vote on any matter may vote part of the shares in favor
of the proposal and refrain from voting the remaining shares or vote them
against the proposal (other than elections of directors), but if the shareholder
fails to specify the number of shares such shareholder is voting affirmatively,
it will be conclusively presumed that the shareholder's approving vote is with
respect to all shares such shareholder is entitled to vote. Such vote may be
viva voce or by ballot; provided, however, that all elections for directors must
be by ballot upon demand made by a shareholder at any election and before the
voting begins. The affirmative vote of a majority of the shares represented and
voting at a duly held meeting at which a quorum is present (which shares voting
affirmatively shall constitute at least a majority of the required quorum) shall
be the act of the shareholders except as may otherwise be provided by (i)
Section 4 of this Article 11, (ii) the cumulative voting provisions for the
election of directors as stated in this section below, and (iii) the General
Corporation Law or the articles of incorporation of this corporation (including
without limitation the provision that, upon the vote of the holder or holders of
shares representing fifty percent or more of the voting power of this
corporation, this corporation may elect voluntarily to wind up and dissolve).
Subject to the requirements of the next sentence, every shareholder entitled to
vote at any election for directors may cumulate his votes and give one candidate
a number of votes equal to the number of directors to be elected multiplied by
the number of votes to which his shares are normally entitled, or distribute his
votes on the same principle among as many candidates as he shall think fit. No
shareholder shall be entitled to cumulate votes unless such candidate or
candidates' names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate his votes. If any one shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. The candidates receiving the highest number of votes of shares
entitled to be voted for them, up to the number of directors to be elected,
shall be elected.
Section 7. Waiver of Notice. The transactions of any meeting
of shareholders, either annual or special, however called and noticed, and
wherever held, shall be as valid as though they had been determined at a meeting
duly held after regular call and notice, if a quorum be present either in person
or by proxy, and if, either before or after the meeting, each person entitled to
vote, not present in person or by proxy, signs a written waiver of notice or a
consent to a holding of the meeting, or an approval of the minutes thereof. The
waiver of notice, consent or approval need not specify either the business to be
transacted or the purpose of any regular or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in subparagraph (d) of the third paragraph of Section 2
of this Article 11, the waiver of notice, consent or approval shall state the
general nature of such
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<PAGE> 6
proposal. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall also constitute a
waiver of notice of such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required to
be included in the notice but not so included if such objection is expressly
made at the meeting.
Section 8. Action by Written Consent. Directors may be elected
without a meeting by a consent in writing, setting forth the action so taken,
signed by all of the persons who would be entitled to vote for the election of
directors; in addition a director may be elected at any time to fill a vacancy
(other than a vacancy created by removal) not filled by the directors by the
written consent of persons holding a majority of the outstanding shares entitled
to vote for the election of directors. Notice of such election shall be given to
nonconsenting shareholders if required by this Section 8.
Any other action which, under any provision of the General
Corporation Law, may be taken at a meeting of the shareholders, may be taken
without a meeting, and without notice except as hereinafter set forth, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. All such consents shall
be filed with the secretary of the corporation and shall be maintained in the
corporate records.
Unless the consents of all shareholders entitled to vote have
been solicited in writing:
(a) Notice of any proposed shareholder approval of (i) a
contract or other transaction with an interested director; (ii)
indemnification of an agent of the corporation as authorized by Section
9 of Article IV of these bylaws; (iii) a reorganization of the
corporation as defined in section 181 of the General Corporation Law;
or (iv) a distribution in dissolution other than in accordance with the
rights of outstanding preferred shares, if any, without a meeting by
less than unanimous written consent, shall be given at least ten (10)
days before the consummation of the action authorized by such approval;
and
(b) Prompt notice shall be given of the taking of any other
corporate action approved by shareholders without a meeting by less
than unanimous written consent, to those shareholders entitled to vote
who have not consented in writing. Such notices shall be given in the
manner provided in Section 2 of Article II of these bylaws.
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<PAGE> 7
Unless, as provided in Section 1 of Article VI of these
bylaws, the board of directors has fixed a record date for the determination of
shareholders entitled to notice of and to give such written consent, the record
date for such determination shall be (a) the day on which the first written
consent is given, when no prior action by the board of directors has been taken,
or (b) the close of business on the day the board of directors adopts the
resolution relating to such action.
Any shareholder giving a written consent, or the shareholder's
proxyholders, or a transferee of the shares or a personal representative of the
shareholder or their respective proxyholders, may revoke the consent by a
writing received by the corporation prior to the time that written consents of
the number of shares required to authorize the proposed action have been filed
with the secretary of the corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the secretary of the corporation.
Section 9. Proxies. Every person entitled to vote shares or
execute consents shall have the right to do so either in person or by one or
more agents authorized by a written proxy executed by such person or his duly
authorized agent and delivered to the secretary of the corporation. A proxy
shall be deemed executed if the shareholder's name is placed on the proxy
(whether by manual signature, typewriting, telegraphic transmission or
otherwise) by the shareholder or the shareholder's attorney in fact. Any proxy
duly executed which does not state that it is irrevocable shall continue in full
force and effect until (i) a writing stating that the proxy is revoked is
delivered to the secretary of the corporation, (ii) a proxy bearing a later date
is executed by the person who executed the prior proxy and is presented to the
meeting, (iii) as to any meeting, by attendance at such meeting and voting in
person by the person executing the proxy or (iv) written notice of the death or
incapacity of the maker of such proxy is received by the corporation before the
vote pursuant thereto is counted; provided that no such proxy shall be valid
after the expiration of eleven (11 ) months from the date of its execution,
unless otherwise provided in the proxy. The revocability of a proxy which states
on its face that it is irrevocable shall be governed by the provisions of
sections 705(e) and (f) of the General Corporation Law.
Section 10. Inspectors of Election. In advance of any meeting
of shareholders, the board of directors may appoint any persons other than
nominees for office as inspectors of election to act at such meeting and any
adjournment thereof. If inspectors of election be not so appointed, the chairman
of any such meeting may, and on the request of any shareholder or his proxy
shall, make such appointment at the meeting. The number of inspectors shall be
either one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares represented in person or by
proxy shall determine whether one or three inspectors are to be appointed. In
case any person appointed as inspector fails to appear or fails or refuses to
act, the vacancy may and on the request of any shareholder or a shareholder's
proxy shall, be filled by appointment by the board of directors in advance of
the meeting, or at the meeting by the chairman of the meeting.
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<PAGE> 8
The duties of such inspectors shall be as prescribed by
section 707 of the General Corporation Law and shall include: determining the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies; receiving votes, ballots or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes or consents;
determining when the polls shall close; determining the result; and such acts as
may be proper to conduct the election or vote with fairness to all shareholders.
In the determination of the validity and effect of proxies the dates contained
on the forms of proxy shall presumptively determine the order of execution of
the proxies, regardless of the postmark dates on the envelopes in which they are
mailed.
The inspectors of election shall perform their duties
impartially, in good faith, to the best of their ability and as expeditiously as
is practical. If there are three inspectors of election, the decision, act or
certificate of a majority is effective in all respects as the decision, act or
certificate of all. Any report or certificate made by the inspectors of election
is prima facie evidence of the facts stated therein.
ARTICLE III
Board of Directors
Section 1. Powers of the Board. Subject to the provisions of
the General Corporation Law and any limitations in the articles of incorporation
and these bylaws as to action to be authorized or approved by the shareholders,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same limitations,
it is hereby expressly declared that the board of directors shall have the
following powers:
First: To conduct, manage and control the affairs and business
of the corporation and to make such rules and regulations therefor, not
inconsistent with law or with the articles of incorporation or with
these bylaws, as they may deem best;
Second: To elect and remove at pleasure the officers, agents
and employees of the corporation, prescribe their duties and fix their
compensation;
Third: To authorize the issue of shares of stock of the
corporation from time to time upon such terms as may be lawful, in
consideration of money paid, labor done, services actually rendered to
the corporation or for its benefit or in its formation or
reorganization, debts or securities canceled, and tangible or
intangible property actually received, but neither promissory notes of
the purchaser (unless adequately secured by collateral other than the
shares acquired or unless permitted by section 408 of the General
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<PAGE> 9
Corporation Law) nor future services shall constitute payment or part
payment for the shares of the corporation;
Fourth: To borrow money and incur indebtedness for the
purposes of the corporation and to cause to be executed and delivered
therefor, in the corporate name, promissory notes, bonds, debentures,
deeds of trust, mortgages, pledges, hypothecations or other evidences
of debt and securities therefor;
Fifth: To alter, repeal or amend, from time to time, and at
any time, these bylaws and any and all amendments of the same, and from
time to time, and at any time, to make and adopt such new and
additional bylaws as may be necessary and proper, subject to the power
of the shareholders to adopt, amend or repeal such bylaws, or to revoke
the delegation of authority of the directors, as provided by law or by
Article VIII of these bylaws; and
Sixth: By resolution adopted by a majority of the authorized
number of directors, to designate an executive and/or other committees,
each consisting of two or more directors, to serve at the pleasure of
the board, and to prescribe the manner in which proceedings of such
committee shall be conducted. The appointment of members or alternate
members (who may replace any absent member at any meeting of the
committee) of a committee requires the vote of a majority of the
authorized number of directors. Any such committee, to the extent
provided in a resolution of the board, shall have all of the authority
of the board, except with respect to:
(i) The approval of any action for which the General
Corporation Law or the articles of incorporation also require
shareholder approval;
(ii) The filling of vacancies on the board or in any
committee;
(iii) The fixing of compensation of the directors for serving
on the board or on any committee;
(iv) The adoption, amendment or repeal of bylaws;
(v) The amendment or repeal of any resolution of the board
which by its express terms is not so amendable or repealable;
(vi) Any distribution to the shareholders, except at a rate
or in a periodic amount or within a price range determined by the
board; and
(vii) The appointment of other committees of the board or the
members thereof.
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<PAGE> 10
Section 2. Number of Directors. The number of directors of the
corporation shall be not less than five (5) nor more than seven (7). The exact
number of directors shall be seven (7) 0.
until changed, within the limits specified above, by a bylaw amending this
Section 3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than five (5) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).
No reduction of the authorized number of directors shall have
the effect of removing any director before that director's term of office
expires.
Section 3. Election of Directors. The directors shall be
elected at each annual meeting of shareholders, but if any such annual meeting
is not held or the directors are not elected thereat, the directors may be
elected at any special meeting of shareholders held for that purpose. Each
director, including a director elected to fill a vacancy, shall hold office
until his successor is elected, except as otherwise provided by statute.
Section 4. Vacancies; Resignation. A vacancy in the board of
directors shall be deemed to exist in case of the death, resignation or removal
of any director, if the authorized number of directors be increased, or if the
shareholders fail, at any annual or special meeting of shareholders at which any
director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting. The board of directors may declare
vacant the office of a director who has been declared of unsound mind by an
order of court or has been convicted of a felony.
Vacancies in the board of directors, except for a vacancy
created by the removal of a director, may be filled by a majority of the
directors then in office, whether or not less than a quorum, or by a sole
remaining director, and each director so elected shall hold office until his
successor is elected at an annual or a special meeting of the shareholders. A
vacancy in the board of directors created by the removal of a director may only
be filled by the vote of a majority of the shares represented and voting at a
duly held meeting at which a quorum is present (which shares voting
affirmatively also constitute at least a majority of the required quorum), or by
the written consent of the holders of all of the outstanding shares.
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The shareholders may elect a director or directors at any time
to fill any vacancy or vacancies not filled by the directors. Any such election
by written consent other than to fill a vacancy created by removal shall require
the consent of holders of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice
to the chairman of the board, the president, the secretary or the board of
directors of the corporation, unless the notice specifies a later time for the
effectiveness of such resignation. If the board of directors accepts the
resignation of a director tendered to take effect at a future time, the board or
the shareholders shall have power to elect a successor to take office when the
resignation is to become effective.
No reduction of the authorized number of the directors shall
have the effect of removing any director prior to the expiration of his term of
office.
ARTICLE IV
Meetings of Directors
Section 1. Location of Meetings. Regular meetings of the board
of directors shall be held at any place within or without the State of
California that has been designated from time to time by the board of directors.
In the absence of such designation, regular meetings shall be held at the
principal executive office of the corporation, except as provided in Section 2.
Special meetings of the board of directors may be held at any place within or
without the State of California which has been designated in the notice of the
meeting, or, if not designated in the notice or if there is no notice, at the
principal executive office of the corporation.
Section 2. Regular Meetings. Immediately following each annual
meeting of the shareholders there shall be a regular meeting of the board of
directors of the corporation at the place of said annual meeting or at such
other place as shall have been designated by the board of directors for the
purpose of organization, election of officers and the transaction of other
business. Other regular meetings of the board of directors shall be held without
call on such date and time as may be fixed by the board of directors; provided,
however, that should any such day fall on a legal holiday, then said meeting
shall be held at the same time on the next business day thereafter ensuing which
is not a legal holiday. Notice of regular meetings of the directors is hereby
dispensed with and no notice whatever of any such meeting need be given,
provided that notice of any change in the time or place of regular meetings
shall be given to all of the directors in the same manner as notice for special
meetings of the board of directors.
Section 3. Special Meetings: Notice. Special meetings of the
board of directors for any purpose or purposes may be called at any time by the
chairman of the board or president or,
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if both the chairman of the board and the president are absent or are unable or
refuse to act, by any vice president or by any two directors. Notice of the time
and place of special meetings shall be delivered personally or by telephone to
each director, or sent by first-class mail or telegram or facsimile
transmission, charges prepaid, addressed to him at his address as it appears
upon the records of the corporation or, if it is not so shown on the records and
is not readily ascertainable, at the place at which the meetings of the
directors are regularly held. In case such notice is mailed, it shall be
deposited in the United States mail at least four (4) days prior to the time of
the holding of the meeting. In case such notice is delivered personally,
telephoned, telegraphed or sent by facsimile transmission, it shall be delivered
to the director or transmitted to the director at least forty-eight (48) hours
prior to the time of the holding of the meeting. Any notice given personally or
by telephone, telegraph or facsimile may be communicated to either the director
or to a person at the office of the director whom the person giving the notice
has reason to believe will promptly communicate it to the director. Such deposit
in the mail, delivery to a common carrier, transmission by electronic means or
delivery, personally or by telephone, as above provided, shall be due, legal and
personal notice to such directors. The notice need not specify the place of the
meeting if the meeting is to be held at the principal executive office of the
corporation, and need not specify the purpose of the meeting.
Section 4. Quorum. Presence of a majority of the authorized
number of directors at a meeting of the board of directors constitutes a quorum
for the transaction of business, except as hereinafter provided. Members of the
board may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another. Every act or decision done or made by a majority
of the directors present at a meeting duly held at which a quorum is present
shall be regarded as the act of the board of directors, subject to the
provisions of sections 310, 311 and 317 of the General Corporation Law. A
meeting at which a quorum is initially present may continue to transact business
notwithstanding the withdrawal of directors, provided that any action taken is
approved by at least a majority of the required quorum for such meeting. A
majority of the directors present, whether or not a quorum is present, may
adjourn any meeting to another time and place. If the meeting is adjourned for
more than twenty-four (24) hours, notice of any adjournment to another time or
place (other than adjournments until the time fixed for the next regular meeting
of the board of directors, as to which no notice is required) shall be given
prior to the time of the adjourned meeting to the directors who were not present
at the time of the adjournment.
Section 5. Waiver of Notice. Notice of a meeting need not be
given to any director who signs a waiver of notice or a consent to holding the
meeting or an approval of the minutes thereof, whether before or after the
meeting, or who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director. All such waivers, consents
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
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Section 6. Action by Written Consent. Any action required or
permitted to be taken by the board of directors, may be taken without a meeting
if all members of the board shall individually or collectively consent in
writing to such action. Such written consent or consents shall be filed with the
minutes of the proceedings of the board. Such action by written consent shall
have the same force and effect as a unanimous vote of such directors.
Section 7. Committees. The provisions of this Article IV shall
also apply, with necessary changes in points of detail, to committees of the
board of directors, if any, and to actions by such committees (except for the
first sentence of Section 2 of Article IV, which shall not apply, and except
that special meetings of a committee may also be called at any time by any two
members of the committee), unless otherwise provided by these bylaws or by the
resolution of the board of directors designating such committees. For such
purpose, references to "the board" or "the board of directors" shall be deemed
to refer to each such committee and references to "directors" and "members of
the board" shall be deemed to refer to members of the committee.
Section 8. Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
board.
Section 9. Indemnification. The corporation shall, to the
maximum extent permitted by the General Corporation Law, indemnify each of its
agents against expenses, judgments, fines, settlements and other amounts
actually and reasonably incurred in connection with any proceeding arising by
reason of the fact that any such person is or was an agent of the corporation.
For purposes of this Section, an "agent" of the corporation includes any person
who is or was a director, officer, employee or other agent of the corporation,
or who is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, or who was a director, officer, employee or agent of
a corporation which was a predecessor of the corporation or of another
enterprise at the request of such predecessor corporation.
ARTICLE V
Officers
Section 1. Designation of Officers. The officers of the
corporation shall be a chairman of the board or a president, or both, a
secretary, and a treasurer, who shall also be the chief financial officer of the
corporation. The corporation may also have, at the discretion of the board of
directors, one or more vice presidents, one or more assistant secretaries, one
or more assistant treasurers, and such other officers as may be designated from
time to time by the board of directors. Any number of offices may be held by the
same person. The officers shall be elected by the board of directors and shall
hold office at the pleasure of such board.
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Section 2. Chairman of the Board. The chairman of the board,
if there be such officer, shall, if present, preside at all meetings of the
board of directors and exercise and perform such other powers and duties as may
be from time to time assigned to him by the board of directors or prescribed by
the bylaws. If there is not a president, the chairman of the board shall, in
addition, be the general manager and chief executive officer of the corporation
and shall have the powers and duties prescribed in Section 3 of Article V of
these bylaws.
Section 3. President. Subject to such powers and duties, if
any, as may be prescribed by these bylaws or the board of directors for the
chairman of the board, if there be such officer, the president shall be the
general manager and chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and officers of the corporation. He shall
preside at all meetings of the shareholders and, in the absence of the chairman
of the board, or if there be none, at all meetings of the board of directors. He
shall have all of the powers and shall perform all of the duties which are
ordinarily inherent in the office of the president, and he shall have such
further powers and shall perform such further duties as may be prescribed for
him by the board of directors.
Section 4. Vice Presidents. In the absence or disability or
refusal to act of the president, the vice presidents in order of their rank as
fixed by the board of directors, or, if not ranked, the vice president
designated by the president or the board of directors, shall perform all of the
duties of the president and when so acting shall have all the powers of and be
subject to all the restrictions upon the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them, respectively, by the board of directors or the bylaws.
Section 5. Secretary. The secretary shall keep or cause to be
kept at the principal executive office of the corporation or such other place as
the board of directors may order, a book of minutes of all proceedings of the
shareholders, the board of directors and committees of the board, with the time
and place of holding, whether regular or special, and if special how authorized,
the notice thereof given, the names of those present at directors' and committee
meetings, and the number of shares present or represented at shareholders'
meetings. The secretary shall keep or cause to be kept at the principal
executive office or at the office of the corporation's transfer agent a record
of shareholders or a duplicate record of shareholders showing the names of the
shareholders and their addresses, the number of shares and classes of shares
held by each, the number and date of certificates issued for the same and the
number and date of cancellation of every certificate surrendered for
cancellation. The secretary or an assistant secretary, or, if they are absent or
unable or refuse to act, any other officer of the corporation, shall give or
cause to be given notice of all the meetings of the shareholders, the board of
directors and committees of the board required by the bylaws or by law to be
given, and he shall keep the seal of the corporation, if any, in safe custody
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or by the bylaws.
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Section 6. Assistant Secretary. It shall be the duty of the
assistant secretaries to assist the secretary in the performance of his duties
and generally to perform such other duties as may be delegated to them by the
board of directors.
Section 7. Treasurer. The treasurer shall be the chief
financial officer of the corporation and shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of account of the
corporation. He shall receive and deposit all moneys and other valuables
belonging to the corporation in the name and to the credit of the corporation
and shall disburse the same only in such manner as the board of directors or the
appropriate officers of the corporation may from time to time determine, shall
render to the president and the board of directors, whenever they request it, an
account of all his transactions as treasurer and of the financial condition of
the corporation, and shall perform such further duties as the board of directors
may require.
Section 8. Assistant Treasurer. It shall be the duty of the
assistant treasurers to assist the treasurer in the performance of his duties
and generally to perform such other duties as may be delegated to them by the
board of directors.
ARTICLE VI
Miscellaneous
Section 1. Record Date. The board of directors may fix a time
in the future as a record date for the determination of the shareholders
entitled to notice of and to vote at any meeting of shareholders or entitled to
give consent to corporate action in writing without a meeting, to receive any
report, to receive any dividend or distribution, or any allotment of rights, or
to exercise rights in respect to any change, conversion, or exchange of shares.
The record date so fixed shall be not more than sixty (60) days nor less than
ten (10) days prior to the date of any meeting, nor more than sixty (60) days
prior to any other event for the purposes of which it is fixed. When a record
date is so fixed, only shareholders of record at the close of business on that
date are entitled to notice of and to vote at any such meeting, to give consent
without a meeting, to receive any report, to receive a dividend, distribution,
or allotment of rights, or to exercise the rights, as the case may be,
notwithstanding any transfer of any shares on the books of the corporation after
the record date, except as otherwise provided by statute or in the articles of
incorporation or bylaws.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close
of business on the business day next preceding the day on which notice
is given or, if notice is waived, at the close of business on the
business day next preceding the day on which the meeting is held.
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(b) The record date for determining shareholders entitled to
give consent to corporate action in writing without a meeting, when no
prior action by the board has been taken, shall be the day on which the
first written consent is given.
(c) The record date for determining shareholders for any other
purpose shall be at the close of business on the day on which the board
adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
Section 2. Inspection of Corporate Records. The accounting
books and records, the record of shareholders, and minutes of proceedings of the
shareholders and the board and committees of the board of this corporation and
any subsidiary of this corporation shall be open to inspection upon the written
demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts.
Every director shall have the absolute right at any reasonable
time to inspect and copy all books, records and documents of every kind and to
inspect the physical properties of the corporation and its subsidiary
corporations. Such inspection by a director may be made in person or by agent or
attorney and the right of inspection includes the right to copy and make
extracts.
Section 3. Certificates for Shares. Every holder of shares in
the corporation shall be entitled to have a certificate signed in the name of
the corporation by the chairman or vice chairman of the board or the president
or a vice president and by the treasurer or an assistant treasurer or the
secretary or any assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the certificate may be facsimile.
Any such certificate shall contain such legend or other
statement as may be required by the California Corporate Securities Law of 1968,
the Federal securities laws, and any agreement between the corporation and the
issuee thereof.
Certificates for shares may be issued prior to full payment
under such restrictions and for such purposes as the board of directors or the
bylaws may provide; provided, however, that any such certificate so issued prior
to full payment shall state on the face thereof the amount remaining unpaid and
the terms of payment thereof.
Section 4. Representation of Shares of Other Corporations. The
president or any vice president or the secretary or any assistant secretary of
this corporation is authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of any
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other corporation or corporations standing in the name of this corporation. The
authority herein granted to said officers to vote or represent on behalf of this
corporation any and all shares held by this corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
other person authorized so to do by proxy or power of attorney duly executed by
said officers.
Section 5. Inspection of Bylaws. The corporation shall keep in
its principal executive office in California, or if its principal executive
office is not in California, then at its principal business office in California
(or otherwise provide upon written request of any shareholder), the original or
a copy of the bylaws as amended to date, certified by the secretary, which shall
be open to inspection by the shareholders at all reasonable times during office
hours.
Section 6. Construction and Definitions. Unless the context
otherwise requires, the general provisions, rules of construction and
definitions contained in the General Corporation Law shall govern the
construction of these bylaws. Without limiting the generality of the foregoing,
the masculine gender includes the feminine and neuter, the singular number
includes the plural and the plural number includes the singular, and the term
"person" includes a corporation as well as a natural person.
ARTICLE VII
Amendments
Section 1. Amendment by Shareholders. New bylaws may be
adopted or these bylaws may be amended or repealed by the affirmative vote or
written consent of a majority of the outstanding shares entitled to vote, except
as otherwise provided by law or by the articles of incorporation or these
bylaws.
Section 2. Amendment by Board of Directors. Subject to the
right of shareholders as provided in Section 1 of this Article to adopt, amend
or repeal bylaws, and except as otherwise provided by law or by the articles of
incorporation, bylaws (other than a bylaw or amendment thereof changing the
authorized maximum or minimum number of directors) may be adopted, amended or
repealed by the board of directors.
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ARTICLE VIII
Annual and Other Reports
Section 1. Annual Report to Shareholders.
(a) So long as the corporation shall have fewer than one
hundred shareholders of record (determined as provided in section 605 of the
General Corporation Law), the requirement of section 1501 (a) of said law that
an annual report be sent to the shareholders is expressly waived.
(b) Notwithstanding subdivision (a) of this Section, the
corporation shall, upon the written request of any shareholder made more than
one hundred twenty (120) days after the close of a fiscal year, deliver or mail
to the person making the request, within thirty (30) days thereafter, the
financial statements required by section 1501 (a) of the General Corporation
Law.
Section 2. Request for Financial Statements. A shareholder or
shareholders holding at least five percent (5%) of the outstanding shares of any
class of the corporation may make a written request to the corporation for an
income statement of the corporation for the three-month, six-month or nine-month
period of the current fiscal year ended more than thirty (30) days prior to the
date of the request and a balance sheet of the corporation as of the end of such
period and, in addition, if no annual report for the last fiscal year has been
sent to shareholders, the statements referred to in section 1501 (a) of the
General Corporation Law for the last fiscal year. The corporation shall deliver
or mail the statements to the person making the request within thirty (30) days
thereafter. A copy of any such statements shall be kept on file in the principal
executive office of the corporation for twelve (12) months and they shall be
exhibited at all reasonable times to any shareholder demanding an examination of
them or a copy shall be mailed to such shareholder. The quarterly income
statements and balance sheets referred to in this Section shall be accompanied
by the report thereon, if any, of any independent accountants engaged by the
corporation or the certificate of an authorized officer of the corporation that
such financial statements were prepared without audit from the books and records
of the corporation.
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EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT ("AGREEMENT") is made as of this _____
day of April, 1997, by and between 3Dfx Interactive, Inc., a California
corporation (the "COMPANY"), and __________________ ("INDEMNITEE").
WHEREAS, the Company and Indemnitee recognize the increasing
difficulty in obtaining directors' and officers' liability insurance, the
significant increases in the cost of such insurance and the general reductions
in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available
as adequate under the present circumstances, and Indemnitee and other officers,
directors, employees and agents of the Company may not be willing to continue
to serve in such capacities without additional protection; and
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve as officers and
directors of the Company and to indemnify its officers and directors so as to
provide them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
(a) Third Party Proceedings. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee is or was a
party or is threatened to be made a party to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by
reason of the fact that Indemnitee is or was a director, officer, employee or
agent of the Company, or any subsidiary of the Company, by reason of any action
or inaction on the part of Indemnitee while an officer or director or by reason
of the fact that Indemnitee is or was serving at the request of the Company as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement (if such
settlement is approved in advance by the Company, which approval shall not be
unreasonably withheld) actually and reasonably incurred by Indemnitee in
connection with such action or proceeding if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe Indemnitee's conduct was
unlawful. The termination of any action or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that (i) Indemnitee did not act in
good faith and in a manner
<PAGE> 2
which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, or (ii) with respect to any criminal action or
proceeding, Indemnitee had reasonable cause to believe that Indemnitee's
conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The
Company shall indemnify Indemnitee if Indemnitee was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
proceeding by or in the right of the Company or any subsidiary of the Company
to procure a judgment in its favor by reason of the fact that Indemnitee is or
was a director, officer, employee or agent of the Company, or any subsidiary of
the Company, by reason of any action or inaction on the part of Indemnitee
while an officer or director or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, to the fullest extent
permitted by law, amounts paid in settlement, in each case to the extent
actually and reasonably incurred by Indemnitee in connection with the defense
or settlement of such action or proceeding if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its shareholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been finally adjudicated by court order or judgment
to be liable to the Company in the performance of Indemnitee's duty to the
Company and its shareholders unless and only to the extent that the court in
which such action or proceeding is or was pending shall determine upon
application that, in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for expenses and then only to the
extent that the court shall determine.
2. EXPENSES; INDEMNIFICATION PROCEDURE.
(a) Advancement of Expenses. The Company shall advance
all expenses incurred by Indemnitee in connection with the investigation,
defense, settlement or appeal of any civil or criminal action or proceeding
referenced in Section 1(a) or (b) hereof (but not amounts actually paid in
settlement of any such action or proceeding which amounts are not considered
expenses which can be advanced). Indemnitee hereby undertakes to repay such
amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within forty-five (45) days following delivery of a
written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall,
as a condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as reasonably practicable
of any claim made against Indemnitee for which indemnification will or will be
sought under this Agreement. Notice to the Company shall be directed to the
Chief Executive Officer of the Company at the address shown on the signature
page of this Agreement (or such other address as the Company shall designate in
writing to Indemnitee). Notice shall be deemed received three business days
after the date postmarked if sent by domestic certified or registered mail,
properly addressed; otherwise notice shall be deemed received when such notice
shall actually be received by the Company. In addition, Indemnitee shall give
the Company such information and cooperation as it may reasonably require and
as shall be within Indemnitee's power.
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(c) Procedure. Any indemnification and advances provided
for in Section 1 and this Section 2 shall be made no later than forty-five (45)
days after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's Restated
Articles of Incorporation or Bylaws providing for indemnification, is not paid
in full by the Company within forty-five (45) days after a written request for
payment thereof has first been received by the Company, Indemnitee may, but
need not, at any time thereafter bring an action against the Company to recover
the unpaid amount of the claim and, subject to Section 12 of this Agreement,
Indemnitee shall also be entitled to be paid for the expenses (including
attorneys' fees) of bringing such action. It shall be a defense to any such
action (other than an action brought to enforce a claim for expenses incurred
in connection with any action or proceeding in advance of its final
disposition) that Indemnitee has not met the standards of conduct which make it
permissible under applicable law for the Company to indemnify Indemnitee for
the amount claimed, but the burden of proving such defense shall be on the
Company and Indemnitee shall be entitled to receive interim payments of
expenses pursuant to Subsection 2(a) unless and until such defense may be
finally adjudicated by court order or judgment from which no further right of
appeal exists. It is the parties' intention that if the Company contests
Indemnitee's right to indemnification, the question of Indemnitee's right to
indemnification shall be for the court to decide, and neither the failure of
the Company (including its Board of Directors, any committee or subgroup of the
Board of Directors, independent legal counsel, or its shareholders) to have
made a determination that indemnification of Indemnitee is proper in the
circumstances because Indemnitee has met the applicable standard of conduct
required by applicable law, nor an actual determination by the Company
(including its Board of Directors, any committee or subgroup of the Board of
Directors, independent legal counsel, or its shareholders) that Indemnitee has
not met such applicable standard of conduct, shall create a presumption that
Indemnitee has or has not met the applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt
of a notice of a claim pursuant to Section 2(b) hereof, the Company has
director and officer liability insurance in effect, the Company shall give
prompt notice of the commencement of such proceeding to the insurers in
accordance with the procedures set forth in the respective policies. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of the Indemnitee, all amounts payable as a result
of such proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall
be obligated under Section 2(a) hereof to pay the expenses of any proceeding
against Indemnitee, the Company, if appropriate, shall be entitled to assume
the defense of such proceeding, with counsel approved by Indemnitee, which
approval shall not be unreasonably withheld, upon the delivery to Indemnitee of
written notice of its election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the
same proceeding, provided that (i) Indemnitee shall have the right to employ
his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the
employment of counsel by Indemnitee has been previously authorized by the
Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such
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<PAGE> 4
defense, or (C) the Company shall not, in fact, have employed counsel to assume
the defense of such proceeding, then the fees and expenses of Indemnitee's
counsel shall be at the expense of the Company.
3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
(a) Scope. Notwithstanding any other provision of this
Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the
Company's Articles of Incorporation or Bylaws (as now or hereafter in effect)
or by statute. In the event of any change, after the date of this Agreement,
in any applicable law, statute or rule which expands the right of a California
corporation to indemnify a member of its Board of Directors, an officer or
other corporate agent, such changes shall be ipso facto, within the purview of
Indemnitee's rights and Company's obligations, under this Agreement. In the
event of any change in any applicable law, statute or rule which narrows the
right of a California corporation to indemnify a member of its Board of
Directors, an officer or other corporate agent, such changes, to the extent not
otherwise required by such law, statute or rule to be applied to this Agreement
shall have no effect on this Agreement or the parties' rights and obligations
hereunder.
(b) Nonexclusivity. The indemnification provided by this
Agreement shall not be deemed exclusive of any rights to which Indemnitee may
be entitled under the Company's Articles of Incorporation or Bylaws (as now or
hereafter in effect), any agreement, any vote of shareholders or disinterested
Directors, the Corporation Law of the State of California, or otherwise, both
as to action in Indemnitee's official capacity and as to action in another
capacity while holding such office. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though he may have ceased to
serve in such capacity at the time of any action, suit or other covered
proceeding.
4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any
civil or criminal action or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee
acknowledge that in certain instances, Federal law or applicable public policy
may prohibit the Company from indemnifying its directors and officers under
this Agreement or otherwise. Indemnitee understands and acknowledges that the
Company has undertaken or may be required in the future to undertake with the
Securities and Exchange Commission to submit the question of indemnification to
a court in certain circumstances for a determination of the Company's right
under public policy to indemnify Indemnitee.
6. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall,
from time to time, make the good faith determination whether or not it is
practicable for the Company to obtain and maintain a policy or policies of
insurance with reputable insurance companies providing the officers and
directors
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<PAGE> 5
of the Company with coverage for losses from wrongful acts, or to ensure the
Company's performance of its indemnification obligations under this Agreement.
Among other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees or agents, if Indemnitee is not an officer or director
but is a key employee or agent. Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain such insurance if the Company
determines in good faith that such insurance is not reasonably available, if
the premium costs for such insurance are disproportionate to the amount of
coverage provided, if the coverage provided by such insurance is limited by
exclusions so as to provide an insufficient benefit, or if Indemnitee is
covered by similar insurance maintained by a subsidiary or parent of the
Company.
7. SEVERABILITY. Nothing in this Agreement is intended to
require or shall be construed as requiring the Company to do or fail to do any
act in violation of applicable law. The Company's inability, pursuant to court
order, to perform its obligations under this Agreement shall not constitute a
breach of this Agreement. The provisions of this Agreement shall be severable
as provided in this Section 7. If this Agreement or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
Company shall nevertheless indemnify Indemnitee to the full extent permitted by
any applicable portion of this Agreement that shall not have been invalidated,
and the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
8. EXCEPTIONS. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts
or omissions or transactions from which a director may not be relieved of
liability under the California General Corporation Law; or
(b) Claims Initiated by Indemnitee. To indemnify or
advance expenses to Indemnitee with respect to proceedings or claims initiated
or brought voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under this Agreement or any other statute or law or otherwise
as required under Section 317 of the California Corporation Law, but such
indemnification or advancement of expenses may be provided by the Company in
specific cases if the Board of Directors has approved the initiation or
bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any
expenses incurred by the Indemnitee with respect to any proceeding instituted
by Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses
or liabilities of any type whatsoever (including, but not limited to,
judgments, fines, ERISA excise taxes or penalties, and amounts
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<PAGE> 6
paid in settlement) which have been paid directly to Indemnitee by an insurance
carrier under a policy of officers' and directors' liability insurance
maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee
for expenses and the payment of profits arising from the purchase and sale by
Indemnitee of securities in violation of Section 16(b) of the Securities
Exchange Act of 1934, as amended, or any similar successor statute.
9. CONSTRUCTION OF CERTAIN PHRASES.
(a) For purposes of this Agreement, references to the
"Company" shall include, in addition to Pete's Brewing Company, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees or agents, so that if Indemnitee is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, Indemnitee shall stand in the same position under the provisions of
this Agreement with respect to the resulting or surviving corporation as
Indemnitee would have with respect to such constituent corporation if its
separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee or agent of the Company
which imposes duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have
acted in a manner "not opposed to the best interests of the Company" as
referred to in this Agreement.
10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
11. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part,
of the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director,
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<PAGE> 7
officer, employee or agent (as applicable) of the Company or of any other
enterprise at the Company's request.
12. ATTORNEYS' FEES. In the event that any action is instituted
by Indemnitee under this Agreement to enforce or interpret any of the terms
hereof, Indemnitee shall be entitled to be paid all costs and expenses,
including reasonable attorneys' fees, incurred by Indemnitee with respect to
such action, unless as a part of such action, the court of competent
jurisdiction determines that each of the material assertions made by Indemnitee
as a basis for such action were not made in good faith or were frivolous. In
the event of an action instituted by or in the name of the Company under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action were made in bad faith or were
frivolous.
13. NOTICE. All notices, requests, demands and other
communications under this Agreement shall be in writing, shall be effective
upon receipt, and shall be delivered by Federal Express or a similar courier,
personal delivery, certified or registered air mail, or by facsimile
transmission. Addresses for notice to either party are as shown on the
signature page of this Agreement, or as subsequently modified by written
notice.
14. CONSENT TO JURISDICTION. The Company and Indemnitee each
hereby irrevocably consent to the jurisdiction of the courts of the State of
California for all purposes in connection with any action or proceeding which
arises out of or relates to this Agreement and agree that any action instituted
under this Agreement shall be brought only in the state courts of the State of
California.
15. CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of California, as
applied to contracts between California residents entered into and to be
performed entirely within California.
16. SEVERABILITY. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court
of competent jurisdiction to be invalid, void or otherwise unenforceable, and
the remaining provisions shall remain enforceable to the fullest extent
permitted by law. Furthermore, to the fullest extent possible, the provisions
of this Agreement (including, without limitations, each portion of this
Agreement containing any provision held to be invalid, void or otherwise
unenforceable, that is not itself invalid, void or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable.
17. SUBROGATION. In the event of payment under this Agreement,
the Company shall be subrogated to the extent of such payment to all of the
rights of recovery of Indemnitee, who shall execute all documents required and
shall do all acts that may be necessary to secure such rights and to enable to
corporation effectively to bring suit to enforce such rights.
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<PAGE> 8
18. CONTINUATION OF INDEMNIFICATION. All agreements and
obligations of the Company contained herein shall continue during the period
that Indemnitee is a director, officer or agent of the Company and shall
continue thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal, arbitrational, administrative or investigative, by reason of
the fact that Indemnitee was serving in the capacity referred to herein.
19. AMENDMENT AND TERMINATION. Subject to Section 17, no
amendment, modification, termination or cancellation of this Agreement shall be
effective unless in writing signed by both parties hereto.
20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth
the entire understanding between the parties hereto and supersedes and merges
all previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in
this Agreement shall be construed as giving Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries or affiliated entities.
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<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
3Dfx INTERACTIVE, INC.
By: __________________________________
Title: _______________________________
Address: 4435 Fortran Drive
San Jose, California 94089
AGREED TO AND ACCEPTED:
INDEMNITEE:
__________________________________
__________________________________
__________________________________
(address)
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<PAGE> 1
EXHIBIT 10.5
LEASE AGREEMENT
1. Parties. This Lease, dated for reference purposes only, August 7,
1996, is made by and between South Bay/Fortran, a California limited
partnership, ("Landlord"), and 3Dfx Interactive, a California corporation
("Tenant.").
2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord, upon the terms and conditions hereinafter set forth, those
certain premises (the "Premises") presently known, as of the date of this Lease,
as 4435 Fortran Court, situated in the City of San Jose, County of Santa Clara,
State of California, described as follows: for purposes of this Lease, the
rentable square footage area of the Building shall be deemed to be approximately
seventy-seven thousand eight hundred five (77,805) square feet (the "Building"),
as shown cross-hatched on the site plan (the "Site Plan") attached hereto as
Exhibit ~An. The Building is located on a larger parcel (the "Parcel")
containing other buildings (the "Buildings") as shown on the Site Plan, which
Parcel is described in Exhibit "B" attached hereto, In the event Landlord
subdivides the Parcel in the future into two (2) or more legal parcels, the term
"Parcel" shall thereafter refer to the legal parcel on which the Premise are
located. Landlord shall not be required to make any alterations, additions or
improvements to the Premises and the Premises shall be leased to Tenant in an
"as-is" condition, except Landlord shall complete, at Landlord's expense, minor,
previously planned, structural improvements and modifications required by the
Americans with Disabilities Act (ADA) with regard to the existing Premises.
Landlord shall not be responsible to pay or the cost of any improvements
required to comply with ADA which is a result of any work of improvement to the
Premises initiated or completed by Tenant. If Landlord's Work is not completed
prior to Commencement Date, Tenant shall cooperate with Landlord and Landlord's
contractor in the performance of Landlord's Work. To the extent Landlord's Work
interferes with Tenant's use of the Premises, the Monthly Installment of rent
shall be reduced during the period of such interference in proportion to the
square footage of the area of the Premises which is not usable by Tenant during
the performance of Landlord's Work.
3. Term. The term of this Lease ("Lease Term") shall be for ten (10)
years, commencing on the earlier of (i) May 1, 1997 or (ii) the date of
termination of the existing lease between Landlord and Reply Corporation (the
"Commencement Date"), and ending ten (10) years thereafter, unless sooner
terminated pursuant to any provision hereof. Notwithstanding said scheduled
Commencement Date, If for any reason Landlord cannot deliver possession of the
Premises to Tenant on said date, Landlord shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease or the
obligations of Tenant hereunder, but in such case Tenant shall not be obligated
to pay rent until possession of the Premises is tendered to Tenant and the
commencement and termination dates of this Lease shall be revised to conform to
the date of Landlord's delivery of possession.
<PAGE> 2
4. Rent.
A. Time of Payment. Tenant shall pay to Landlord as rent for the
Premises the respective sums specified in Paragraphs 4.B and 4.C below (the
"Monthly Installment".) each month in advance on the first day of each calendar
month, without deduction or offset, prior notice or demand, commencing on the
Commencement Date and continuing through the term of this Lease, together with
such additional rents as are payable by Tenant to Landlord under the terms of
this Lease. The Monthly Installment for any period during the Lease Term which;
period is less than one (1) full month shall be a prorate portion of the Monthly
Installment based upon a thirty (30) day month.
B. Monthly Installment. The initial Monthly Installment of rent
payable each month during the first (1st) through the twenty-fourth (24th)
months of the Lease Term shall be the sum of Seventy Thousand Twenty-five and
no/100ths Dollars ($70,025.00) per month.
C. Rental Adjustments. The Monthly Installment of rent payable each
month shall increase during the Lease Term as follows:
(a) Commencing on the twenty-fifth (25th) month of the Lease Term
and continuing through the forty-eighth (48th) month of the Lease Term, the
Monthly Installment of rent payable each month shall be Seventy-Seven Thousand
Eight Hundred Five and no/100ths Dollars ($77,805.00).
(b) Commencing on the forty-ninth (49th) month of the Lease Term
and continuing through the seventy-second (72nd) month of the Lease Term, the
Monthly Installment of rent payable each month shall be Eighty-five Thousand
Five Hundred Eighty-six and no/100ths Dollars ($85,586.00).
(c) Commencing on the seventy-third (73rd) month of the Lease
Term and continuing through the ninety-sixth (96th) month, the Monthly
Installment of rent payable each month shall be Ninety-three Thousand Three
Hundred Sixty-six and no/100ths Dollars ($93,366.00).
(d) Commencing on the ninety-seventh month (97th) and continuing
through the one hundred and twentieth (120th) month, the Monthly Installment of
rent payable each month shall be One Hundred One Thousand One Hundred
Forty-seven and no/100ths Dollars ($101,147.00).
D. Late Charge. Tenant acknowledges that late payment by Tenant to
Landlord of rent and other sums due hereunder will cause Landlord to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed on Landlord by the
terms of any mortgage or deed of trust covering the Premises. Accordingly, if
any
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<PAGE> 3
installment of rent or any other sum due from Tenant shall not be received by
Landlord within ten (10) days after such amount shall be due, Tenant shall pay
to Landlord, as additional rent, a late charge equal to five percent (5%) or
such overdue amount. The parties hereby agree that such late charge represents a
fair and reasonable estimate of the costs Landlord will incur by reason of late
payment by Tenant.
E. Additional Rent. All taxes, insurance premiums, Common Area
Charges, late charges, costs and expenses which Tenant is required to pay
hereunder, together with all interest and penalties that may accrue thereon in
the event of Tenant's failure to pay such amounts, and all reasonable damages,
costs and attorneys, fees and expenses which Landlord may incur by reason of any
default of Tenant or failure on Tenant's part to comply with the terms of this
Lease, shall be deemed to be additional rent ("Additional Rent") and shall be
paid in addition to the Monthly Installment of rent, and, in the event of
nonpayment of the Monthly Installment of rent.
F. Place of Payment. Rent shall be payable in lawful money of the
United States of America to Landlord at 511 Division Street, Campbell CA, or to
such other person(s) or at such other place(s) as Landlord may designate in
writing.
G. Advance Payment. Concurrently with the execution of this Lease,
Tenant shall pay to Landlord the sum of Seventy Thousand Twenty-Five Dollars
($70,025.00) to be applied to the Monthly Installment of rent first accruing
under this Lease.
5. Security Deposit. Tenant shall deposit the sum of Seventy Thousand
Twenty-Five Dollars ($70,025.00) (the "Security Deposit") upon execution of this
Lease, to secure the faithful performance by Tenant of each term, covenant and
condition of this Lease. On each date that the Monthly Installment of rent is
increased pursuant to Paragraph 4.C above, Tenant shall deposit with Landlord an
additional sum to increase the Security Deposit to an amount equal to the
Monthly Installment of rent then payable under the Lease. If Tenant shall at any
time fail to make any payment or fail to keep or perform any term, covenant or
condition on its part to be made or performed or kept under this Lease, Landlord
may, but shall not be obligated to and without waiving or releasing Tenant from
any obligation under this Lease, use, apply or retain the whole or any part of
the Security Deposit (A) to the extent of any sum due to Landlord; (B) to make
any required payment on Tenant's behalf; or (C) to compensate Landlord for any
loss, damages, attorneys' fees or expense sustained by Landlord due to Tenant's
default. In such event, Tenant shall, within five (5) days of written demand by
Landlord, remit to Landlord sufficient funds to restore the Security Deposit to
its original sum. No interest shall accrue on the Security Deposit. Landlord
shall not be required to keep the Security Deposit separate from its general
funds. Should Tenant comply with all the terms, covenants, and conditions of
this Lease and at the end of the term of this Lease leave the Premises in the
condition required by this Lease, then said Security Deposit, less any sums
owing to Landlord, shall be returned to Tenant within thirty (30) days after the
termination of this Lease and vacancy of the Premises by Tenant.
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<PAGE> 4
6. Use of Premises. Tenant shall use the Premises only in conformance
with applicable governmental laws, regulations, rules and ordinances for the
purpose of general office, sales, manufacturing, assembly, distribution and
warehousing of electronics materials and for no other purpose. Tenant shall
indemnify, protect, defend, and hold Landlord harmless against any loss,
expense, damage, attorneys' fees or liability arising out of the failure of
Tenant to comply with any applicable law. Tenant shall not commit or suffer to
be committed, any waste upon the Premises, or any nuisance, or other acts or
things which may disturb the quiet enjoyment of any other tenant in the
buildings adjacent to the Premises, or allow any sale by auction upon the
Premises, or allow the Premises to be used for any unlawful purpose, or place
any loads upon the floor, walls or ceiling which endanger the structure, or
place any harmful liquids in the drainage system of the Building. No waste
materials or refuse shall be dumped upon or permitted to remain upon any part of
the Premises outside of the Building proper, except in trash containers placed
inside exterior enclosures designated for that purpose 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
on any portion of the Premises outside of the Building proper. Tenant shall
strictly comply with the provisions of Paragraph 39 below.
7. Taxes and Assessments.
A. Tenant's Property. Tenant shall pay before delinquency any and
all taxes and assessments, license fees and public charges levied, assessed or
imposed upon or against Tenant's fixtures, equipment, furnishings, furniture,
appliances and persona' property installed or located on or within the Premises.
Tenant shall petition the applicable taxing authority to cause said fixtures,
equipment, furnishings, furniture, appliances and personal property to be
assessed and billed separately from the real property of Landlord. If any of
Tenant's said personal property shall be assessed with Landlord's real property,
Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days
after receipt of a written statement from Landlord setting forth the taxes
applicable to Tenant's property.
B. Property Taxes. Tenant shall pay, as additional rent, its Pro
Rata Share (as defined below) of all Property Taxes levied or assessed with
respect to the land comprising the Parcel and with respect to all buildings and
improvements located on the Parcel which become due or accrue during the term of
this Lease. Tenant shall pay such Property Taxes to Landlord within thirty (30)
days after receipt of billing. Provided that Landlord bills Tenant at least
thirty (30) days prior to the delinquency date of such Property Taxes, Tenant
shall pay such Property Taxes to Landlord at least ten (10) days prior to the
delinquency date, and if Tenant fails to do so, Tenant shall reimburse Landlord,
on demand, for all interest, late fees and penalties that the taxing authority
charges Landlord. In the event Landlord's mortgagee requires an impound for
Property Taxes, then on the first day of each month during the Lease Term,
Tenant shall pay Landlord one twelfth (1/12) of its annual share of such
Property Taxes. Tenant's liability hereunder shall be prorated to reflect the
Commencement and termination dates of this Lease. If Landlord elects to pay any
assessment imposed against the Premises or the Building in full (which
assessment could have been paid in
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<PAGE> 5
installments), the amount of any such~ assessment to be included in the
calculation of Tenant's Pro Rata Share of Property Taxes shall be limited to the
installments of the principal and interest which would have become due during
the Lease Term had Landlord elected to pay such assessment installments over the
longest period available to Landlord.
As used in this Lease, the term "Tenant's Pro Rata Share" shall mean a
fraction, expressed as a percentage, the numerator of which is the number of
square feet of floor space contained in the Premises and the denominator of
which is the number of square feet of floor space contained in all of the
Buildings located on the Parcel. As of the Commencement Date, Tenant's Pro Rata
Share is twenty-five and eighty-five hundredths percent (25.85~).
For the purpose of this Lease, "Property Taxes" means and includes all
taxes, assessments (including, but not limited to, assessments for public
improvements or benefits), taxes based on vehicles, utilizing parking areas,
taxes based or measured by the rent paid, payable or received under this Lease,
taxes on the value, use, or occupancy of the Premises, the Buildings and/or the
Parcel, Environmental Surcharges, and all other governmental impositions and
charges of every kind and nature whatsoever, whether or not customary or within
the contemplation of the parties hereto and regardless of whether the same shall
be extraordinary or ordinary, general or special, unforeseen or foreseen, or
similar or dissimilar to any of the foregoing which, at any time during the
Lease Term, shall be applicable to the Premises, the Buildings and/or the Parcel
or assessed, levied or imposed upon the Premises, the Buildings e: d/or the
Parcel, or become due and payable and a lien or charge upon the Premises, the
Buildings and/or the Parcel, or any part thereof, under or by virtue of any
present or future laws, statutes, ordinances, regulations or other requirements
of any governmental authority whatsoever. The term "Environmental Surcharges"
shall mean and include any and all expenses, taxes, charges or penalties imposed
by the Federal Department of Energy, the Federal Environmental protection
Agency, the Federal Clean Air Act, or any regulations promulgated thereunder or
any other local, state or federal governmental agency or entity now or hereafter
vested with the power to impose taxes, assessments, or other types of surcharges
as a means of controlling or abating environmental pollution or the use of
energy. The term "Property Taxes" shall not include any federal, state or local
net income, estate, or inheritance tax imposed on Landlord.
C. Proposition 13 Limitation. If, during the first three (3) years
of the Lease Term, Landlord voluntarily sells or transfers ownership of the
Premises, and if such sale or transfer causes Property Taxes to be increased to
such an extent that Tenant's Pro Rata Share of Property Taxes would exceed $1.20
per square foot of rentable area of the Premises per year, then in such case,
and only in such case, Tenant shall not be obligated to pay that portion of
Tenant's Pro Rata Share of Property Taxes which (i) exceeds $1.20 per square
foot of rentable area of the Premises per year, and (ii) is attributable to the
increase in Property Taxes caused by such sale or transfer; provided, however,
that the foregoing limitation on Tenant's obligation to pay Property Taxes shall
not apply to increases in Property Taxes resulting from (i) a transfer caused by
foreclosure (whether resulting from a judicial foreclosure, non-judicial
foreclosure or deed-in-lieu thereof) of a first
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<PAGE> 6
mortgage or first deed of trust encumbering the Premises or (ii) any sale or
transfer occurring after the first three (3) years of the Lease Term.
D. Other Taxes. Tenant shall, as additional rent, pay or reimburse
Landlord for any tax based upon, allocable to, or measured by the area of the
Premises or the Buildings or the Parcel; or by the rent paid, payable or
received under this Lease; any tax upon or with respect to the possession,
leasing, operation, any tax upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy of the
Premises or any portion thereof; any privilege tax, excise tax, business and
occupation tax, gross receipts tax, sales and/or use tax, water tax, sewer tax,
employee tax, occupational license tax imposed upon Landlord or Tenant with
respect to the Premises; any tax upon this transaction or any document to which
Tenant is a party creating or transferring an interest or an estate in the
Premises.
8. Insurance.
A. Indemnity. Tenant agrees to indemnify, protect and defend
Landlord against and hold Landlord harmless from any and all claims, causes of
action, judgements, obligations or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys'
fees), on account of, or arising out of, the operation, maintenance, use or
occupancy of the Premises and all areas appurtenant thereto. This Lease is made
on the express understanding that Landlord shall not be liable for, or suffer
loss by reason of, injury to person or property, from whatever cause (except for
negligence or willful misconduct of Landlord or its Agents), which in any way
may be connected with the operation, use or occupancy of the Premises
specifically including, without limitation, any liability for injury to the
person or property of Tenant, its agents, officers, employees, licensees and
invitees.
B. Liability Insurance. Tenant shall, at Tenant's expense, obtain
and keep in force during the term of this Lease a policy of comprehensive public
liability insurance insuring Landlord and Tenant against claims and liabilities
arising out of the operation, use, or occupancy of the Premises and all areas
appurtenant thereto, including parking areas. Such insurance shall be in an
amount of not less than Three Million Dollars ($3,000,000.00) for bodily injury
or death as a result of any one occurrence and Five Hundred Thousand Dollars
($500,000.00) for damage to property as a result of any one occurrence. The
insurance shall be with companies approved by Landlord, which approval Landlord
agrees not to withhold unreasonably. Tenant shall deliver to Landlord, prior to
possession, and at least thirty (30) days prior to the expiration thereof, a
certificate of insurance evidencing the existence of the policy required
hereunder and such certificate shall certify that the policy (1) names Landlord
as an additional insured, (2) shall not be cancelled or altered without thirty
(30) days prior written notice to Landlord, (3) insures performance of the
indemnity set forth in Paragraph 8.A above, (4) the coverage is primary and any
coverage by Landlord is in excess thereto and (5) contains a cross-liability
endorsement.
Landlord may maintain a policy or policies of comprehensive general
liability insurance insuring Landlord (and such others as are designated by
Landlord), against liability for personal
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<PAGE> 7
injury, bodily injury, death and damage to property occurring or resulting from
an occurrence in, on or about the Premises or the Common Area, with such limits
of coverage as Landlord may from time to time determine are reasonably necessary
for its protection. The cost of any such liability insurance maintained by
Landlord shall be a Common Area Charge and Tenant shall pay, as Additional Rent,
Tenant's Pro Rata Share of such cost to Landlord as provided in Paragraph 12
below.
C. Property Insurance. Landlord shall, as a Common Area Charge,
obtain and keep in force during the term of this Lease a policy or policies of
insurance covering loss or damage to the Premises and the Buildings, in the
amount of the full replacement value thereof, providing protection against those
perils included within the classification of "all risk" insurance, plus a policy
of rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months rent (including, without limitation, sums payable as Additional
Rent), plus, at Landlord's option, flood insurance and earthquake insurance, and
any other coverages which may be required from time to time by Landlord's
mortgagee. Tenant shall have no interest in nor any right to the proceeds of any
insurance procured by Landlord on the Premises. The full cost of such insurance
procured and maintained by Landlord shall be a Common Area Charge and Tenant
shall pay, as Additional Rent, Tenant's Pro Rata Share of such cost to Landlord
pursuant to Paragraph 12 below. Tenant acknowledges that such insurance procured
by Landlord shall contain a deductible which reduces Tenant~s cost for such
insurance and, in the event of loss or damage, Tenant shall be required to pay
to Landlord the amount of such deductible.
Notwithstanding the foregoing, Tenant shall not be required to pay that
portion of the annual cost of earthquake insurance which exceeds forty cents
(40(cent)) per $100.00 of insured value.
D. Tenant's Insurance. Tenant acknowledges that the insurance to be
maintained by Landlord on the Premises pursuant to Subparagraph C above will not
insure any of Tenant's property. Accordingly, Tenant, at Tenant's own expense,
shall maintain in full force and effect on all of its fixtures, equipment,
leasehold improvements and personal property in the Premises, a policy of "All
Risk" coverage insurance to the extent of at least ninety percent (90%) of their
insurable value.
E. Mutual Waiver of Subrogation. Tenant and Landlord hereby mutually
waive their respective rights of recovery against each other of any loss of or
damage to the property of either party, to the extent such loss or damage is
insured by any insurance policy required to be maintained by this Lease or
otherwise in force at the time of such loss or damage. Each party shall obtain
any special endorsements, if required by the insurer, whereby the insurer waives
its right of subrogation against the other party hereto. The provisions of this
Subparagraph 8.E shall not apply in those instances in which the waiver of
subrogation would cause either party's insurance coverage to be voided or
otherwise made uncollectible; provided, however, if either party's insurance
carrier is not willing to waive its right of subrogation or if either party's
insurance carrier notifies such party that such waiver of subrogation would
cause such party's insurance coverage to be voided or made uncollectible, such
party shall notify the other party of such fact, in which case, the other party
shall
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<PAGE> 8
not be required to obtain such waiver of subrogation from its insurance carrier.
Each party shall use its best efforts to obtain such waiver of subrogation from
its insurance carrier.
9. Utilities. Tenant shall pay for all water, gas, light, heat, power,
electricity, telephone, trash pick-up, sewer charges and all other services
supplied to or consumed on the Premises, and all taxes and surcharges thereon.
In addition, the cost of any utility services supplied to the Common Area or not
separately metered to the Premises shall be a Common Area Charge and Tenant
shall pay its share of such costs to Landlord as provided in Paragraph 12 below.
Landlord shall not take any action or knowingly consent to any action by a third
party which cuts-off or interrupts utility service to the Premises.
10. Repairs and Maintenance.
A. Landlord's Repairs. Subject to provisions of Paragraph :6,
Landlord shall (i) keep and maintain the exterior roof, structural elements and
exterior walls of the Building in good order and repair and (ii) repair any
defects in Landlord's Work (as defined in Paragraph 2 above), including the
failure to perform Landlord's Work in compliance with applicable Laws in effect
at the time of such construction. Landlord shall not, however, be required to
maintain, repair or replace the interior surface of exterior walls, nor shall
Landlord be required to maintain, repair or replace windows, doors, skylights or
plate glass. Landlord shall have no obligation to make repairs under this
Subparagraph until a reasonable time after receipt of written notice from Tenant
of the need for such repairs. Tenant shall reimburse Landlord, as Additional
Rent, within thirty (30) days after receipt of billing, for the cost of such
repairs and maintenance which are the obligation of Landlord hereunder, provided
however, that Tenant shall not be required to reimburse Landlord for the (i)
cost of maintenance and repairs of the structural elements of the Building
unless such maintenance or repair is required because of the negligence or
willful misconduct of Tenant or its employees, agents or invitees; or (ii) any
amounts paid or payable by Landlord in connection with the repair of any defects
in Landlord's Work (as defined in Paragraph 2); or (iii) any cost for which
Landlord is reimbursed by any third party, including, without limitation, by
insurance or condemnation proceeds; or (iv) any amounts paid or payable by
Landlord in connection with the repairs or maintenance necessitated by (a)
negligence or willful misconduct of Landlord or its Agents; (b) Landlord's
failure to perform any of the Landlord's obligations under this Lease; or (c)
the occurrence of any damage or destruction or condemnation as provided in
Paragraphs 16 and 17, respectively (except with respect to payment by Tenant of
Tenant's Pro Rata Share of any deductible); and (v) costs pertaining to
Hazardous Materials (as defined in Paragraph 39) which are not the
responsibility of Tenant under Paragraph 39 of this Lease. As used herein, the
term 'structural elements of the Building" shall mean and be limited to the
foundation, footings, floor slab (but not flooring), structural walls, and roof
structure (but not roofing or roof membrane).
B. Tenant's Repairs. Except as expressly provided in Subparagraph A
above, Tenant shall, at its sole cost, keep and maintain the entire Premises and
every part thereof, including without limitation, the windows, window frames,
plate glass, glazing, skylights, truck doors, doors
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<PAGE> 9
and all door hardware, the walls and partitions, and the electrical, plumbing,
lighting, heating, ventilating and air conditioning systems and equipment in
good order, condition and repair. The term "repair' shall include replacements,
restorations and/or renewals when necessary as well as painting. Tenant's
obligation shall extend to all alterations, additions and improvements to the
Premises, and all fixtures and appurtenances therein and thereto. Tenant shall,
at all times during the Lease Term, have in effect a service contract for the
maintenance of the heating, ventilating and air conditioning ("HVAC") equipment
with an HVAC repair and maintenance contractor approved by Landlord. The HVAC
service contract shall provide for periodic inspection and servicing at least
once every three (3) months during the term hereof, and Tenant shall provide
Landlord with a copy of such contract and all periodic service reports. Tenant
shall not be responsible for any repairs or maintenance to the Premises
necessitated by (i) the negligence or willful misconduct of Landlord or its
agents; (ii) the failure of Landlord to perform any of Landlord's obligations
under this Lease; or (iii) the occurrence of any damage or destruction or
condemnation as provided in Paragraphs 16 and 17, respectively, except as
otherwise provided in Paragraph 16 below. Should Tenant fail to make repairs
required of Tenant hereunder within thirty (30) days after receipt of written
notice of the need thereof from Landlord to Tenant, or if such repairs cannot be
made within such thirty (30) day period, then such additional time as may be
necessary to make such repairs provided Tenant has commenced such repairs within
the thirty (30) day period and is diligently pursuing the repairs to completion,
Landlord, in addition to all other remedies available hereunder or by law and
without waiving any alternative remedies, may, following written notice to
Tenant, make the same, and in that event, Tenant shall reimburse Landlord as
Additional Rent for the reasonable cost of such maintenance or repairs within
fifteen (15) days after receipt of written demand from Landlord.
Landlord shall have no maintenance or repair obligations whatsoever
with respect to the Premises except as expressly provided in Paragraphs 10.A,
10.C an 11. Tenant hereby expressly waives the provisions of Subsection 1 of
Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all
rights to make repairs at the expense of Landlord as provided in Section 1942 of
said Civil Code. Landlord shall not be liable for any damages arising from any
act or neglect of any other tenant, if any, of the Buildings or the Parcel.
C. Replacement of Roof Membrane and/or HVAC Equipment.
Notwithstanding anything contained in Paragraph 10.A above to the contrary, if
the roof membrane of the Building requires replacement during the Lease Term,
then Landlord shall perform such replacement and Tenant shall pay to Landlord,
within thirty (30) days after receipt of billing, as Additional Rent, a fraction
of the cost of such replacement, which fraction shall have as its numerator the
number of calendar months then remaining in the Lease Term at the time of such
replacement and shall have as its denominator one hundred eighty (180) months.
Notwithstanding anything in Subparagraph 10.B to the contrary, if any HVAC
equipment requires replacement during the first year of the Lease Term, then
Landlord shall perform such replacement at its sole cost and expense. If any
HVAC equipment requires replacement after the first year of the Lease Term, then
Tenant shall perform such replacement at its sole cost and expense.
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<PAGE> 10
11. Common Area. Subject to the terms and conditions of this Lease and
such rules and regulations as Landlord may from time to time prescribe, Tenant
and Tenant's employees, invitees and customers shall, in common with other
occupants of the Parcel, and their respective employees, invitees and customers,
and others entitled to the use thereof, have the nonexclusive 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 Parcel, 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
the Common Area provided that no area located outside the Parcel shall be
included within the Common Areas and provided that such changes do not adversely
affect Tenant's access to or use of the Premises. 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 interest of the occupants of the Parcel. 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 of
them to Tenant. Tenant shall have the non-exclusive use of no more than three
hundred (300) of the parking spaces in the Common Area as designated from time
to time by Landlord. Tenant shall not at any time park or permit the parking of
Tenant's trucks or other vehicles, or the trucks or other vehicles of others,
adjacent to 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
vehicles or trucks, or the vehicles or trucks 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 abandon any inoperative vehicles or equipment on any
portion of the Common Area. Tenant shall make no alterations, improvements or
additions to the Common Area.
Landlord shall operate, manage, insure, maintain and repair the Common
Area in good order, condition and repair. The manner in which the Common Area
shall be maintained and the expenditures for such maintenance shall be at the
reasonable business discretion of Landlord. The cost of such repair,
maintenance, operation, insurance and management, including without limitation,
maintenance and repair of landscaping, irrigation systems, paving, sidewalks,
fences, and lighting, shall be a Common Area Charge and Tenant shall pay to
Landlord its share of such costs as provided in Paragraph 12 below.
12. Common Area Charges. Tenant shall pay to Landlord, as Additional
Rent, within thirty (30) days after receipt of billing but not more often than
once each calendar month, an amount equal to its Pro Rata Share of the Common
Area Charges as defined in Paragraphs 8.B, 8.C, 9, 11 and 13 of this Lease.
Tenant acknowledges and agrees that the Common Area Charges shall include an
additional three percent (31) of the actual expenditures in order to compensate
Landlord for accounting, management and processing services. Tenant shall have
the right to review Landlord's books and records in order to confirm that only
those charges which are permitted under this Lease
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<PAGE> 11
are being passed through to Tenant provided that Tenant completes such review
within ninety (90) days after receipt of a billing invoice from Landlord.
13. Alterations. Tenant shall not make, or suffer to be made, any
alterations, improvements or additions in, on, about or to the Premises or any
part thereof, without the prior written consent of Landlord and without a valid
building permit issued by the appropriate governmental authority; provided,
however, Tenant may make non-structural alterations to the interior of the
Premises costing less than Fifty Thousand Dollars ($50,000.00) without obtaining
the prior written consent of Landlord provided that such alterations do not
change the use of the Premises. As a condition to giving such consent, Landlord
may require that Tenant agree to remove any such alterations, improvements or
additions at the termination of this Lease, and to restore the Premises to their
prior condition. Unless Landlord requires that Tenant remove any such
alterations, improvement or addition, any alteration, addition or improvement to
the Premises, except movable furniture and trade fixtures not affixed to the
Premises, shall become the property of Landlord upon termination of the Lease
and shall remain upon and be surrendered with the Premises at the termination of
this Lease. Without limiting the generality of the foregoing, all heating,
lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts,
main and subpanels), air conditioning, partitioning, drapery, and carpet
installations made by Tenant regardless of how affixed to the Premises, together
with all other additions, alterations and improvements that have become an
integral part of the Building, shall be and become the property of the Landlord
upon termination of the Lease, and shall not be deemed trade fixtures, and shall
remain upon and be surrendered with the Premises at the termination of this
Lease.
If, during the Lease Term, any non-structural alteration, addition or
change of any sort to all or any portion of the Premises (other than the fire
sprinkler system) is required by law, regulation, ordinance or order of any
public agency, Tenant shall promptly make the same at its sole cost and expense.
If, during the Lease Term, any structural or fire sprinkler system alteration,
addition or change of any sort to all or any portion of the Premises (other than
the fire sprinkler system) is required by law, regulation, ordinance or order of
any public agency because of (i) Tenant's particular use or change of use of the
Premises, (ii) Tenant's application for a new permit or governmental approval,
or (iii) Tenant's construction or installation of leasehold improvements or
trade fixtures, Tenant shall promptly make the same at its sole cost and
expense. If, during the Lease Term, any structural or fire sprinkler system
alteration, addition or change of any sort to all or any portion of the Premises
is required by law, regulation, ordinance or order for any reason other than
those described in the immediately preceding sentence, Landlord shall promptly
make the same at its sole cost and expense. If, during the Lease Term, any
alteration, addition or change to the Common Area is required by law,
regulation, ordinance or order of any public agency, Landlord shall make the
same and the cost of such alteration, addition or change shall be a Common Area
Charge and Tenant shall pay its share of said cost to Landlord as provided in
Paragraph 12 above.
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<PAGE> 12
14. Acceptance of the Premises. By entry and taking possession of the
Premises pursuant to this Lease, Tenant accepts the Premises as being in good
and sanitary order, condition and repair and accepts the Premises in their
condition existing as of the date of such entry, and Tenant further accepts the
tenant improvements to be constructed by Landlord, if any, as being completed in
accordance with the plans and specifications for such improvements, except for
punch list items. Tenant acknowledges that neither the Landlord nor Landlord's
agents has made any representation or warranty as to the suitability of the
Premises to the conduct of Tenant's business. Any agreements, warranties or
representations not expressly contained here n shall in no way bind either
Landlord or Tenant, and Landlord and Tenant expressly waive all claims for
damages by reason of any statement, representation, warranty, promise or
agreement, if any, not contained in this Lease. This Lease constitutes the
entire understanding between the parties hereto and no addition to, or
modification of, any term or provision of this Lease shall be effective until
set forth in a writing signed by both Landlord and Tenant.
15. Default.
A. Events of Default. A breach of this Lease shall exist if any of
the following events (hereinafter referred to as "Event of Default") shall
occur:
1. Default in the payment when due of any installment of rent or
other payment required to be made by Tenant hereunder, where such default shall
not have been cured within three (3) days after written notice of such default
is given to Tenant;
2. Tenant's failure to perform any other term, covenant or
condition contained in this Lease where such failure shall have continued for
thirty (30) days after written notice of such failure is given to Tenant;
provided, however, if such failure reasonably requires more than thirty (30)
days to cure, Tenant shall not be deemed in default if Tenant commences to cure
such failure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion;
3. Tenant's assignment of its assets for the benefit of its
creditors;
4. The sequestration of, attachment of, or execution on, any
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business shall have occurred and Tenant shall have failed to
obtain a return or release of such property within thirty (30) days thereafter,
or prior to sale pursuant to such sequestration, attachment or levy, whichever
is earlier;
5. Tenant or any guarantor of Tenant's obligations hereunder
shall commence any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy,
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<PAGE> 13
insolvency, reorganization or relief of debtors, or seek appointment of a
receiver, trustee, custodian, or other similar official for it or for all or any
substantial part of its property;
6. Tenant or any such guarantor shall take any corporate action
to authorize any of the actions set forth in Clause 5 above; or
7. Any case, proceeding or other action against Tenant or any
guarantor of Tenant's obligations hereunder shall be commenced seeking to have
an order for relief entered against it as debtor, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization or relief
of debtors, or seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its property, and
such case, proceeding or other action (i) results in the entry of an order for
relief against it which is not fully stayed within seven (7) business days after
the entry thereof or (ii) remains undismissed for a period of forty-five (45)
days.
B. Remedies. Upon any Event of Default, Landlord shall have the
following remedies, in addition to all ether rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
1. Recovery of Rent. Landlord shall be entitled to keep this
Lease in full force and effect (whether or not Tenant shall have abandoned the
Premises) and to enforce all of its rights and remedies under this Lease,
including the right to recover rent and other sums as they become due, plus
interest at the Permitted Rate (as defined in Paragraph 33 below) from the due
date of each installment of rent or other sum until paid.
2. Termination. Landlord may terminate this Lease by giving
Tenant written notice of termination. On the giving of the notice all of
Tenant's rights in the Premises and the Building and Parcel shall terminate.
Upon the giving of the notice of termination, Tenant shall surrender and vacate
the Premises in the condition required by Paragraph 34, and Landlord may
re-enter and take possession of the Premises and all the remaining improvements
or property and eject Tenant or any of Tenant's subtenants, assignees or other
person or persons claiming any right under or through Tenant or eject some and
not others or eject none. This Lease may also be terminated by a judgement
specifically providing for termination. Any termination under this paragraph
shall not release Tenant from the payment of any sum then due Landlord or from
any claim for damages or rent previously accrued or then accruing against
Tenant. In no event shall any one or more of the following actions by Landlord
constitute a termination of this Lease:
a. maintenance and preservation of the Premises;
b. efforts to relet the Premises;
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<PAGE> 14
c. appointment of a receiver in order to protect Landlord's
interest hereunder;
d. consent to any subletting of the Premises or assignment of
this Lease by Tenant, whether pursuant to provisions hereof concerning
subletting and assignment or otherwise; or
e. any other action by Landlord or Landlord's agents intended
to mitigate the adverse effects from any breach of this Lease by Tenant.
3. Damages. In the event this Lease is terminated pursuant to
Subparagraph 15.B.2 above, or otherwise, Landlord shall be entitled to damages
in the following sums:
a. the worth at the time of award of the unpaid rent which
has been earned at the time of termination; plus
b. the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that Tenant proves could have been
reasonably avoided; plus
c. 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 such rental loss that Tenant proves could be reasonably avoided; and
d. any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of things would be likely to
result therefrom including, without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Premises; (ii) real estate broker's fees,
advertising costs and other expenses of reletting the Premises fairly allocable
to the balance of the Lease Term; (iii) costs of carrying the Premises such as
taxes and insurance premiums thereon, utilities and security precautions; (iv)
expenses in retaking possession of the Premises; and (v) attorneys, fees and
court costs.
e. The "worth at the time of award's of the amounts referred
to in Subparagraphs (a) and (b) of this Paragraph, is computed by allowing
interest at the Permitted Rate. The "worth at the time of award" of the amounts
referred to in Subparagraph (c) of this Paragraph is computed by discounting
such amount at the discount rate of the Federal Reserve Board of San Francisco
at the time of award plus one percent (1%). The term "rent" as used in this
Paragraph shall include all sums required to be paid by Tenant to Landlord
pursuant to the terms of this Lease.
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<PAGE> 15
C. Landlord's Default. In the event of failure by Landlord to
perform any of its obligation under this Lease, Tenant shall notify Landlord of
such failure. Landlord shall have thirty (30) days within which to cure such
failure or if such failure is of such a nature that it cannot be reasonably
cured within said thirty (30) day period, then such additional time; as may be
required to cure such failure provided Tenant has commenced to cure such failure
within the thirty (30) day period and diligently pursues such cure to
completion. If Landlord fails to cure or commence to cure, as the case may be,
such failure within the time set forth above, then Tenant, following written
notice from Tenant to Landlord, may, but shall not be obligated to, perform such
obligations. Landlord shall reimburse Tenant for all reasonable costs incurred
by Tenant pursuant to the previous sentence within fifteen (15) days following
written demand thereof by Landlord.
16. Destruction. In the event that any portion of the Premises are
destroyed or damaged by an uninsured peril, Landlord or Tenant may, upon written
notice to the other, given within thirty (30) days after the occurrence of such
damage destruction, elect to terminate this Lease; provided, however, that
either party may, within thirty (30) days after receipt of such notice, elect to
make any required repairs and/or restoration at such party's sole cost and
expense, in which event this Lease shall remain in full force and effect, and
the party having made such election to restore or repair shall thereafter
diligently proceed with such repairs and/or restoration. In the event neither
parr~ elects to terminate this Lease as provided in the foregoing sentence, then
Landlord shall be deemed to have elected to restore or repair the Premises at
Landlord's sole cost and expense, in which event this Lease shall remain in full
force and effect and Landlord shall thereafter diligently proceed with such
repairs and/or restoration. For purposes of this paragraph, the term "uninsured
peril" shall not include a peril which would have been covered by Landlord if
Landlord had carried the insurance required under the terms of this Lease.
In the event the Premises are damaged or destroyed from any insured
peril to the extent of fifty percent (50~) or more of the then replacement cost
of the Premises, Landlord may, upon written notice to Tenant, given within
thirty (30) days after the occurrence of such damage or destruction, elect to
terminate this Lease. If Landlord does not give such notice in writing within
such period, Landlord shall be deemed to have elected to rebuild or restore the
Premises, in which event Landlord shall, at its expense, promptly rebuild or
restore the Premises to their condition prior to the damage or destruction and
Tenant shall pay to Landlord upon commencement of reconstruction the amount of
any deductible from the insurance policy.
In the event the Premises are damaged or destroyed from any insured
peril to the extent of less than fifty percent (50~) of the then replacement
cost of the Premises, Landlord shall, at Landlord's expense, promptly rebuild or
restore the Premises to their condition prior to the damage or destruction and
Tenant shall pay to Landlord upon commencement of reconstruction the amount of
any deductible from the insurance policy.
In the event that, pursuant to the foregoing provisions, Landlord is to
rebuild or restore the Premises, Landlord shall, within thirty (30) days after
the occurrence of such damage or destruction,
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<PAGE> 16
provide Tenant with written notice of the time required for such repair or
restoration. If such period is longer than two hundred one hundred eighty (180)
days from the issuance of a building permit, Tenant may, within thirty (30) days
after receipt of Landlord's notice, elect to terminate the Lease by giving
written notice to Landlord of such election, whereupon the Lease shall
immediately terminate. If the repairs or restoration are not completed within
two hundred seventy (270) days after the date of the damage or destruction,
Tenant may elect to terminate this Lease by giving written notice to Landlord of
such election, whereupon the Lease shall immediately terminate. The period of
time for Landlord to complete the repair or restoration shall be extended for
delays caused by the fault or neglect of Tenant or because of acts of God, acts
of publication, 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 contractors or subcontractors due to
such causes, or other contingencies beyond the control of Landlord. Landlord's
obligation to repair or restore the Premises shall not include restoration of
Tenant's trade fixtures, equipment, merchandise, or any improvements,
alterations or additions made by Tenant to the Premises.
Landlord and Tenant shall each have the right to terminate this Lease
if (a) the damage to the Premises occurs at any time during the last eighteen
(18) months of the Lease Term and (b) it is estimated that the necessary repairs
will take more than sixty (60) days to complete from the date of the damage.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect; provided, however, that during
any period of repairs or restoration, rent and all other amounts to be paid by
Tenant on account of the Premises and this Lease shall be abated in proportion
to the area of the Premises rendered not reasonably suitable for the conduct of
Tenant's business thereon. Tenant hereby expressly waives the provisions of
Section 1932, Subdivision 2 and Section 1933, Subdivision 4 of the California
Civil Code.
17. Condemnation.
A. Definition of Terms. For the purposes of this Lease, the term
(1) "Taking" means a taking of the Premises or damage to the Premises related to
the exercise of the power of eminent domain and includes a voluntary conveyance,
in lieu of court proceedings, to any agency, authority, public utility, person
or corporate entity empowered to condemn property; (2) "Total Taking" means the
taking of the entire Premises or so much of the Premises as to prevent or
substantially impair the use thereof by Tenant for the uses herein specified;
provided, however, in no event shall a Taking of less than ten percent (101) of
the Premises be deemed a Total Taking; (3) "Partial Taking" means the taking of
only a portion of the Premises which does not constitute a Total Taking; (4)
"Date of Taking" means the date upon which the title to the Premises, or a
portion thereof, passes to and vests in the condemnor or the effective date of
any order for possession if issued prior to the date title vests in the
condemnor; and (5) "Award" means the amount of any award made, consideration
paid, or damages ordered as a result of a Taking.
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<PAGE> 17
B. Rights. The parties agree that in the event of a Taking all
rights between them or in and to an Award shall be as set forth herein and
Tenant shall have no right to any Award except as set forth herein.
C. Total Taking. In the event of a Total Taking during the term
hereof (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the Premises shall cease and terminate as of the Date of
Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied
Security Deposit; (3) Tenant shall pay Landlord any rent or charges due Landlord
under the Lease, each prorated as of the Date of Taking; (4) Tenant shall
receive from Landlord those portions of the Award attributable to (i) trade
fixtures of Tenant, (ii) unamortized value of leasehold improvements made to the
Premises by Tenant (amortized on a straight line basis over the Lease Term), and
(iii) good will and moving expenses of Tenant; and (5) the remainder of the
Award shall be paid to and be the property of Landlord.
D. Partial Taking. In the event of a Partial Taking during the term
hereof (1) the rights of Tenant under the Lease and leasehold estate of Tenant
in and to the portion of the Premises taken shall cease and terminate as of the
Date of Taking; (2) from and after the Date of Taking the Monthly Installment of
rent shall be an amount equal to the product obtained by multiplying the Monthly
Installment of rent immediately prior to the Taking by a fraction, the numerator
of which is the number of square feet contained in the Premises after the Taking
and the denominator of which is the number of square feet contained in the
Premises prior to the Taking; (3) Tenant's Pro Rata Share shall be recalculated
as provided in Paragraph 8 above; and (4) Tenant shall receive from the Award
the portions of the Award attributable to (i) trade fixtures of Tenant; (ii)
unamortized value of leasehold improvements made to the Premises by Tenant; and
(iii) good will of Tenant and (iv) the remainder of the Award shall be paid to
and be the property of Landlord.
18. Mechanics' Lien. Tenant shall (A) pay for all labor and services
performed for, materials used by or furnished to, Tenant: or any contractor
employed by Tenant with respect to the Premises; (B) indemnify, defend, protect
and hold Landlord and the Premises harmless and free from any liens, claims,
liabilities, demands, encumbrances, or judgements created or suffered by reason
of any labor or services performed for, materials used by or furnished to,
Tenant or any contractor employed by Tenant with respect to the Premises; (C)
give notice to Landlord in writing five (5) days prior to commencement of any
construction in the Premises or delivery of materials to be used in such
construction; and (D) permit Landlord to post a notice of nonresponsibility in
accordance with the statutory requirements of California Civil Code Section 3094
or any amendment thereof. In the event Tenant is required to post an improvement
bond with a public agency in connection with the above, Tenant agrees to include
Landlord as an additional obligee.
19. Inspection of the Premises. Tenant shall permit Landlord and its
agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities, posting a notice of non-responsibility for alterations,
additions or repairs and at any time within ninety (90) days prior to expiration
of this Lease, to place
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<PAGE> 18
upon the Premises, ordinary "For Lease" or "For Sale" signs. Except in the event
of an emergency, Landlord agrees that prior to any such entry onto the Premises,
Landlord shall (a) give at least twenty-four (24) hours notice, (b) be
accompanied by an employee of Tenant at all times while on the Premises provided
that Tenant provides such employee on a reasonable basis, (c) comply with
Tenant's reasonable security procedures, and (d) not unreasonably interfere with
Tenant's use of the Premises.
20. Compliance with Laws. Subject to the provisions Oc Paragraph 12
above, Tenant shall comply with all of the requirements of all municipal,
county, state and federal authorities now in force, or which may hereafter be in
force, pertaining to the use and occupancy of the Premises, and shall faithfully
observe all municipal, county, state and federal law, statutes or ordinances now
in force or which may hereafter be in force. The judgement of any court of
competent jurisdiction or the admission of Tenant in any action or proceeding
against Tenant, whether Landlord be a party thereto or not, that Tenant has
violated any such ordinance or statute in the use and occupancy of the Premises
shall be conclusive of the fact that such violation by Tenant has occurred.
21. Subordination. The following provisions shall govern the
relationship of this Lease to any underlying lease, mortgage or deed of trust
which now or hereafter affects the Premises, the Building and/or the Parcel, or
Landlord's interest or estate therein (the "Project") and any renewal,
modification, consolidation, replacement, or extension thereof (a "Security
Instrument").
A. Priority. This Lease is subject and subordinate to Security
Instruments existing as of the Commencement Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument. Tenant agrees to promptly execute a Subordination, Non-Disturbance
and Attornment Agreement with Landlord's current Lender, Comerica
Bank-California, in the form attached hereto as Exhibit "E" (the "Comerica
SNA").
B. Subsequent Security Instruments. At Landlord's election, this
Lease shall become subject and subordinate to any Security Instrument created
after the Commencement Date provided that the Lender holding such Security
Instrument agrees that in the event of foreclosure of the Security Instrument in
question, such Lender shall recognize the tenancy of Tenant on the terms and
conditions contained in this Lease so long as Tenant is not in default under
this Lease. Notwithstanding such subordination, Tenant's right to quiet
possession of the Premises shall not be disturbed so long as Tenant is not in
default and performs all of its obligations under this Lease, unless this Lease
is otherwise terminated pursuant to its terms.
C. Documents. Tenant shall execute any reasonable document or
instrument required by Landlord or any Lender to make this Lease either prior or
subordinate to a Security Instrument, which may include such other matters as
the Lender customarily requires in connection with such agreements, including
provisions that the Lender, if it succeeds to the interest of Landlord under
this Lease, shall not be (i) liable for any act or omission of any prior
landlord (including Landlord), (ii) subject ~o any offsets or defenses which
Tenant may have against any prior landlord
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<PAGE> 19
(including Landlord), (iii) bound by any rent or Additional Rent paid more than
one (1) month in advance of its date due under this Lease unless the Lender
receives it from Landlord, (iv) liable for any defaults on the part of Landlord
occurring prior to the time that the Lender takes possession of the Premises in
connection with the enforcement of its Security Instrument, (v) liable for the
return of any Security Deposit unless such deposit has been delivered to Lender,
or (vi) bound by any agreement or modification of the Lease made without the
prior written consent of Lender. Tenant's failure to execute any such document
or instrument within twenty (20) days after written demand therefor shall
constitute a default by Tenant. Tenant's obligation to execute and deliver any
subordination agreement to any future Lender shall be conditioned upon such
Lender agreeing that in the event of foreclosure of the Security Instrument in
question, such Lender shall recognize the tenancy of Tenant on the terms and
conditions contained in this Lease so long as Tenant is not in default under
this Lease. Landlord shall not request Tenant to execute a subordination
agreement more often than two times in a twelve (12) month period. Tenant agrees
that any proposed subordination agreement which is substantially similar to the
Comerica SNA shall be deemed a reasonable document or instrument.
D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser of
the Premises at any foreclosure sale or private sale conducted pursuant to any
Security Instrument encumbering the Project; (2) to grantee or transferee
designated in any deed given in lieu of foreclosure; or (3) to the lessor under
any underlying ground lease should such ground lease be terminated.
E. Lender. The term "Lender" shall mean (1) any beneficiary,
mortgagee, secured party, or other holder of any deed of trust, mortgage, or
other written security device or agreement affecting the Project; and (2) any
lessor under any underlying lease under which Landlord holds its interest in the
Project.
22. Holding Over. This Lease shall terminate without further notice at
the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any holding over after
the expiration with the consent of Landlord shall be construed to be a tenancy
from month to month, at one hundred fifty percent (1501) of the monthly rent for
the last month of the Lease Term, and shall otherwise be on the terms and
conditions herein specified insofar as applicable.
23. Notices. Any notice required or desired to be given under this
Lease shall be in writing with copies directed as indicated below and shall be
personally served, sent by overnight delivery service or given by mail. Any
notice given personally or by overnight delivery service shall be deemed given
on the date of delivery. Any notice given by mail shall be deemed to have been
given when forty-eight (48) hours have elapsed from the time such notice was
deposited in the United States mails, certified and postage prepaid, addressed
to the party to be served with a copy as indicated herein at the last address
given by that party to the other party under the provisions of this Paragraph.
At this date of execution of this Lease, the address of Landlord is:
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<PAGE> 20
511 Division Street
Campbell CA 95008
and the address of Tenant is:
3Dfx Interactive
411 Clyde Avenue
Mountain View, CA 94043
Attn: Mr. Gary Martin, CFO/VP Admin.
After the Commencement Date, the address of Tenant shall be at the Premises.
Either party may, by notice given in accordance with this paragraph, specify a
different address for notice purposes.
24. Attorneys' Fees. In the event either party shall bring any action
or legal proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this Lease,
or to enforce, protect or establish any term or covenant of this Lease or right
or remedy of either party, the prevailing party shall be entitled to recover as
a part of such action or proceeding, reasonable attorneys' fees and court costs,
including attorneys' fees and costs for appeal, as may be fixed by the court or
jury. The term "prevailing party" shall mean the party who received
substantially the relief requested, whether by settlement, dismissal, summary
judgement, judgement, or otherwise.
25. Nonassignment.
A. Landlord's Consent Required. Tenant's interest in this Lease is
not assignable, by operation of law or otherwise, nor shall Tenant have the
right to sublet the Premises, transfer any interest of Tenant therein or permit
any use of the Premises by another party, without the prior written consent of
Landlord to such assignment, subletting, transfer or use, which consent Landlord
agrees not to withhold unreasonably subject to the provisions of Subparagraph C
below. A consent to one assignment, subletting, occupancy or use by another
party shall not be deemed to be a consent to any subsequent assignment,
subletting, occupancy or use by another party. Any assignment or subletting
without such consent shall be void and shall, at the option of Landlord,
terminate this Lease.
Landlord's waiver or consent to any assignment or subletting hereunder
shall not relieve Tenant from any obligation under this Lease unless the consent
shall so provide.
B. Transferee Information Required. If Tenant desires to assign its
interest in this Lease or sublet the Premises, or transfer any interest of
Tenant therein, or permit the use of the Premises by another party (hereinafter
collectively referred to as a "Transfer"), Tenant shall give Landlord at least
ten (10) days prior written notice of the proposed Transfer and of the terms of
such proposed Transfer, including, but not limited to, the name and legal
composition of the proposed
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<PAGE> 21
transferee, a financial statement of the proposed transferee, the nature of the
proposed transferee's business to be carried on in the Premises, the payment to
be made or other consideration to be given to Tenant on account of the Transfer,
and such other pertinent information as may be requested by Landlord, all in
sufficient detail to enable Landlord to evaluate the proposed Transfer and the
prospective transferee.
C. Landlord's Rights. It is the intent of the parties hereto that
this Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon Tenant by this
Lease. The parties agree that this Lease is not intended to have a bonus value
nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this
Lease or the right to use or occupy the Premises as a result of any favorable
terms contained herein, or future changes in the market for leased space. It is
the intent of the parties that any such bonus value that may attach to this
Lease shall be and remain the exclusive property of Landlord. Accordingly, in
the event Tenant seeks to Transfer its interest in this Lease or the Premises,
Landlord shall have the following options, which may be exercised at its sole
choice without limiting Landlord in the exercise of any other right or remedy
which Landlord may have by reason of such proposed Transfer:
(1) Except as otherwise set forth in Paragraph 25.D below, in
the event of a proposed assignment of this Lease or a proposed sublease of the
entire Premises for the remaining Lease Term, Landlord may elect to terminate
this Lease effective as of the proposed effective date of such proposed
assignment or sublease and release Tenant from any further liability hereunder
accruing after such termination date by giving Tenant written notice of such
termination within twenty (20) days after receipt by Landlord of Tenant's notice
of intent to assign or sublease as provided above. If Landlord makes such
election to terminate this Lease, Tenant shall surrender the Premises, in
accordance with Paragraph 34, on or before the effective termination date; or
(2) Landlord may consent to the proposed Transfer on the
condition that Tenant agrees to pay to Landlord, as Additional Rent, fifty
percent (50~) of any and all rents or other consideration (including key money)
received by Tenant from the transferee by reason of such Transfer in excess of
the rent payable by Tenant to Landlord under this Lease (less any brokerage
commissions, tenant improvement costs, and advertising expenses incurred by
Tenant in connection with the Transfer). Tenant expressly agrees that the
foregoing is a reasonable condition for obtaining Landlord's consent to any
Transfer; or
(3) Landlord may reasonably withhold its consent to the proposed
Transfer.
D. Permitted Transfers. Notwithstanding the foregoing, Tenant may,
without Landlord's prior written consent and without Subparagraph B above being
applicable, assign its interest in the Lease or sublet the Premises or a portion
thereof to (i) Tech Farm; (ii) a subsidiary, affiliate, division or corporation
which controls or is controlled by or under common control with
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<PAGE> 22
Tenant; (iii) a successor corporation related to Tenant by merger,
consolidation, non-bankruptcy reorganization or government action; or (iv) a
purchaser of substantially all of the Tenant's assets; provided that, in each
instance described above, (a) the transferee (other than in the case of a
sublease) assumes the obligations of the Tenant under this Lease in a written
instrument delivered to Landlord; (b) the transferor tenant remains liable as a
primary obligor for the obligations of Tenant under this Lease; and provided,
further, in the case of (iii) and (iv) above, the tangible net worth (determined
in accordance with generally accepted accounting principles) of the transferee
tenant is no less than Tenant's tangible net worth immediately prior to the date
of such Transfer.
26. Successors. The covenants and agreements contained in this Lease
shall inure to the benefit of and be binding on the parties hereto and on their
respective heirs, successors and assigns (to the extent the Lease is
assignable).
27. Mortgagee Protection. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises, whose address shall have been furnished to Tenant, and shall offer
such beneficiary or mortgagee a reasonable opportunity to cure the default,
including time to obtain possession of the Premises by power of sale or judicial
foreclosure, if such should prove necessary to effect a cure.
28. Landlord Loan or Sale. Tenant agrees promptly following request by
Landlord to (A) execute and deliver to Landlord any documents, including
estoppel certificates presented to Tenant by Landlord, (i) certifying that this
Lease is unmodified and in full force and effect (or, if modified, specifying
such modification and certifying that the 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, that are claimed, and (iii) evidencing the status of the
Lease as may be required either by a lender making a loan to Landlord to be
secured by a deed of trust or mortgage covering the Premises or a purchaser of
the Premises from Landlord and (B) to deliver to Landlord the financial
statement of Tenant with an opinion of a certified public accountant, including
a balance sheet and profit and loss statement, for the last completed fiscal
year all prepared in accordance with generally accepted accounting principles
consistently applied. Landlord agrees to sign a confidentiality agreement with
respect to Tenant's financial statements whereby none of the information
contained in the statements can be released to any person or entity without
first obtaining Tenant's consent and such person or entity signs a similar
confidential agreement, provided, however, Landlord can release such information
to its lender or potential lender to any respective purchaser of the Premises
provided such person signs a similar confidentiality agreement. If Tenant
becomes a public company, the financial statements filed with the SEC as part of
a 10Q or 10K shall satisfy the foregoing requirement for delivery of a financial
statement. Tenant's failure to deliver an estoppel certificate promptly
following such request shall be an Event of Default under this Lease. Landlord
shall not request Tenant to execute an estoppel certificate more often than
twice in any twelve (12) month period.
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<PAGE> 23
29. Surrender of Lease Not Merger. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
subtenants, or operate as an assignment to Landlord of any or all such subleases
or subtenants.
30. Waiver. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of any
preceding or succeeding breach of the same or any other covenant or condition
herein contained.
31. General.
A. Captions. The captions and paragraph headings used in this Lease
are for the purposes of convenience only. They shall not be construed to limit
or extend the meaning of any part of this Lease, or be used to interpret
specific sections. The word(s) enclosed in quotation marks shall be construed as
defined terms for purposes of this Lease. As used in this Lease, the masculine,
feminine and neuter and the singular or plural number shall each be deemed to
include the other whenever the context so requires.
B. Definition of Landlord. The term "Landlord" as used in this
Lease, so far as the covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner at the time in
question of the fee title of the Premises, and in the event of any transfer or
transfers of the title of such fee, the Landlord herein named (and in case of
any subsequent transfers or conveyances, the then grantor) shall after the date
of such transfer or conveyance be freed and relieved of all liability with
respect to performance of any covenants or obligations on the part of Landlord
contained in this Lease, thereafter to be performed; provided that (i) any funds
in the hands of Landlord or the then grantor at the time of such transfer, in
which Tenant has an interest, shall be turned over to the grantee, and (ii) the
grantee assumes in writing the obligations of Landlord under this Lease to be
performed after the date of the transfer or conveyance. It is intended that the
covenants and obligations contained in this Lease on the part of Landlord shall,
subject as aforesaid, be binding upon each Landlord, its heirs, personal
representatives, successors and assigns only during its respective period of
ownership.
C. Time of Essence. Time is of the essence for the performance of
each term, covenant and condition of this Lease.
D. Severability. In case any one or more of the provisions
contained herein, except for the payment of rent, shall for any reason be held
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Lease, but this Lease shall be construed as if such invalid, illegal or
unenforceable provision had not been contained herein. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
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<PAGE> 24
E. Joint and Several Liability. If Tenant is more than one person
or entity, each such person or entity shall be jointly and severally liable for
the obligations of Tenant hereunder.
F. Law. The term "law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirement of any government agency or authority having jurisdiction over
the parties to this Lease or the Premises or both, in effect at the Commencement
Date of this Lease or any time during the Lease Term, including, without
limitation, any regulation, order, or policy of any quasi-official entity or
body (e.g., board of fire examiners, public utility or special district).
G. Agent. As used herein the term "Agent" shall mean, with respect
to either Landlord or Tenant, its respective agents, employees, contractors (and
their subcontractors), and invitees (and in the case of Tenant, its subtenants).
32. Sign. Tenant shall not place or permit to be placed any sign or
decoration on the Parcel or the exterior of the Building without the prior
written consent of Landlord. Tenant, upon written notice by Landlord, shall
immediately remove any sign or decoration that Tenant has placed or permitted to
be placed on the land or the exterior of the Building without the prior written
consent of Landlord, and if Tenant fails to so remove such sign or decoration
within five (5) days after Landlord's written notice, Landlord may enter upon
the Premises and remove said sign or decoration and Tenant agrees to pay
Landlord, as additional rent upon demand, the cost of such removal. At the
termination of this Lease, Tenant shall remove any sign which it has placed on
the Parcel or Building and shall repair any damage caused by the installation or
removal of such sign. Notwithstanding the foregoing, Tenant may; at its sole
cost and expense, install its sign on the monument located on the Parcel in
front of the building provided Tenant obtains all necessary governmental permits
and complies with all governmental ordinances.
33. Interest on Past Due Obligations. Any Monthly Installment of rent
or any other sum due from Tenant under this Lease which is received by Landlord
after the date the same is due shall bear interest from said due date until
paid, at an annual rate equal to the lesser of (the "Permitted Rate"): (1) ten
percent (10%); or (2) five percent (5%) plus the rate established by the Federal
Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month
immediately preceding the due date, on advances to member banks under Section 13
and 13 (a) of the Federal Reserve Act, as now in effect or hereafter from time
to time amended. Payment of such interest shall not excuse or cure any default
by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred
by Landlord in collection of such amounts.
34. Surrender of the Premises. On the last day of the term hereof, or
on the sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in their condition existing as of the Commencement Date of this Lease,
ordinary wear and tear, fire or other casualty, and damage from the acts of God
excepted, with the air conditioning and heating equipment serviced and repaired
by a reputable and licensed service firm. Tenant shall remove all of Tenant's
personal
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<PAGE> 25
property and trade fixtures from the Premises, and all property not so removed
shall be deemed abandoned by Tenant. Tenant, at its sole cost, shall repair any
damage to the Premises caused by the removal of Tenant's personal property,
machinery and equipment, which repair shall include, without limitation, the
patching and filling of holes and repair of structural damage. If the Premises
are not so surrendered at the termination of this Lease, Tenant shall undemnify,
defend, protect and hold Landlord harmless from and against loss or liability
resulting from delay by Tenant in so surrendering the Premises including without
limitation, any claims made by any succeeding tenant or losses to Landlord due
to lost opportunities to lease to succeeding tenants.
35. Authority. The undersigned parties hereby warrant that they have
proper authority and are empowered to execute this Lease on behalf of Landlord
and Tenant, respectively.
36. Public Record. This Lease is made subject to all matters of public
record affecting title to the property of which the Premises are a part.
37. Brokers. Landlord and Tenant each represent and warrant to the
other party that it has solely dealt with Richard B. Flynn and Grubb & Ellis
Commercial Real Estate respecting this transaction. Landlord shall pay a real
estate commission to Grubb & Ellis pursuant to the terms of a separate
agreement. Each party agrees to indemnify and hold the other harmless from and
against any brokerage commission or fee, obligation claim, damage (including
attorneys' fees) paid or incurred respecting any broker claim (other than Grubb
& Ellis) claiming through such party or with which/whom such party has dealt. It
is hereby acknowledged that one or more of Landlord's partners may be real
estate brokers.
38. Limitation on Landlord's Liability. Tenant, for itself and its
successors and assigns (to the extent this Lease is assignable), hereby agrees
that in the event of any actual, or alleged, breach or default by Landlord under
this Lease that:
A) If, as a consequence of a default by Landlord under this Lease,
Tenant recovers a money judgment against Landlord, such judgment shall be
satisfied only with the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Parcel and/or the Buildings, and out of rent or other income from such
property, and out of any insurance proceeds, and out of cash proceeds received
by Landlord from the prior sale or other disposition of all or any part of
Landlord's right, title or interest in the Parcel and/or the Buildings and no
partner or officer of any partner of Landlord shall be liable for any
deficiency.
B) No partner or officer of any partner of Landlord shall be sued
or named as a party in a suit or action (except as may be necessary to secure
jurisdiction of the partnership);
C) No service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
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D) No partner of Landlord shall be required to answer or otherwise
plead to any service of process;
E) No judgment will be taken against any partner of Landlord;
F) Any judgment taken against any partner of Landlord may be
vacated and set aside at any time nunc pro tune;
G) No writ of execution will ever be levied-against the assets of
any partner of Landlord;
H) The covenants and agreements of Tenant set forth in this Section
38 shall be enforceable by Landlord and any partner of Landlord.
39. Hazardous Material.
A. Definitions. As used herein, the term "Hazardous Material" shall
mean any substance: (i) the presence of which requires investigation or
remediation under any federal, state or local statutes, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined "hazardous
waste," "hazardous substance," pollutant or contaminant under any federal, state
or local statute, regulation, rule or ordinance or amendments thereto including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Section 9601 et seq.) and/or the Resource Conservation
and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) which is toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is or becomes regulated by any
governmental authority, agency, department, commission, board, agency, or
instrumentality of the United States, the State of California or any political
subdivision thereof; (iv) the presence of which on the Premises causes or
threatens to cause a nuisance upon the Premises or to adjacent properties or
poses or threatens to pose a hazard to the health or safety of persons on or
about the Premises; (v) the presence of which on adjacent properties could
constitute a trespass to Landlord or Tenant; (vi) without limitation which
contains gasoline, diesel fuel, or other petroleum hydrocarbons; (vii) without
limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea
formaldehyde foam insulation; or (viii) without limitation radon gas.
B. Landlord's Indemnity. Landlord shall indemnify, defend, protect and
hold Tenant harmless from and against all liabilities, claims, penalties, fines,
response costs and other expenses (including, but limited to, reasonable
attorneys, fees and consultants, fees and costs) arising out of, resulting from,
or caused by any Hazardous Material used, generated, discharged, transported to
or from, stored or disposed of by Landlord or its Agents in, on, under, over,
through or about the Premises and/or the surrounding real property.
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<PAGE> 27
C. Permitted Use. Subject to the compliance by Tenant with the
provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be
permitted to use and store on the Premises those Hazardous Materials listed in
EXHIBIT "C" attached hereto in the quantities attached set forth in EXHIBIT "C".
Tenant shall also be permitted to use and store on the Premises standard office
supplies in such quantities used in the normal course of general office use
without complying with the provisions of Subparagraph D below.
D. Hazardous Materials Management Plan. Prior to Tenant using,
handling, transporting or storing any Hazardous Material at or about the
Premises (including, without limitation, those listed in EXHIBIT "C"), Tenant
shall submit to Landlord a Hazardous Materials Management Plan ("HMMP") for
Landlord's review and approval, which approval shall not be unreasonably
withheld. The HMMP shall describe: (i) the quantities of each material to be
used, (ii) the purpose for which each material is to be used, (iii) the method
of storage of each material, (iv) the method of transporting each material to
and from the Premises and within the Premises, (v) the methods Tenant will
employ to monitor the use of the material and to detect any leaks or potential
hazards, and (vi) any other information any department of any governmental
entity (city, state or federal) requires prior to the issuance of any required
permit for the Premises or during Tenant's occupancy of the Premises. Landlord
may, but shall have no obligation to review and approve the foregoing
information and HMO, and such review and approval or failure to review and
approve shall not act as an estoppel or otherwise waive Landlord's rights under
this Lease or relieve Tenant of its obligations under this Lease. If Landlord
determines in good faith by inspection of the Premises or review of the HMMP
that the methods in use or described by Tenant do not meet standard industry
practices to prevent or eliminate the existence of environmental hazards, then
Tenant shall not use, handle, transport, or store such Hazardous Materials at or
about the Premises unless and until such methods are upgraded to standard
industry practices and added to an approved HMMP. Once approved by Landlord,
Tenant shall strictly comply with the HMMP and shall not change its use,
operations or procedures with respect to Hazardous Materials without submitting
an amended HMMP for Landlord's review and approval as provided above.
E. Use Restriction. Except as specifically allowed in Subparagraph
C above, Tenant shall not cause or permit any Hazardous Material to be used,
stored, generated, discharged, transported to or from, or disposed of in or
about the Premises, or any other land or improvements in the vicinity of the
Premises. Without limiting the generality of the foregoing, Tenant, at its sole
cost, shall comply with all Laws relating to the storage, use, generation,
transport, discharge and disposal by Tenant or its Agents of any Hazardous
Material. If the presence of any Hazardous Material on the Premises caused or
permitted by Tenant or its Agents results in contamination of the Premises or
any soil, air, ground or surface waters under, through, over, on, in or about
the Premises, Tenant, at its expense, shall promptly take all actions necessary
to return the Premises and/or the surrounding real property to the condition
existing prior to the appearance of such Hazardous Material.
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<PAGE> 28
F. Tenant Indemnity. Tenant shall defend, protect, hold harmless
and indemnify Landlord and its Agents and Lenders with respect to all actions,
claims, losses (including, diminution in value of the Premises), fines,
penalties, fees, (including, but not limited to, reasonable attorneys' and
consultants' fees and costs) costs, damages, liabilities, remediation costs,
investigation costs, response costs and other expenses arising out of, resulting
from, or caused by any Hazardous Material used, generated discharged,
transported to or from, stored, or disposed of by Tenant or its Agents in, on,
under, over, through or about the Premises and/or the surrounding real property.
Tenant shall not suffer any lien to be recorded against the Premises as a
consequence for the disposal of any Hazardous Material on the Premises by Tenant
or its Agents, including any so called state, federal or local "super fund" lien
related to the "clean up" of any Hazardous Material in, over, on, under through,
or about the Premises.
G. Compliance. Tenant shall immediately notify Landlord of any
inquiry, test, investigation, enforcement proceeding by or against Tenant or the
Premises concerning any Hazardous Material. Subject to compliance with
applicable Laws, any remediation plan prepared by or on behalf of Tenant must be
submitted to Landlord prior to conducting any work pursuant to such plan and
prior to submittal to any applicable government authority and shall be subject
to Landlord's consent. Tenant acknowledges that Landlord, as the owner of the
Property, at its election, shall have the sole right to negotiate, defend,
approve and appeal any action taken or order issued with regard to any Hazardous
Material by any applicable governmental authority.
H. Assignment and Subletting. It shall not be unreasonable for
Landlord to withhold its consent to any proposed assignment or subletting if (i)
the proposed assignee's or subtenants' anticipated use of the Premises involves
the storage, generation, discharge, transport, use or disposal of any Hazardous
Material not permitted under Subparagraph C above; (ii) if the proposed assignee
or subtenant has been required by any prior landlord, lender, or governmental
authority to "clean up" or remediate any Hazardous Material and has failed to
promptly do so; (iii) if the proposed assignee or subtenant is subject to
investigation or enforcement order or proceeding by any governmental authority
in connection with the use, generation, discharge, transport, disposal or
storage of any material amount of Hazardous Material; provided that (ii) and
(iii) will not apply in the case of a Fortune 500 Company.
I. Surrender. Upon the expiration or earlier termination of the
Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the
Premises that Tenant or its Agents introduced to the Premises. If Tenant fails
to so surrender the Premises, Tenant shall indemnify, protect, defend and hold
Landlord harmless from and against all damages resulting from Tenant's failure
to surrender the Premises as required by this Paragraph, including, without
limitation, any actions, claims, losses, liabilities, fees (including, but not
limited to, reasonable attorneys' fees and consultants' fees and costs), fines,
costs, penalties, or damages in connection with the condition of the Premises
including, without limitation, damages occasioned by the inability to relet the
Premises or a reduction in the fair market and/or rental value of the Premises
by reason of the existence of any
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<PAGE> 29
Hazardous Materials in, on, over, under, through or around the Premises as the
direct result of the acts or omissions of Tenant or its Agents.
J. Right to Appoint Consultant. Landlord shall have the right to
appoint a consultant to conduct an investigation to determine whether any
Hazardous Material is being used, generated, discharged, transported to or from,
stored or disposed of in, on, over, through, or about the Premises, in
compliance with the approved HMMP and all applicable Laws. If Tenant has
violated any Law or covenant in this Lease regarding the use, storage or
disposal of Hazardous Materials on or about the Premises, Tenant shall
reimburse Landlord for the cost of such investigation. Tenant, at its expense,
shall comply with all reasonable recommendations of the consultant required to
conform Tenant's use, storage or disposal of Hazardous Materials to the
requirements of applicable Law or to fulfill the obligations of Tenant
hereunder.
K. Holding Over. If any action of any kind is required to be taken
by any governmental authority to clean-up, remove, remediate or monitor
Hazardous Material (the presence of which is the result of the acts or omissions
of Tenant or its Agents) and such action is not completed prior to the
expiration or earlier termination of the Lease, Tenant shall be deemed to have
impermissibly held over until such time as such required action is completed,
and Landlord shall be entitled to all damages directly or indirectly incurred in
connection with such holding over, including without limitation, damages
occasioned by the inability to re-let the Premises or a reduction of the fair
market and/or rental value of the Premises.
L. Existing Environmental Reports. Tenant hereby acknowledges that
it has received, read and reviewed the reports and test results described in
Exhibit "D" attached hereto and made a part hereof (the "Existing Environmental
Reports").
M. Provisions Survive Termination. The provisions of this Paragraph 39
shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this Paragraph 39 are
intended to govern the rights and liabilities of the Landlord and Tenant
hereunder respecting Hazardous Materials to the exclusion of any other
provisions in this Lease that might otherwise be deemed applicable. The
provisions of this Paragraph 39 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 39.
40. Quiet Enjoyment. Landlord covenants that Tenant upon performing the
terms, conditions and covenants of this Lease shall have the peaceful, quiet,
possession, use and enjoyment of the Premises without interference on the part
of Landlord or any party claiming by, through, or under Landlord and Landlord
shall defend Tenant in such peaceful and quiet possession, use and enjoyment of
the Premises against any such claims.
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<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates set forth below.
LANDLORD: TENANT:
SOUTH BAY/FORTRAN, 3Dfx INTERACTIVE,
a California limited partnership a California corporation
SBC&D CO., INC., By: ______________________________
a California corporation
Title: ___________________________
By: ______________________________
Date: ____________________________
Name: ____________________________
Title: ___________________________
Date: ____________________________
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<PAGE> 31
EXHIBIT "A"
[description?]
-31-
<PAGE> 32
EXHIBIT "B"
LEGAL DESCRIPTION:
All that real property situate in the City of San Jose, County of Santa Clara,
State of California, described as follows:
Beginning at the Southwesterly corner of that certain 31.74 acre tract of land
described in the deed from The first National Bank of San Jose, a corporation,
to F. W. Zanker and Curtner Zanker, dated May 5, 1939, recorded May 8, 1939 in
Book 934 Official Records, page 16, Santa Clara County Records, in the Northerly
line Alviso-Milpitas Road, thence from said point of beginning N. 89 deg. 35' E.
630.30 feet to the Southeasterly corner thereof; thence along the Easterly line
of said 31.74 acre tract for the three following courses and distances: N. 1
deg. 13' E. 768.90 feet, N. 0 deg. 57 E. 597.96- feet and N. 0 deg. 31' E.
149.97 feet to the Southeasterly corner of that certain 9.316 acre tract of land
described in the deed from F. W. Zanker, et al, to B. S. Brazil, a single man,
dated October 25, 1943, recorded November 16, 1943 in Book 1176 Official
Records, page 21, Santa Clara County Records; thence S. Sg deg. 35' W. along the
Southerly line of said 9.316 acre tract 651.78 feet to the Southwesterly corner
thereof in the Westerly line of said 31.74 acre tract; thence S. 0 deg. 08' W.
along said last mentioned line 1512.88 feet to the point of beginning.
Excepting therefrom that portion; hereof conveyed to the City of San Jose, a
municipal corporation, recorded September 2, 1S85 in Book J82B, page 17ig,
Official Records, described as follows:
Beginning at the Southeasterly corner of that certain 31.74 acre tract of land
described in the deed from The First National Bank of San Jose, a corporation,
to f. W. Zanker and Curtner Zanker, dated May 5, 1929, recorded May 8, 1939 in
Book 934 Official Records, page 16, Santa Clara County Records, said point being
on the Northerly line of Alviso-Milpitas Road, thence leaving said point of
beginning along the Easterly line of said 31.74 acre parcel N. 1 deg. 1;' E.
30.00 feet to the true point of beginning of the parcel herein being described;
thence leaving said true point of beginning and said Easterly line along the
following courses and distances; from a tangent bearing of N. 8e deg. 47' 00" W.
along a curve to the right with a radius of 50.00 feet, through a central angle
of 126 deg. 52' 12. for an arc length of 110.71 feet to a point on reverse
curvature; from a tangent bearing of N. 38 deg. 05' 12E. along a curve to the
left with a radius of 50.00 feet, through a central angle of 36 deg. 52' 12" for
an arc length of 32.18 feet; N. 1 deg. 13' (cent)0~ E. 361.13 feet; N. 0 deg.
57' 00~ E. 597.g3 feet; N. 0 deg. 31' 52- E. 18.6g feet; along a tangent curve
to the left with a radius of 40.00 feet, through a central angle of 90 deg. 56'
58- for an arc length of 63.50 feet to a point on a line parallel with and
distant 90.00 feet Southerly, measured at right angles from the Southerly line
of that certain 9.316 acre parcel of land described 1n the deed from f. W.
Zanker, et al, to B. S. Brazi1, recorded November 16, 1943 in Book 1176 of
Official Records, at page 21, Santa Clara County Records; thence along said
parallel line, S. 89 deg. 34' 54- W. 579.9g feet to a point on the Westerly line
of said 31.74 acre parcel of land; thence leaving said parallel line along said
Westerly line, N.
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<PAGE> 33
0 deg. 06' 10- E. 90.00 feet to the Southwesterly corner of the hereinabove
described 9.316 acre parcel; thence leaving said Westerly line along the
Southerly line of said 9.316 acre parcel, N. 89 deg. 34' 54~ E. 651.24 feet to
the Southeasterly corner thereof, said corner lying in said Easterly line of the
hereinabove described 31.74 acre parcel; thence along said Easterly line the
following course and distances: S. 0 deg. 31 52 W. 149.98 feet; S. 0 deg. 57'
00" W. 598.11 feet and S. 1 deg. 13' 00" W. 598.11 feet and S. 1 deg. 13' 00" W.
471.20 feet to the true point of beginning.
ALSO EXCEPTING THEREFROM all that portion conveyed to the State of California by
Grant Deed recorded August 31, 19g4 in 6Ook N 579, Page 2028, Official Records,
described as follows:
Being a portion of that certain parcel of land described in the Deed from Ray H.
Collishaw and Earlyn R. Collishaw, husband and wife, to William L. Marocco, a
single man, recorded May 4, 1982 in Book G 762 of Official Records at Page 218,
Santa Clara County Records.
Beginning at the southeast corner of said parcel conveyed to Marocco; thence
from said Point of Beginning, along the southerly line of said parcel conveyed
to Marocco N. 8g(degree) 01' 16" W. 626.45 feet to the southwest corner of said
parcel conveyed to Marocco; thence along the westerly line of said parcel
conveyed to Marocco N. 1(degree) 13 13 E. 227.77 feet; thence leaving said
westerly line, from a tangent bearing of S. 67(degree) 46 42 E., along a curve
to the right with a radius of 275.00 feet, through a central angle of 18(degree)
08' 37" for an arc length of 87.08 feet; thence S. cgo 38' 05 E., 103.64 feet:
thence along a tangent curve to the left with a radius of 275.00 feet, through a
central angle of 34(degree) 57' 21- for an arc length of 167.78 feet; thence S.
84(degree) 35' 25E. 318.58 feet to a point in the easterly line of said parcel
conveyed to Marocco; thence along said easterly line S. 2(degree) 20 03' W.,
31.97 feet to the Point of Beginning.
AR8 No. 15-30-9 & 9.1
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<PAGE> 34
EXHIBIT "C"
HAZARDOUS MATERIALS MANAGEMENT PLAN ("HMMP")
(To be Provided by Tenant prior to Occupancy)
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<PAGE> 35
EXHIBIT "D"
1. ATT report dated July 9, 1992: Preliminary (Phase I) Environmental Site
Assessment Update for the Property at 4405 - 4445 Fortran Court, San
Jose, CA (Project No. 929368).
2. SECOR International Incorporated report dated July 10, 1995: Phase I
Environmental Site Assessment Report - 4405, 4415, 4425, 4435 and 4445
Fortran Drive, San Jose, CA (Job No. 70076-001-01).
3. SECOR International Incorporated report dated July 24, 1995: Technical
Report Soil Sampling and Grab Groundwater Sampling - 4405-4445 Fortran
Drive, San Jose, CA
4. ProTech Consulting and Engineering Asbestos Survey and Evaluation
report dated October 25, 1995, Report #AA95-559, conducted at 4415 1445
Fortran Drive, San Jose, CA.
5. Clayton Environmental Consultants' export dated January 8, 1996, Site
Visit and File Review for 4405 and 4413 Fortran Drive, San Jose, CA.
(Project No. 63877.00).
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<PAGE> 36
EXHIBIT C
TENANT ESTOPPEL CERTIFICATE
To: CarrAmerica Realty Corporation
1700 Pennsylvania Avenue, N.W.
Washington, D.C. 2006
Attention: Tom Levy
Re: Property Address: 4405-4445 Fortran Court
San Jose, CA 95134
Premises at Property: 4435 Fortran Court (the "Premises")
The undersigned tenant (the "Tenant") hereby certifies as of the date set forth
below to you as follows:
1) Tenant is a tenant at the Property under a lease (the "Lease") dated
August 7, 1996, for the Premises; the Lease has not been canceled,
modified, assigned, extended or amended except as follows: N/A; and
there are no other agreements, written or oral, affecting or relating
to Tenant's lease of the Premises or any other space at the Property.
2) All base rent, rent escalations and additional rent under the Lease has
been paid through N/A, 19___. There is no prepaid rent, except
$70,025.00, and the amount of security deposit is $70,025.00. Tenant
currently has no right to any future rent abatement under the Lease.
Except increases in real estate taxes which may occur as a result of
the sale of the property are subject to the limitations set forth in
Section 7.C of the Lease and the rental abatement rights set forth in
Section 2 of the Lease.
3) Lease will take possession of the Premises, consisting of 77,805 square
feet, on May 1, 1997 and commence to pay rent on May 1, 1997. Base rent
will be payable in the amount of $70,025.00 per month, and Tenant will
be billed on a monthly basis for operating expenses actually incurred
by the Landlord.
4) The Lease terminates on April 30, 2007, and Tenant has the following
renewal option(s): none. The renewal options for the following periods
have been exercised: N/A.
5) All work to be performed for Tenant under the Lease has been performed
as required under the Lease and has been accepted by Tenant, except
structural work referenced in Paragraph 2 of Lease, and all allowances
to be paid to Tenant, including allowances for tenant improvements,
moving expenses or other items, have been paid.
C-1
<PAGE> 37
6) The Lease is: (a) in full force and effect; (b) free from default and
free from any event which could become a default under the Lease; and
(c) Tenant has no claims against the landlord or offsets or defenses
against rent, and there are no disputes with the landlord.
7) The Tenant has received no notice of prior sale, transfer or
assignment, hypothecation or pledge of the Lease or of the rents
payable thereunder, except: none.
8) Tenant shall take full possession of the Premises under the Lease dated
August 7, 1996, on May 1, 1997, and Tenant has not assigned the Lease
or sublet any part of the Premises, and Tenant is currently in
possession of 31,572 square feet of the Premises under a Sublease dated
July 31, 1996, with Reply Corporation.
9) The base year for pass-through of operating expenses and taxes is N/A,
or the base amount for taxes is N/A, and the base amount for operating
expenses is N/A.
10) The Tenant has the following expansion rights or options for the
Property: none.
11) The Tenant has no rights or options to purchase the Property.
12) The Tenant has no right to remove any property from the Premises except
for its personal property and trade fixtures.
13) The Tenant is not insolvent or bankrupt and is not contemplating
seeking relief under any insolvency or bankruptcy statutes.
The undersigned has executed this Estoppel Certificate with the
knowledge and understanding that CarrAmerica Realty Corporation is acquiring the
Property in reliance on this Estoppel Certificate and that the undersigned will
be bound by this Estoppel Certificate. The statements contained herein may be
relied upon by CarrAmerica Realty Corporation, and any mortgagee of the Property
and their respective successors and assigns.
Dated this 25th day of March 1997.
3Dfx Interactive, a California corporation
By: ______________________________________
Title: ___________________________________
C-2
<PAGE> 1
EXHIBIT 10.6
INVESTORS' RIGHTS AGREEMENT
This Investors' Rights Agreement is made and entered into as
of September 12, 1996 by and among 3Dfx Interactive, Inc. (the "Company") the
undersigned holders of capital stock or warrants to purchase capital stock of
the Company (the "Investors") and the undersigned purchasers of Series C
Preferred Stock of the Company (the "Purchasers"). The Investors and other
holders of shares of the Company's Series A and Series B Preferred Stock, or
warrants to purchase shares of Series A and Series B Preferred Stock, enjoying
certain registration rights and rights regarding receipt of information pursuant
to an Investors' Rights Agreement dated February 14, 1996 (the "Prior
Agreement") and the Purchasers are sometimes collectively referred to as the
"Shareholders". The names of the Investors and the Purchasers are set forth on
the Schedule of Investors and Purchasers attached hereto as Schedule A.
RECITALS:
A. The Company will issue to the Purchasers an aggregate of up
to 2,800,000 shares of Series C Preferred Stock pursuant to a Series C Preferred
Stock Purchase Agreement dated as of September 12, 1996, (the "Series C
Agreement").
B. The Purchasers have required that certain registration and
other rights be granted to them with respect to the securities of the Company to
be acquired.
C. The Investors hold the majority of the shares of Series A
and Series B Preferred Stock of the Company, or warrants to purchase shares of
Series A and Series B Preferred Stock of the Company, enjoying certain
registration rights and rights regarding receipt of information pursuant to the
Prior Agreement. The Investors hereby agree that all such rights under the Prior
Agreement are hereby terminated and superseded by the rights provided under this
Agreement, which Agreement supersedes and replaces the Prior Agreement in its
entirety.
<PAGE> 2
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises and covenants contained herein, the parties agree as follows:
1. Restrictions on Transfer; Registration Rights.
1.1 Definitions. As used herein:
(a) The terms "register", "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of the effectiveness of such
registration statement.
(b) For the purposes hereof, the term "Registrable
Securities" means shares of (i) any and all Common Stock of the Company issued
or issuable upon conversion of shares of the Series A Preferred Stock of the
Company issued pursuant to the Series A Preferred Stock Purchase Agreement dated
as of March 13, 1995, which have not been previously resold to the public in a
registered public offering, (ii) any and all Common Stock of the Company issued
or issuable upon conversion of shares of the Series B Preferred Stock of the
Company issued pursuant to the Series B Preferred Stock Purchase Agreement dated
February 14, 1996, which have not been previously resold to the public in a
registered public offering, (iii) any and all Common Stock of the Company issued
or issuable upon conversion of shares of the Series C Preferred Stock of the
Company issued pursuant to the Series C Agreement, which have not been
previously resold to the public in a registered public offering, (iv) any and
all Common Stock of the Company issued or issuable upon conversion of up to
87,500 shares of the Series A Preferred Stock of the Company issued or issuable
upon exercise of a warrant to purchase shares of Series A Preferred Stock issued
by the Company to Lighthouse Capital Partners, which have not been previously
resold to the public in a registered public offering, (v) any and all Common
Stock of the Company issued or issuable upon conversion of up to 336,817 shares
of the Series B Preferred Stock of the Company issued or issuable upon exercise
of warrants to purchase shares of Series B Preferred Stock which have been
issued by the Company to MMC\GATX Partnership No. I, Silicon Valley Bank and
Taiwan Semiconductor Manufacturing Corporation, which have not been previously
resold to the public in a registered public offering, (vi) stock issued with
respect to or in any exchange for or in replacement
-2-
<PAGE> 3
of stock included in subparagraphs (i), (ii), (iii), (iv) and (v) above which
have not been previously resold to the public in a registered public offering,
and (vii) stock issued in respect of the stock referred to in (i), (ii), (iii),
(iv), (v) and (vi) above as a result of a stock split, stock dividend or the
like, which have not been previously resold to the public in a registered public
offering.
(c) The terms "Holder" or "Holders" mean any person or persons
to whom Registrable Securities were originally issued and who execute this
Agreement or qualifying transferees under Section 3 hereof who hold Registrable
Securities.
(d) The term "Initiating Holders" means any Holder or Holders
of in the aggregate at least 40% of the Registrable Securities which have not
been previously resold to the public in a registered public offering.
(e) The term "Majority Holders" means holders of a majority of
Registrable Securities included in a particular registration.
1.2 Requested Registration.
(a) Request for Registration. In case the Company shall
receive from the Initiating Holders a written request that the Company effect
any registration with respect to all or a part of the Registrable Securities,
the Company will:
(i) within ten (10) days after its receipt thereof give
written notice of the proposed registration to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, preparation of a
registration statement and prospectus complying as to form with the
requirements of the Securities Act, the execution of an undertaking to file
post-effective amendments, appropriate qualifications under the applicable blue
sky or other state securities laws and appropriate compliance with exemptive
regulations issued under the Securities Act and any other governmental
requirements or regulations) as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Holder's or
Holders' Registrable Securities as is specified in such request, together with
all or such portion of the Registrable Securities of any Holder or Holders
joining in such request as are specified in a written request given within 20
days after receipt of such written notice from the Company;
-3-
<PAGE> 4
provided, that the Company shall not be obligated to take any action to effect
such registration pursuant to this Section 1.2:
(A) Prior to the earlier of (1)
March 3, 1999, or (2) 270 days following the effective date of the Company's
first registered offering to the general public of its securities for its own
account; or
(B) In any particular jurisdiction
in which the Company would be required to execute a general consent to service
of process in effecting such registration; or
(C) After the Company has effected
two such registrations pursuant to this subsection 1.2(a) and such registrations
have been declared or ordered effective for the period set forth in Section
1.6(a); or
(D) If the Registrable Securities
to be registered have an anticipated offering price to the public of less than
$5,000,000.
Subject to the foregoing clauses (A) through (D), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practical, but in any event within ninety (90) days after
receipt of the request or requests of the Initiating Holders; provided, however,
that if such request is made prior to the completion of the Company's initial
public offering of securities, and if the Company shall furnish to such Holders
a certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company for such registration statement to be filed
at the date filing would be required and it is therefore essential to defer the
filing of such registration statement, the Company shall be entitled to delay
the filing of such registration statement not more than once for an additional
period of up to one hundred and twenty (120) days.
(b) Underwriting. If the Majority Holders intend to
distribute the Registrable Securities covered by their request by means of an
under writing, they shall so advise the Company as a part of their request made
pursuant to Section 1.2 and the Company shall include such information in the
written notice referred to in subsection 1.2(a)(i). The right of any Holder to
registration pursuant to Section 1.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
the Majority Holders and such Holder) to the extent provided herein. The Company
shall (together with all Holders proposing to distribute their securities
through such
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<PAGE> 5
underwriting) enter into an underwriting agreement in customary form with the
underwriter or underwriters selected for such underwriting by the Majority
Holders, provided, however, that the managing underwriter shall be approved by
the Company, which approval shall not be unreasonably withheld. Notwithstanding
any other provision of this Section 1.2, if the underwriter advises the Majority
Holders in writing that marketing factors require a limitation of the number of
shares to be underwritten, the Majority Holders shall so advise all Holders of
Registrable Securities who have elected to participate in such offering, and the
number of shares of Registrable Securities that may be included in the
registration and underwriting shall be allocated among all such Holders thereof
in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities held by such Holders. If any Holder of Registrable
Securities disapproves of the terms of the underwriting, he may elect to
withdraw therefrom by written notice to the Company, the underwriter and the
Initiating Holders. Any Registrable Securities which are excluded from the
underwriting by reason of the underwriter's marketing limitation or withdrawn
from such underwriting shall be withdrawn from such registration. If the
underwriter has not limited the number of Registrable Securities to be
underwritten, the Company may include securities for its own account (or for the
account of employees and other holders, at the Company's sole discretion) in
such registration if the underwriter so agrees and if the number of Registrable
Securities which would otherwise have been included in such registration and
underwriting will not thereby be limited by the underwriter.
1.3 Company Registration.
(a) Right to Include. If at any time or from time to time, the
Company proposes to register any of its securities, for its own account or the
account of any of its shareholders other than the Holders, (other than a
registration relating solely to employee stock option or purchase plans, or a
registration relating solely to an SEC Rule 145 transaction, or a registration
on any other form, other than Form S-1, S-2, S-3, SB-2 or any successor to such
form which does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities) the Company will:
(i) promptly give to each Holder written notice thereof;
and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance with applicable laws), and
in any underwriting involved therein, all the Registrable Securities specified
in a
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written request or requests, made within 20 days after receipt of such written
notice from the Company, by any Holder or Holders to be included in any such
registration, except as set forth in subsection 1.3(b) below.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.3(a)(i). In such event the right of any Holder to
registration pursuant to Section 1.3 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other holders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for such underwriting by the
Company. Notwithstanding any other provision of this Section 1.3, if the
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the underwriter may limit the number of
Registrable Securities to be included in the registration and underwriting (i)
completely, in the case of the Company's initial public offering, or (ii) to not
less than 20% of the shares to be included in any other registration that is
solely for the account of the Company. In the event of a cutback by the under
writers of the number of Registrable Securities to be included in the
registration and underwriting, the Company shall advise all Holders of
Registrable Securities which would otherwise be registered and underwritten
pursuant hereto, and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all of
such Holders in proportion, as nearly as practicable, to the respective amounts
of Registrable Securities held by such Holders. If any Holder disapproves of the
terms of any such underwriting, he may elect to withdraw therefrom by written
notice to the Company and the underwriter. Any Registrable Securities excluded
or withdrawn from such underwriting shall be withdrawn from such registration.
1.4 Form S-3. After its initial public offering, the Company shall use
its best efforts to qualify for registration on Form S-3 or any comparable or
successor form. After the Company has qualified for the use of Form S-3, Holders
of the outstanding Registrable Securities shall have the right to request up to
two (2) registrations on Form S-3 (such requests shall be in writing and shall
state the number of shares of Registrable Securities to be disposed of and the
intended method of disposition of Shares by such Holders), subject only to the
following:
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(a) The Company shall not be required to effect a registration
pursuant to this Section 1.4 within 180 days of the effective date of any
registration referred to in Sections 1.2 or 1.3 above.
(b) The Company shall not be required to effect a registration
pursuant to this Section 1.4 unless the Holder or Holders requesting
registration propose to dispose of shares of Registrable Securities having an
aggregate disposition price (before deduction of underwriting discounts and
expenses of sale) of at least $1,000,000.
(c) The Company shall not be required to effect more than one
registration pursuant to this Section 1.4 in any consecutive 12 month period.
The Company shall promptly give written notice to all Holders of
Registrable Securities of the receipt of a request for registration pursuant to
this Section 1.4 and shall provide a reasonable opportunity for other Holders to
participate in the registration, provided that if the registration is for an
under written offering, the terms of subsection 1.2(b) shall apply to all
participants in such offering. Subject to the foregoing, the Company will use
its best efforts to effect as promptly as practicable the registration of all
shares of Registrable Securities on Form S-3 to the extent requested by the
Holder or Holders thereof for purposes of disposition; provided, however, that
if the Company shall furnish to such Holders a certificate signed by the
President or Chief Executive Officer of the Company stating that in the good
faith judgement of the Board of Directors it would be seriously detrimental to
the Company for such registration statement to be filed at the date filing would
be required and it is therefore essential to defer the filing of such
registration statement, the Company shall be entitled to delay the filing of
such registration statement for such a period that the Board determines in good
faith to be necessary, which in no event shall exceed, one hundred and twenty
(120) days. Any registration pursuant to this Section 1.4 shall not be counted
as a registration pursuant to Section 1.2.
1.5 Expenses of Registration. All expenses incurred in connection with
any registration, qualification or compliance pursuant to this Section 1,
including without limitation, all registration, filing and qualification fees,
printing expenses, exchange or NASDAQ listing fees, fees and disbursements of
counsel for the Company and fees and expenses of any special audits incidental
to or required by such registration, shall be borne by the Company except as
follows:
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<PAGE> 8
(a) The Company shall not be required to pay for expenses of
any registration proceeding begun pursuant to Section 1.2 or 1.4, the request
for which has been subsequently withdrawn by the Majority Holders (other than as
a result of the Company's deferral), in which such case, such expenses shall be
borne by the Holders requesting inclusion in such registration; provided,
however, that in lieu of paying such expenses the Majority Holders may elect to
forfeit their right to request one registration pursuant to Section 1.2;
provided further, however, that if at the time of such withdrawal the Majority
Holders have learned of a material adverse change in the business, condition or
prospects of the Company from that known to the Majority Holders at the time of
their request and have withdrawn the request with reasonable promptness
following disclosure by the Company of such change, then the Holders shall not
be required to pay any such expenses and shall retain their rights to such
registration pursuant to Section 1.2.
(b) The Company shall not be required to pay fees of legal
counsel of a Holder except for a single counsel acting on behalf of all selling
Holders (which counsel shall also be counsel to the Company unless counsel to
the Company has a conflict of interest with respect to the representation of any
selling Holder or the underwriters object to the selling Holders' representation
by Company counsel).
(c) The Company shall not be required to pay underwriters'
fees, discounts or commissions relating to the Registrable Securities.
1.6 Registration Procedures. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each Holder participating therein advised in writing as to
the initiation of each registration, qualification and compliance and as to the
completion thereof. At its expense the Company will:
(a) Keep such registration, qualification or compliance
pursuant to Sections 1.2, 1.3 or 1.4 effective for a period of 180 days or until
the Holder or Holders have completed the distribution described in the
registration statement relating thereto, whichever first occurs;
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
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<PAGE> 9
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them;
(d) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing;
(e) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such United States jurisdictions as shall be reasonably
requested by the Holders; provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions, unless the Company is already subject to service in such
jurisdiction and except as may be required by the Securities Act;
(f) Cause all such Registrable Securities registered under
this Section 1 to be listed on each securities exchange or reporting system on
which similar securities issued by the Company are then listed; and
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities are delivered to the underwriters for sale in
connection with such registration, if such securities are being sold through
underwriters or, if such securities are not being sold through underwriters, on
the date that the registration statement with respect to such securities becomes
effective, (i) an opinion, dated such date, of the counsel representing the
Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders requesting registration of
Registrable Securities, and (ii) a letter dated such date, from the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent certified public accountants to underwriters in
an underwritten public offering, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
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<PAGE> 10
1.7 Indemnification.
(a) The Company will indemnify and hold harmless each Holder
of Registrable Securities, each of its officers, directors and partners, and
each person controlling such Holder, with respect to which such registration,
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter of the
Registrable Securities held by or issuable to such Holder, against all claims,
losses, expenses, damages and liabilities (or actions in respect thereto)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any preliminary or final prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or any violation or alleged violation by the Company
relating to action or inaction required of the Company in connection with any
rule or regulation promulgated under the Securities Act or any state securities
law applicable to the Company and will reimburse (on an as incurred basis) each
such Holder, each of its officers, directors and partners, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any reasonable legal and any other expenses incurred in
connection with investigating, defending or settling any such claim, loss,
damage, liability or action; provided, however, that the Company will not be
liable in any such case to the extent that any such claim, loss, damage or
liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company in an instrument duly executed
by such Holder or underwriter specifically for use therein, and provided further
that the agreement of the Company to indemnify any underwriter and any person
who controls such underwriter contained herein with respect to any such
preliminary prospectus shall not inure to the benefit of any underwriter, from
whom the person asserting any such claim, loss, damage, liability or action
purchased the stock which is the subject thereof, if at or prior to the written
confirmation of the sale of such stock, a copy of the prospectus (or the
prospectus as amended or supplemented) was not sent or delivered to such person,
excluding the documents incorporated therein by reference, and the untrue
statement or omission of a material fact contained in such preliminary
prospectus was corrected in the prospectus (or the prospectus as amended or
supplemented).
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify and hold
harmless
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<PAGE> 11
the Company, each of its directors and officers, each underwriter, if any, of
the Company's securities covered by such a registration statement, each person
who controls the Company within the meaning of the Securities Act, and each
other such Holder, each of its officers, directors and partners and each person
controlling such Holder, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any preliminary or final prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance or based on any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
will reimburse (on an as incurred basis) the Company, such Holders, such
directors, officers, partners, persons or underwriters for any reasonable legal
or any other expenses incurred in connection with investigating, defending or
settling any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company in an instrument
duly executed by such Holder specifically for use therein, and provided further
that the agreement of the Holder to indemnify any underwriter and any person who
controls such underwriter contained herein with respect to any such preliminary
prospectus shall not inure to the benefit of any underwriter, from whom the
person asserting any such claim, loss, damage, liability or action purchased the
stock which is the subject thereof, if at or prior to the written confirmation
of the sale of such stock, a copy of the prospectus (or the prospectus as
amended or supplemented) was not sent or delivered to such person, excluding the
documents incorporated therein by reference, and the untrue statement or
omission of a material fact contained in such preliminary prospectus was
corrected in the prospectus (or the prospectus as amended or supplemented).
Notwithstanding the foregoing, in no event shall the indemnification provided
by any Holder hereunder exceed the gross proceeds received by such Holder for
the sale of such Holder's securities pursuant to such registration.
(c) Each party entitled to indemnification under this Section
1.7 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought. The
Indemnified Party shall promptly permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom, provided
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<PAGE> 12
that counsel for the Indemnifying Party, who shall conduct the defense of such
claim or litigation, shall be approved by the Indemnified Party (whose approval
shall not be unreasonably be withheld). The Indemnified Party may participate in
such defense and hire counsel at such party's own expense (or at the
Indemnifying Party's expense, in the event that a conflict of interest exists
between Indemnifying Party's counsel and the Indemnified Party's counsel). The
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations hereunder, unless and only to
the extent that such failure is materially prejudicial to an Indemnifying
Party's ability to defend such action. No Indemnifying Party, in the defense of
any such claim or litigation, shall, except with the consent of the Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. Any Indemnified Party shall reasonably cooperate
with the Indemnifying Party in the defense of any claim or litigation brought
against such Indemnified Party.
If the indemnification provided for in this Section 1.7 is for any reason
not available to an Indemnified Party with respect to any loss, liability,
claim, damage, or expense referred to therein, then the Indemnifying Party, in
lieu of indemnifying such Indemnified Party hereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of the
Indemnified Party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as will as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and of the Indemnified Party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
1.8 Lock-Up Provision. Upon receipt of a written request by
the Company or by its underwriters, the Holders shall not sell, sell short,
grant an option to buy, or otherwise dispose of shares of the Company's Common
Stock or other securities (except for any such shares included in the
registration) for a period of one hundred and twenty (120) days following the
effective date of the initial registration of the Company's securities (other
than any transfer of shares as a bona fide gift or gifts, or by will or
intestacy or, if the Holder is a
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<PAGE> 13
partnership or corporation, any distribution by such partnership or corporation
to its partners or shareholders); provided, however, that such Holder shall have
no obligation to enter into the agreement described in this Section 1.8 unless
all executive officers and directors of the Company and all other Holders and
holders of other registration rights from the Company enter into similar
agreements. The Company may impose stop-transfer instructions with respect to
the shares (or securities) subject to the foregoing restriction until the end of
said 120-day period.
1.9 Information by Holder. The Holder or Holders of
Registrable Securities included in any registration shall promptly furnish to
the Company such information regarding such Holder or Holders and the
distribution proposed by such Holder or Holders as the Company may request in
writing and as shall be required in connection with any registration,
qualification or compliance referred to herein.
1.10 Rule 144 Reporting.
(a) With a view to making available to Holders of Registrable
Securities the benefits of certain rules and regulations of the Securities and
Exchange Commission (the "SEC") which may permit the sale of the Registrable
Securities to the public without registration, at all times after 90 days after
the effective date of the first registration filed by the Company for an
offering of its securities to the general public the Company agrees to:
(i) Make and keep public information available, as
those terms are understood and defined in SEC Rule 144 under the Securities Act;
(ii) File with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (the "Exchange Act"); and
(iii) So long as a Holder owns any Registrable
Securities, to furnish to such Holder forthwith upon such Holder's request a
written statement by the Company as to its compliance with the reporting
requirements of said Rule 144 (at any time after 90 days after the effective
date of the first registration statement filed by the Company for an offering of
its securities to the public), and of the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements), a copy
of the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as such Holder may reasonably
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<PAGE> 14
request in availing itself of any rule or regulation of the SEC allowing such
Holder to sell any such securities without registration.
1.11 Limitations on Subsequent Registration Rights. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the Holders of a majority of the outstanding Registrable
Securities, enter into any agreement with any holder or prospective holder of
any securities of the Company which would allow such holder or prospective
holder (a) to include such securities in any registration filed under Section
1.2, 1.3 or 1.4 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of its securities will not reduce the amount of
the Registrable Securities of the Holders which is included or (b) to make a
demand registration which (i) could result in such registration statement being
declared effective prior to the earlier of either of the dates set forth in
subsection 1.2(a)(ii)(A) or (ii) would result in the registration of such
parties' securities to the exclusion of any securities requested to be included
in such registration under Section 1.3 hereof.
1.12 Termination. The rights of a Holder under this Agreement
shall terminate on the earlier to occur of (a) the sixth anniversary of the
closing of the Company's first registered public offering of its securities, or
(b) the date on which a Holder can sell all of its Registrable Securities
without registration pursuant to Rule 144 within a three (3) month period,
unless at the time the Holder's Registrable Securities represent more than one
percent (1%) of the outstanding capital stock of the Company.
2. Covenants of the Company.
2.1 Financial Information. So long as a Shareholder (together
with any permitted assigns who are affiliates) continues to hold at least 25,000
shares of Preferred Stock or shares of Common Stock issued upon conversion of
Preferred Stock or any combination of the foregoing (collectively, the
"Securities"), the Company will furnish the following information to the
Shareholder:
(a) Annual Financials. As soon as practicable after the
end of each fiscal year, and in any event within 120 days thereafter, the
Company will provide the Shareholder with consolidated balance sheets of the
Company and its subsidiaries, if any, as at the end of such fiscal year, and
consolidated statements of operations and consolidated statements of cash flows
of the Company and its subsidiaries, if any, for such year, prepared in
accordance
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with generally accepted accounting principles, all in reasonable detail,
certified by independent public auditors of recognized national standing
selected by the Company; provided, however, that until the Company shall have
revenues in excess of $10,000,000, such financial statements may be reviewed but
not audited.
(b) Quarterly Financials. As soon as practicable after
the end of each fiscal quarter (except the fourth fiscal quarter), and in any
event within 45 days thereafter, the Company will provide the Shareholder with
consolidated balance sheets of the Company and its subsidiaries, if any, as at
the end of such fiscal quarter, and consolidated statements of operations and
consolidated statements of cash flows of the Company and its subsidiaries, if
any, for such quarter, prepared in accordance with generally accepted accounting
principles (except for required footnotes and for minor year-end adjustments),
all in reasonable detail, certified by the chief financial officer of the
Company.
2.2 Additional Information. So long as a Shareholder (together
with permitted assigns who are affiliates) continues to hold at least 250,000
shares of Preferred Stock, the Company shall provide such Shareholder with
copies of any information provided to members of the Company's Board of
Directors.
2.3 Confidentiality of Information. All information obtained
by a Shareholder pursuant to Section 2.1 and 2.2 shall be deemed proprietary and
confidential to the Company and will not be disclosed by a Shareholder to any
person or entity without the prior written consent of the Company. This
restriction shall not apply to information which is (i) previously known or
thereafter becomes known to the public, (ii) received by a Shareholder on a
non-confidential basis from other sources or (iii) disclosed pursuant to a
governmental regulation or order, provided that prior to disclosure the
disclosing party notifies the Company of such proposed disclosure in order to
permit the Company to seek confidential treatment of such information.
2.4 Employee Stock Purchase and Option Agreements. The Company
agrees that it will utilize, in connection with any stock purchase or stock
option agreements entered into with officers, directors, employees or
consultants pursuant to equity incentive plans adopted by the Board of Directors
of the Company, vesting provisions providing in substance that such stock or
options shall vest at the rate of 25% of such shares one year after the option
grant date (which will be no earlier than the date of hire or appointment) and
1/48th of the shares monthly thereafter; provided, however, such vesting
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rate may be changed or accelerated if unanimously approved by the Company's
Board of Directors. In addition, each such stock purchase or stock option
agreement shall contain a "market stand-off" provision, pursuant to which the
recipient of stock pursuant to such agreement will agree, upon request, not to
sell or otherwise transfer any securities of the Company during a period of up
to 120 days following the effective date of the initial registration statement
pursuant to which the Company registers shares of its Common Stock for sale to
the public and any other registration statement filed within three years of such
initial statement.
2.5 Termination of Covenants. The Company's obligation to
deliver the information required under subsections 2.1 (a) and (b) and under
Section 2.2 above shall terminate upon the date on which the Company is required
to file a report with the SEC pursuant to Section 13(a) of the Exchange Act by
reason of the Company having registered any of its securities pursuant to
Section 12(g) of the Exchange Act.
2.6 Attendance at Board Meetings. As long as Chase Venture
Capital Associates, L.P., formerly known as Chemical Venture Capital Associates,
A California Limited Partnership ("CVCA") and/or any affiliate (the "Major
Purchaser") hold at least 800,000 shares of Securities, Major Purchaser (or its
representative) shall have the right to attend all meetings of the Board of
Directors in a nonvoting observer capacity, to receive notice of such meetings
and to receive the information provided by the Company to the Board of
Directors; provided, however, that the Company may require as a condition
precedent to Major Purchaser's rights under this Section 2.6 that each person
proposing to attend any meeting of the Board of Directors and each person to
have access to any of the information provided by the Company to the Board of
Directors shall agree to be bound by Section 2.3; and provided further that the
Company reserves the right not to provide information and to exclude such Major
Purchaser (or its representative) from any meeting or portion thereof if
delivery of such information or attendance at such meeting by such Major
Purchaser (or its representative) would adversely affect the attorney-client
privilege between the Company and its counsel, as determined in good faith by
the Board of Directors based upon an opinion of counsel. The rights of the Major
Purchaser under this Section 2.6 shall terminate upon the date on which the
Company is required to file a report with the SEC pursuant to Section 13(a) of
the Exchange Act by reason of the Company having registered any of its
securities pursuant to Section 12(g) of the Exchange Act.
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3. Right to Maintain.
3.1 "New Securities". For purposes of this Section 3, the term
"New Securities" shall mean shares of Common Stock, Preferred Stock or any other
class of capital stock of the Company, whether or not now authorized, securities
of any type that are convertible into shares of such capital stock, and options,
warrants or rights to acquire shares of such capital stock. Notwithstanding the
foregoing, the term "New Securities" will not include (a) securities issuable
upon conversion of the Series A, Series B and Series C Preferred Stock; (b)
securities issued in connection with bona fide equipment lease or working
capital debt financings with lending institutions; (c) securities offered to the
public pursuant to a registration statement filed under the Securities Act; (d)
securities issued pursuant to the acquisition of another corporation by the
Company by merger, purchase of substantially all of the assets, or other
reorganization whereby the Company owns not less than fifty-one percent (51%) of
the voting power of such corporation; (e) shares of Common Stock (or related
options or warrants) issued or issuable at any time to employees or consultants
of the Company for compensation purposes, pursuant to any stock offering, plan
or arrangement approved by the Board of Directors; (f) securities issued upon
exercise or conversion of options, warrants and other convertible securities
outstanding on the date hereof and described in the Series C Agreement or the
Schedules thereto, including those securities sold pursuant to the Series C
Agreement; (g) shares of Common Stock or Preferred Stock issued in connection
with any stock split, stock dividend or recapitalization by the Company; and (h)
any security if holders of at least a majority of the outstanding shares of
Series A, Series B and Series C Preferred Stock consent in writing that the
rights under this Section 3 shall not apply to such securities.
3.2 Grant of Rights. Subject to the terms specified in this
Section 3, the Company hereby grants to (a) each Shareholder the right of first
refusal to purchase a portion of any issue of New Securities which the Company
hereafter may from time to time propose to issue and sell as shall maintain the
Shareholder's pro rata percentage ownership of the Company's capital stock. The
"pro rata" percentage ownership of a Shareholder is calculated by dividing (i)
the number of shares of Common Stock held by the Shareholder plus the total
number of shares of Common Stock issuable upon the conversion of all Preferred
Stock then held by the Shareholder by (ii) the total number of shares of Common
Stock then outstanding, including shares issuable upon conversion of any
Preferred Stock.
-17-
<PAGE> 18
3.3 Procedure.
(a) In the event the Company proposes to undertake an issuance
of New Securities, it shall give the Shareholders written notice of its
intention, describing the type of New Securities, the proposed purchasers, the
price and all other material terms upon which the Company proposes to issue the
same. A Shareholder shall have 15 days from the date of receipt of any such
notice to agree to purchase up to its pro rata share of such New Securities for
the price and upon the terms specified in the Company's notice by giving written
notice to the Company to such effect and stating therein the quantity of New
Securities to be purchased.
(b) In the event a Shareholder fails to exercise its right to
purchase its pro rata share of the New Securities within such 15 day period, the
Company shall have 90 days thereafter to sell or enter into an agreement to sell
any New Securities not purchased by Shareholders exercising their rights at a
price and upon terms no more favorable to the purchaser than the terms specified
in the Company's notice to the Shareholders, after which 90 day period the
Company shall not thereafter sell such New Securities without first offering a
portion to the Shareholders in accordance with this Section 3.
3.4 Termination of Rights. The rights granted under this
Section 3 shall expire (a) as to all Shareholders, upon the closing of a public
offering which, under the terms of the Company's Articles of Incorporation as
then in effect, shall cause the automatic conversion of all shares of the
Company's Preferred Stock into Common Stock and (b) as to any Shareholder if
such Shareholder fails to exercise its right to purchase its pro rata share of
the New Securities as provided in this Section 3 in an offering of New
Securities in which the holders of a majority of the Registrable Securities
exercise their rights to purchase their pro rata shares of such New Securities,
and such failure was not at the written request of the Company.
4. Assignment of Rights.
The rights granted pursuant to this Agreement may be assigned by a
Shareholder or its transferee upon sale or transfer (other than a sale to the
public) of at least 25,000 shares of Registrable Securities (as adjusted for
stock dividends, stock splits, recapitalizations and the like) held by a
Shareholder, or in connection with any transfer or assignment by a Shareholder
of any number of shares to any partner, retired partner or shareholder of such
Shareholder or any transfer to spouses and ancestors, lineal descendants and
siblings of such partners or shareholders or spouses who acquire Registrable
Securities by gift,
-18-
<PAGE> 19
will or intestate succession, provided that such rights may not be assigned to a
transferee which the Company reasonably believes is a competitor or intends to
become a competitor of the Company and provided further that the Company is
given prompt notice of such transfer and any such transferee shall agree to
become subject to the obligations of the Shareholders under this Agreement.
5. Miscellaneous.
5.1 Amendment or Waiver. Any term of this Agreement may be
amended and the observance of any such term may be waived (either generally or
in a particular instance and either retroactively or prospectively) with the
written consent of the Company and Holders holding at least a majority of the
outstanding Registrable Securities. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon the parties hereto and
their successors and assigns; provided that no amendment or modification may
discriminate against a holder of Registrable Securities without such holder's
consent.
5.2 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
5.3 Entire Agreement. This Agreement constitutes the full and
entire understanding and agreement between the parties with respect to the
subject hereof and it supersedes, merges, and renders void any and all prior
understandings and/or agreements, written or oral, with respect to such subject
matter.
5.4 Notices. All notices and other communications required or
permitted hereunder shall be in writing and shall be personally delivered,
mailed by certified or registered mail, postage prepaid, or delivered by
overnight delivery or express courier, addressed to the Holders at their
addresses shown on the records of the Company or, to the Company, at its
principal executive office, or at such other address as the Company or any
Holder shall hereafter furnish in writing. All notices that are mailed shall be
deemed delivered five (5) days after deposit in the United States mail.
5.5 Severability. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
-19-
<PAGE> 20
5.6 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one and the same instrument.
5.7 Attorney's Fees. If any legal action is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
5.8 SBIC Matters. Each Shareholder agrees to take whatever
action may be required in order to carry out the purposes and effects of those
certain side letter agreements between the Company and each of Chase Venture
Capital Associates, L.P., formerly known as Chemical Venture Capital Associates,
A California Limited Partnership, and Norwest Equity Partners V, A Minnesota
Limited Liability Partnership, in the forms attached to the Series C Agreement
as Exhibits D and E; provided that no Shareholder shall be required to take any
action if it would have a material and adverse effect on such Shareholder.
5.9 Confidentiality. The Company and the Shareholders shall
not use Intel Corporation's ("Intel") or its affiliates' names or refer to Intel
or its affiliates directly or indirectly in connection with Intel's or its
affiliates' relationship with the Company in an advertisement, news release or
professional or trade publication, or in any other manner, unless otherwise
required by law, regulation, executive order, order or decree of any court or
governmental authority or with Intel's prior written consent. The Company and
the Shareholders agree that there will be no press release or other public
statement issued by either party relating to this Agreement, the Series C
Agreement, the Co-Sale Agreement or any other agreement entered into between the
Company and Intel or the transactions contemplated hereby or thereby unless
required by law. If the Company or any Shareholder determines that it is
required by law to file this Agreement or any such other agreements with the
SEC, it shall, a reasonable time before making any such filing, consult with
Intel regarding such filing and, if Intel reasonably requests, shall file with
the SEC a request seeking confidential treatment for such portions of those
agreements as may be reasonably requested by Intel.
-20-
<PAGE> 21
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
3DFX INTERACTIVE, INC.
By:______________________________________
Title:___________________________________
PURCHASERS:
_________________________________________
[print name of Purchaser]
By:______________________________________
By:______________________________________
By:______________________________________
Title:___________________________________
Investors' Rights Agreement
Signature Page -21-
<PAGE> 22
INVESTORS:
_______________________________________
[print name of Investor]
By:____________________________________
By:____________________________________
By:____________________________________
Title:_________________________________
Investors' Rights Agreement
Signature Page -22-
<PAGE> 23
Schedule A
Investors Holding a Majority of the Registrable Securities under the Prior
Agreement.
U.S. Venture Partners IV, L.P.
Second Ventures II, L.P.
USVP Entrepreneur Partners II, L.P.
Venrock Associates II, L.P.
Venrock Associates
Norwest Equity Partners V
Chase Venture Capital Associates, L.P.,
(formerly known as Chemical Venture Capital Associates)
Other Holders of Registrable Securities under the Prior Agreement
Charter Ventures II, L.P.
Gordon Campbell
Frank Madren
Gary Martin
Darryl Foster
Jon H. Beedle & Sandra L. Beedle Family Trust DTD 6/12/91
John Montgomery
Richard Christopher
Stephanie C. Dorris
Henri Jarrat
George E. Miller, Jr.
Stephen J. Zelencik
David J. Fisher
William A. Bennett & Karen L. Bennett Revocable Trust DTD 6-30-88
Leslie T. Harlan
Marc A. Friend
Adam C. Joseph
Phillip H. Ribbs
Stephen H. Ribbs and Sylvie Ribbs
Kurt P. Preising and Theresa O. Preising
Western Widgets C.N.C. Inc.
-23-
<PAGE> 24
Marver Living Trust DTD 12/24/92 James D. Marver, Trustee
GCA Investments 96
Mitsui & Co., Ltd.
Mitsui Comtek Corp.
Gregory Sollers
Bernard V. and Theresa V. Vonderschmitt Joint Declaration of Trust
S.C. Cubed Investment Partnership
Sobrato 1979 Revocable Trust
Eddie Kawamura
Brian J. Currie
Marc E. Jones
Marian Klein
Koji Morihiro
Richard Stubblefield
David E. Scott
Jatinder Makker
Henry O'Hara
George S. Taylor
John Payne
Jeffrey A. Thomas
Ivonne Valdes
Donald Bell
Russell Devore
Holders of Warrants exercisable into Registrable Securities
Lighthouse Capital Partners, L.P.
MMC/GATX Partnership No. 1
Taiwan Semiconductor Manufacturing Corporation
Silicon Valley Bank
Transferees of Registrable Securities no longer enjoying rights as Registrable
Securities under the Prior Agreement and this Agreement
Michael F. Hornig
Greg J. Moran
Leslie J. Hauser
Robert G. Pipkin
Investors' Rights Agreement
Signature Page
-24-
<PAGE> 25
Jeffrey P. Kellman
James K. O'Brien
John J. and Janice K. Dorris
Douglas A. Westley
Purchasers.
U.S. Venture Partners IV, L.P.
Second Ventures II, L.P.
USVP Entrepreneur Partners II, L.P.
Venrock Associates II, L.P.
Venrock Associates
Charter Ventures II L.P.
Norwest Equity Partners V
Chase Venture Capital Associates, L.P.
Intel Corporation
Donald Bell
E.L. Gelbach
Steve Zelencik
Michael Reddon
Henri Jarrat
Sherman Cunningham
Gary Martin
Stephanie Dorris
Gregory Hedman
GCA Investments 96
Eddie Kawamura
-25-
<PAGE> 26
AMENDMENT NO. 1 TO
INVESTORS' RIGHTS AGREEMENT
This Amendment No. 1 (the "Amendment") to the Investors'
Rights Agreement dated as of September 12, 1996 is made and entered into as of
November 25, 1996 by and among 3Dfx Interactive, Inc. (the "Company"), the
holders of a majority of the issued and outstanding Registrable Securities (as
defined in the Investors' Rights Agreement, the "Agreement") of the Company and
certain purchasers of the Series C Preferred Stock of the Company (individually,
a "Purchaser" and, collectively, the "Purchasers"). This Amendment is intended
to be an amendment to the Agreement, the purpose of which is to grant
registration rights to the Purchasers. This Amendment shall become effective as
to the Company and all Holders when signed by the Company and by Holders holding
a majority of the Registrable Securities then outstanding. All capitalized terms
used, but not defined, herein shall have the same meanings ascribed to them in
the Agreement. A copy of the Agreement is attached hereto as Exhibit A.
RECITALS
A. The Company will issue to the Purchasers up to 812,248
shares of Series C Preferred Stock pursuant to a Series C Preferred Stock
Purchase Agreement dated September 12, 1996, as amended as of on or about
November 25, 1996.
B. The Purchasers have required that certain registration
and other rights be granted to them with respect to the securities of the
Company to be acquired.
C. The Company wishes to obtain the consent of the Holders
of a majority of Registrable Securities currently outstanding to amend the
Agreement to provide registration rights the Purchasers with respect to up to
812,248 shares of Series C Preferred Stock and to waive certain rights to
maintain as set forth in Section 3 of the Agreement.
D. The Company and Holders of a majority of Registrable
Securities now outstanding wish to amend Recital A of the Agreement as set forth
below to permit the grant of such registration rights to the Purchasers and
waive certain rights to maintain as set forth in Section 3 of the Agreement.
1
<PAGE> 27
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises and covenants contained herein, the parties agree as follows:
1. Amendment of Recital A. Recital A of the Agreement is amended to read
in full as follows:
A. The Company will issue to the Purchasers an aggregate of up
to 3,333,333 shares of Series C Preferred Stock pursuant to a Series C Preferred
Stock Purchase Agreement dated as of September 12, 1996, as amended as of on or
about November 25, 1996 (the "Series C Agreement").
2. Waiver of Rights. The Company and the holders of a majority of
Registrable Securities hereby waive all rights pursuant to the provisions of
Section 3 of the Agreement with respect to the issuance and sale of shares of
Series C Preferred Stock to the Purchasers.
3. Effect of Amendment; Counterparts. Except as amended as set forth in
this Amendment, the Agreement shall continue in full force and effect. This
Amendment may be executed in counterparts, each of which shall be an original
and all of which taken together shall constitute one and the same instrument.
Notwithstanding anything in the Agreement to the contrary, each Purchaser shall
become a party to the Agreement upon full execution of this Amendment by the
Company, Holders of a majority of the Registrable Securities then outstanding
and such Purchaser.
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
3DFX INTERACTIVE, INC.
By:________________________
Title:_____________________
PURCHASER:
By:________________________
Title:_____________________
2
<PAGE> 28
HOLDERS:
U.S. Venture Partners IV, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By_________________________________________
Title______________________________________
Address: 2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Second Ventures II, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By_________________________________________
Title______________________________________
Address: 2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
USVP Entrepreneur Partners II, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By_________________________________________
Title______________________________________
Address: 2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT]
3
<PAGE> 29
Venrock Associates
By
-------------------------------------
Title General Partner
----------------------------------
Address: 755 Page Mill Road
Palo Alto, CA 94304
Venrock Associates II, L.P.
By
-------------------------------------
Title General Partner
----------------------------------
Address: 755 Page Mill Road
Palo Alto, CA 94304
Charter Ventures II, L.P.
By
-------------------------------------
Its
------------------------------------
By
-------------------------------------
Title
----------------------------------
Address: 525 University Avenue,
Suite 1500
Palo Alto, CA 94301
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT]
4
<PAGE> 30
Mitsui Comtek Corp.
By________________________________________
Title_____________________________________
Address 12980 Saratoga Avenue
Saratoga, CA 95070
Mitsui & Co., Ltd.
By________________________________________
Title_____________________________________
Address C/o Mitsui Comtek Corp.
12980 Saratoga Avenue
Saratoga, CA 95070
Norwest Equity Partners V,
a Minnesota Limited Liability Partnership
By: Itasca Partners V, L.L.P., General
Partner
By________________________________________
George Still, Jr., Partner
Address: 245 Lytton Ave., Suite 250,
Palo Alto, California 94301-1426
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT]
5
<PAGE> 31
Chase Venture Capital Associates, L.P.,
(formerly known as Chemical Venture
Capital Associates, A California Limited
Partnership)
By: Chase Venture Partners (formerly
known as Chemical Venture Partners), Its
General Partner
By_______________________________________
Title____________________________________
Address: 380 Madison Avenue,
12th Floor
New York, New York 10017
Intel Corporation
By_______________________________________
Title____________________________________
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052-8119
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT]
6
<PAGE> 32
SEGA Enterprises, Ltd.
By____________________________________
Title_________________________________
Address 2-12, Haneda 1-Chome
Ohta-Ku, Tokyo 144, Japan
Williams Bally/Midway
By____________________________________
Title_________________________________
Address 3401 North California Avenue
Chicago, IL 60618-5899
UMAX Data Systems
By____________________________________
Title_________________________________
Address 8F., 68, Sec. 3,
Nanking East Road
Taipei, Taiwan, R.O.C.
[SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT]
7
<PAGE> 33
EXHIBIT A
[Attach Investors' Rights Agreement]
8
<PAGE> 34
AMENDMENT NO. 2 TO
INVESTORS' RIGHTS AGREEMENT
This Amendment No. 2 (the "Amendment") to the Investors'
Rights Agreement dated as of September 12, 1996, as amended as of November 25,
1996, is made and entered into as of December 18, 1996 by and among 3Dfx
Interactive, Inc. (the "Company"), the holders of a majority of the issued and
outstanding Registrable Securities (as defined in the foregoing Investors'
Rights Agreement, the "Agreement") of the Company and certain purchasers of the
Series C Preferred Stock of the Company (individually, a "Purchaser" and,
collectively, the "Purchasers"). This Amendment is intended to be an amendment
to the Agreement, the purpose of which is to grant registration rights to the
Purchasers. This Amendment shall become effective as to the Company and all
Holders when signed by the Company and by Holders holding a majority of the
Registrable Securities then outstanding. All capitalized terms used, but not
defined, herein shall have the same meanings ascribed to them in the Agreement.
A copy of the Agreement, as amended, is attached hereto as Exhibit A.
RECITALS
A. The Company will issue to the Purchasers up to 161,948
shares of Series C Preferred Stock in a Third Closing (as defined in that
certain Series C Preferred Stock Purchase Agreement dated September 12, 1996, as
amended as of November 25, 1996 and on or about December 18, 1996, collectively,
the "Series C Agreement") pursuant to the Series C Agreement.
B. The Purchasers have required that certain registration
and other rights be granted to them with respect to the securities of the
Company to be acquired.
C. The Company wishes to obtain the consent of the Holders
of a majority of Registrable Securities currently outstanding to amend the
Agreement to provide registration rights to the Purchasers with respect to up to
161,948 shares of Series C Preferred Stock sold in the Third Closing and to
waive certain rights to maintain as set forth in Section 3 of the Agreement.
D. The Company and Holders of a majority of Registrable
Securities now outstanding wish to amend Recital A of the Agreement as set forth
below to permit the grant of such registration rights to the Purchasers and
waive certain rights to maintain as set forth in Section 3 of the Agreement.
1
<PAGE> 35
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the
mutual promises and covenants contained herein, the parties agree as follows:
1. Amendment of Recital A. Recital A of the Agreement is amended to read in
full as follows:
A. The Company will issue to the Purchasers an aggregate of up
to 3,333,333 shares of Series C Preferred Stock pursuant to a Series C Preferred
Stock Purchase Agreement dated as of September 12, 1996, as amended as of
November 25, 1996 and on or about December 18, 1996 (the "Series C Agreement").
2. Waiver of Rights. The Company and the holders of a majority of Registrable
Securities hereby waive all rights pursuant to the provisions of Section 3 of
the Agreement with respect to (i) the issuance by the Company to Simon Szeto, a
sole proprietorship doing business as SYMTEK, for $1.00 of a warrant to purchase
40,000 shares of Series C Preferred Stock at $3.75 per share (the "SYMTEK
Warrant"), (ii) the issuance by the Company to Stanford University for $1.00 of
a warrant to purchase 10,000 shares of Series C Preferred Stock at $3.75 per
share (the "Stanford Warrant") and (iii) the issuance by the Company of up to
161,948 shares of Series C Preferred Stock at $3.75 per share in a Third Closing
pursuant to the Series C Agreement.
3. Effect of Amendment; Counterparts. Except as amended as set forth in this
Amendment, the Agreement shall continue in full force and effect. This Amendment
may be executed in counterparts, each of which shall be an original and all of
which taken together shall constitute one and the same instrument.
Notwithstanding anything in the Agreement to the contrary, each Purchaser shall
become a party to the Agreement upon full execution of this Amendment by the
Company, Holders of a majority of the Registrable Securities then outstanding
and such Purchaser.
2
<PAGE> 36
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date and year first above written.
3DFX INTERACTIVE, INC.
By:________________________
Title:_____________________
PURCHASER:
By:________________________
Title:_____________________
[SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT]
3
<PAGE> 37
HOLDERS:
U.S. Venture Partners IV, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By_________________________________________
Title______________________________________
Address: 2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
Second Ventures II, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By_________________________________________
Title______________________________________
Address: 2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
USVP Entrepreneur Partners II, L.P.
By Presidio Management Group IV, L.P.
Its General Partner
By_________________________________________
Title______________________________________
Address: 2180 Sand Hill Road
Suite 300
Menlo Park, CA 94025
[SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT]
4
<PAGE> 38
Venrock Associates
By
--------------------------------
Title General Partner
-----------------------------
Address: 755 Page Mill Road
Palo Alto, CA 94304
Venrock Associates II, L.P.
By
--------------------------------
Title General Partner
-----------------------------
Address: 755 Page Mill Road
Palo Alto, CA 94304
[SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT]
5
<PAGE> 39
Norwest Equity Partners V,
a Minnesota Limited Liability Partnership
By: Itasca Partners V, L.L.P., General
Partner
By________________________________________
George Still, Jr., Partner
Address: 245 Lytton Ave., Suite 250,
Palo Alto, California 94301-1426
Chase Venture Capital Associates, L.P.,
(formerly known as Chemical Venture
Capital Associates, A California Limited
Partnership)
By: Chase Venture Partners (formerly
known as Chemical Venture Partners),
Its General Partner
By________________________________________
Title_____________________________________
Address: 380 Madison Ave., 12th Floor
New York, New York 10017
Intel Corporation
By________________________________________
Title_____________________________________
Address: 2200 Mission College Blvd.
Santa Clara, CA 95052-8119
[SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT]
6
<PAGE> 40
EXHIBIT A
[Attach Investors' Rights Agreement]
7
<PAGE> 41
AMENDMENT NO. 3 TO
INVESTORS' RIGHTS AGREEMENT
This Amendment No. 3 (the "Amendment") to the Investors' Rights
Agreement dated as of September 12, 1996, as amended as of November 25, 1996,
as amended December 18, 1996, is made and entered into as of March 27, 1997 by
and among 3Dfx Interactive, Inc. (the "Company"), the holders of a majority of
the outstanding Registrable Securities (as defined in the foregoing Investors'
Rights Agreement, the "Agreement") of the Company. This Amendment is intended
to be an amendment to the Agreement to amend the lock-up provisions of the
Agreement. This Amendment shall become effective as to the Company and all
Holders as of the date hereof. All capitalized terms used, but not defined,
herein shall have the same meanings ascribed to them in the Agreement.
RECITALS
A. The Company is currently contemplating the registration of
shares of its Common Stock for sale to the public.
B. In connection with such registration, the underwriters have
advised the Company that current market conditions require the lock up of
shares held by the Holders be extended until the later of (i) 180 days after
the effective date of the Registration Statement or (ii) the open of market on
the third trading day following the date of public disclosure of the Company's
financial results for the fiscal year ending December 31, 1997, rather than 120
days.
C. The Company wishes to obtain the consent of the Holders of a
majority of Registrable Securities currently outstanding to amend Section 1.8
of the Agreement with respect to such lock-up provisions.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises and covenants contained herein, the parties agree as follows:
1. Section 1.8 of the Agreement is hereby amended to read in its
entirety as follows, with the changes thereto underlined:
"1.8 Lock-Up Provision. Upon receipt of a written
request by the Company or by its underwriters, the Holders
shall not sell, sell short, grant an option to buy, or
otherwise dispose of shares of the Company's Common Stock or
other securities (except for any such shares included in the
registration) until the later of (i) one hundred and eighty
(180) days after the effective date of the Registration
Statement or (ii) the open of market on the third trading day
following the date of public disclosure of the Company's
financial results for the fiscal year ending December 31, 1997
(the "Lock-Up Period") (other than any transfer of shares as a
bona fide gift or gifts, or by will or intestacy or, if the
Holder is a partnership or corporation, any distribution by
such partnership or corporation to its
<PAGE> 42
partners or shareholders provided that the distributees thereof agree in
writing to be bound by the terms of this Lock-Up Agreement, or with the prior
written consent of the managing underwriter); provided, however, that such
Holder shall have no obligation to enter into the agreement described in this
Section unless all executive officers and directors of the Company and all
other Holders and holders of other registration rights from the Company enter
into similar agreements. The Company may impose stop-transfer instructions
with respect to the shares (or securities) subject to the foregoing restriction
until the end of said Lock-Up Period."
2. Except as amended as set forth in this Amendment, the
Agreement shall continue in full force and effect. This Amendment may be
executed in counterparts, each of which shall be an original and all of which
taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
3Dfx INTERACTIVE, INC.
By: ____________________________________
Title: _________________________________
________________________________________
Greg Ballard
JON H. BEEDLE & SANDRA L. BEEDLE
FAMILY TRUST DATED 6/12/91
By: ____________________________________
BELL FAMILY TRUST
By: ____________________________________
-2-
<PAGE> 43
Donald Bell
WILLIAM A. BENNETT & KAREN L.
BENNETT REVOCABLE TRUST DTD 6/30/88
By: ____________________________________
________________________________________
Lise J. Buyer
________________________________________
Gordon Campbell
GENE PEARCE CARTER AND PATRICIA
JO-ANN CARTER, TRUSTEES, CARTER
FAMILY TRUST
By: ____________________________________
By: ____________________________________
CHARTER VENTURES II. L.P.
By: ____________________________________
Title: _________________________________
-3-
<PAGE> 44
CHASE VENTURE CAPITAL ASSOCIATES,
L.P.
By: ____________________________________
Title: _________________________________
CHEMICAL VENTURE CAPITAL
ASSOCIATES
By: ____________________________________
Title: _________________________________
________________________________________
Richard E. Christopher
________________________________________
Sherman Cunningham
________________________________________
Brian J. Currie
________________________________________
Russell Devore
________________________________________
John J. and Janice K. Dorris
-4-
<PAGE> 45
_______________________________________
Stephanie C. Dorris
_______________________________________
David J. Fisher
_______________________________________
Darryl Foster
_______________________________________
Marc A. Friend
EDWARD L. GELBACH, TRUSTEE OF THE
EDWARD L. GELBACH 1987 TRUST
By: ___________________________________
Title: ________________________________
_______________________________________
Leslie T. Harlan
_______________________________________
Leslie J. Hauser
_______________________________________
Greogry J. Hedman
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<PAGE> 46
_______________________________________
Michael F. Hornig
INTEL CORPORATION
By: ___________________________________
Title: ________________________________
_______________________________________
Henri Jarrat
STEPHEN C. JOHNSON & MARTHA W.
JOHNSON, TRUSTEES, JOHNSON FAMILY
TRUST
By: ___________________________________
_______________________________________
Marc E. Jones
_______________________________________
Adam C. Joseph
_______________________________________
Eddie Kawamura
_______________________________________
Jeffrey P. Kellman
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<PAGE> 47
_______________________________________
Marian Klein
_______________________________________
Frank S. Madren
_______________________________________
Jatinder Makker
_______________________________________
Gary F. Martin
MARVER LIVING TRUST DTD 12/24/92,
JAMES D. MARVER, TRUSTEE
By: ___________________________________
_______________________________________
George E. Miller, Jr.
_______________________________________
Greg J. Moran
_______________________________________
Koji Morihiro
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<PAGE> 48
NORWEST EQUITY PARTNERS V
By _____________________________________
Title __________________________________
________________________________________
James K. O'Brien
________________________________________
Henry O'Hara
________________________________________
John Payne
________________________________________
Robert G. Pipkin
________________________________________
P. Kurt & Theresa O. Preising
________________________________________
Lawrence F. Probst III
________________________________________
Stephen M. Race
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<PAGE> 49
________________________________________
Michael D. Redden
________________________________________
Phillip H. Ribbs
________________________________________
Stephen H. & Sylvie Ribbs
S.C. CUBED INVESTMENT PARTNERSHIP
By _____________________________________
Title __________________________________
________________________________________
Jan B. Schwartz
________________________________________
David E. Scott
SEGA ENTERPRISES, LTD.
By _____________________________________
Title __________________________________
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<PAGE> 50
THE SOBRATO 1979 REVOCABLE TRUST
By _____________________________________
Title __________________________________
________________________________________
Gregory Sollers
________________________________________
Lauree A. Stangel
________________________________________
Bernard Stolar
________________________________________
Dolores Stone
________________________________________
Richard Stubblefield
________________________________________
George S. Taylor
________________________________________
Jeffrey A. Thomas
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<PAGE> 51
________________________________________
Dennis Thorley
________________________________________
John J. Tretton III
UMAX DATA SYSTEMS, INC.
By _____________________________________
Title __________________________________
________________________________________
Ivonne Valdes
VENROCK ASSOCIATES
By _____________________________________
Title __________________________________
VENROCK ASSOCIATES II, L.P.
By _____________________________________
Title __________________________________
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<PAGE> 52
BERNARD V. AND THERESA V.
VONDERSCMITT JOINT DECLARATION OF
TRUST DATED 01/04/96
By _____________________________________
Title __________________________________
WESTERN WIDGETS C.N.C. INC.
By _____________________________________
Title __________________________________
________________________________________
Douglas A. Westley
________________________________________
Stephen J. Zelencik
MITSUI & CO., LTD., MITSUI COMTEK
CORPORATION
By _____________________________________
Title __________________________________
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<PAGE> 53
________________________________________
John Montgomery
________________________________________
Linda P. Montgomery
GCA INVESTMENTS 96
By _____________________________________
Title __________________________________
USVP ENTREPRENUER PARTNERS II, L.P.
SECOND VENTURES II, L.P.
U.S. VENTURE PARTNERS IV, L.P.
By _____________________________________
Title __________________________________
LIGHTHOUSE CAPITAL PARTNERS, L.P.
By _____________________________________
Title __________________________________
MMC/GATX PARTNERSHIP NO. 1
By _____________________________________
Title __________________________________
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<PAGE> 54
SILICON VALLEY BANK
By _____________________________________
Title __________________________________
TAIWAN SEMICONDUCTOR
MANUFACTURING COMPANY, LTD.
By _____________________________________
Title __________________________________
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<PAGE> 1
EXHIBIT 10.8
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made as of the __th day of _______, 199_, by
and between 3Dfx Interactive Inc., a California corporation (the "Company"), and
____________ (the "Purchaser").
In consideration of the mutual covenants and representations
herein set forth, the Company and Purchaser agree as follows:
1. Purchase and Sale of Stock.
1.1 Purchase of Stock. Subject to the terms and conditions
of this Agreement, the Company hereby agrees to sell to Purchaser and Purchaser
agrees to purchase from the Company at the Closing an aggregate of _______
shares of the Company's Common Stock (the "Stock") at a price of $.__ per share,
for an aggregate purchase price of $________. The shares of Stock shall be
purchased by delivery of Purchaser's full recourse promissory note in the
principal amount of $________ in substantially the form of Exhibit A attached
hereto (the "Note").
1.2 Security for Note. As security for the payment of the
Note and any renewal or modification thereof, Purchaser hereby pledges and
grants to the Company a security interest in all of the Stock pursuant to a
Security Agreement in substantially the form attached hereto as Exhibit B (the
"Security Agreement"). As part of this pledge, Purchaser will sign and deliver
to the Secretary of the Company ("Escrow Agent") a Stock Assignment duly
endorsed (with date and number of shares blank) in the form attached hereto as
Exhibit C (the "Assignment"), together with the certificate or certificates
evidencing the Stock; the Assignment and the certificate or certificates
evidencing the Stock are to be held in escrow by the Escrow Agent pursuant to an
Escrow Agreement in substantially the form attached hereto as Exhibit D (the
"Escrow Agreement-) for use if, as and when required pursuant to the Security
Agreement.
2. Closing. The purchase and sale of the Stock shall occur
at a Closing to be held on the date hereof (the "Closing Date"). The Closing
will take place at the principal office of the Company or at such other place as
shall be designated by the Company. At the Closing, Purchaser shall deliver to
the Company the Note and the Company will issue the Stock registered in the name
of Purchaser. In addition, the Purchaser shall sign and deliver the Security
Agreement, the Assignment and the Escrow Agreement.
<PAGE> 2
3. Purchase Option.
3.1 Grant of Purchase Option. Beginning on the Closing
Date, the Stock shall be subject to the right and option of the Company to
repurchase the Stock (the "Purchase Option") as set forth in this Section 3. In
the event Purchaser's employment by or consulting relationship with the Company
(including a parent or subsidiary of the Company) shall cease for any reason, or
no reason, with or without cause, including death, disability or involuntary
termination ("Termination"), the Company shall have the right, as provided in
Section 3.2 hereof, to purchase from Purchaser or his personal representative,
as the case may be, at the purchase price of $____ per share (the "Option
Price"), all of the Stock that has not been released from the Purchase Option in
accordance with the following schedule:
(a) On __________, 199_, one-eighth (1/8th) of the
shares of the Stock. (______ shares) shall be released from
the Purchase Option;
(b) At the end of each full month elapsing after
__________, 199_, an additional one forty-second (1/42nd) of
the remaining _______ shares of Stock (______ shares) will be
released from the Purchase Option.
3.2 Exercise of Purchase Option. Within ninety (90) days
following Termination, the Company shall notify Purchaser by written notice
delivered or mailed as provided in Section 9.3 as to whether it wishes to
purchase the Stock pursuant to exercise of the Purchase Option. If the Company
(or its assignees) elects to purchase the Stock hereunder, it shall specify a
date (which shall not be later than thirty (30) days from the date of the above
described notice) and a place for the closing of the transaction. At such
closing, the Company (or its assignees) shall tender payment for the Stock and
the certificates representing the Stock so purchased shall be canceled.
Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the
Company to transfer the Stock as to which the Purchase Option has been exercised
from Purchaser to the Company (or its assignees). The Option Price may be
payable, at the option of the Company, in cancellation of all or a portion of
any outstanding indebtedness of Purchaser to the Company, or by check, or both.
3.3 No Limit on Rights. Nothing in this Agreement shall
affect in any manner whatsoever the right or power of the Company, or a parent
or subsidiary of the Company, to terminate Purchaser's employment or consulting
relationship, for any reason, with or without cause, subject to Section 3.4
below.
3.4 Escrow of Stock. Purchaser agrees at the Closing
hereunder, to deliver to and deposit with the Escrow Agent named in the Escrow
Agreement of even date and delivered herewith, the certificate or certificates
evidencing the Stock and the
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<PAGE> 3
duly executed Assignments. Such documents are to be held by the Escrow Agent
until delivered pursuant to the terms of such Escrow Agreement. Shares of the
Stock which are subject to the Purchase Option shall not be transferable by the
Purchaser.
4. Restriction on Transfer: Rights of First Refusal.
4.1 Rights of First Refusal. Before any shares of Stock
registered in the name of Purchaser may be sold or transferred (including
transfer by operation of law other than as excepted pursuant to Section 4.2
hereof), Purchaser must first obtain the written consent of the Company. If such
written consent is not given, then the Company or, if the Company desires, the
other shareholders of the Company, shall have a right of first refusal to
purchase such shares for the same price and on the same terms and conditions
offered to such prospective purchaser, in accordance with the procedures set
forth below (the "Rights of First Refusal").
If the proposed price per share is to be other than in cash,
then an equivalent cash value shall be determined in good faith by the Board of
Directors of the Company. If a transfer other than a voluntary sale is proposed
to be made, then the price per share for purposes of the Rights of First Refusal
shall be determined by the mutual agreement of Purchaser and the Company or, if
no agreement can be reached, the price shall be the fair market value of such
shares, as determined in good faith by the Company's Board of Directors.
Prior to any sale or transfer of any shares of the Stock,
Purchaser, or the legal representative of Purchaser, shall promptly deliver to
the Secretary of the Company a written notice of the price and other terms and
conditions of the offer by the prospective purchaser, the identity of the
prospective purchaser, and, in the case of a sale, Purchaser's bona fide
intention to sell or dispose of such shares together with a copy of a written
agreement between Purchaser and the prospective purchaser conditioned only upon
the satisfaction of the procedures set forth in these Rights of First Refusal.
If the Company does not give its written consent to such transfer, then the
Company (or its assignees) shall, for thirty (30) days after such notice from
Purchaser, have the right under this Section 4 to purchase some or all such
shares, as set forth herein. After the expiration of the Rights of First
Refusal, or upon the written consent of the Company to the proposed transfer,
Purchaser may sell or transfer the shares specified in the notice to the
Company, on the terms and conditions specified in such notice; provided,
however, that the sale must be consummated within three (3) months after the
date of the notice and that all shares sold or transferred shall remain subject
to the provisions and restrictions of this Agreement and shall carry a legend to
that effect.
If the Rights of First Refusal under this Section 4 are not
exercised but Purchaser fails to consummate such sale on the same terms and
conditions as set forth
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<PAGE> 4
in the notice to the Company within three (3) months after the date of the
notice, then such Rights of First Refusal shall be reinstated.
4.2 Termination: Exceptions. The provisions of this Section
4 shall terminate on the closing date of an underwritten public offering of
Common Stock of the Company. The provisions of Section 4.1 shall not apply to a
transfer of any shares of Stock by Purchaser, either during his lifetime or on
death to his ancestors, descendants or spouse, or any custodian or trustee for
the account of Purchaser or Purchaser's ancestors, descendants or spouse;
provided, in each such case a transferee shall receive and hold such shares
subject to the provisions and restrictions on transfer of this Agreement and
there shall be no further transfer of such shares except in accordance herewith.
4.3 Effect of Transfers Not in Compliance. The Company
shall not be required to transfer on its books any shares of Stock of the
Company which shall have been sold or transferred in violation of any of the
provisions set forth in this Agreement or the Security Agreement, or to treat as
owner of such shares, or to accord the right to vote as such owner or to pay
dividends to, any transferee to whom such shares shall have been so transferred.
5. Stock Splits. etc. If, from time to time during the
term of the Purchase Option or Rights of First Refusal as provided in Sections 3
and 4 hereof, there is any stock dividend, stock split or other change in the
character or amount of any of the outstanding securities of the Company or if
there is any consolidation, merger or sale of all, or substantially all, of the
assets of the Company, then in such event any and all new, substituted or
additional securities to which Purchaser is entitled by reason of his ownership
of Stock shall be immediately subject to the Purchase Option and Rights of First
Refusal and be included in the term "Stock" for all purposes of this Agreement
with the same force and effect as the shares of Stock presently subject to this
Agreement.
6. Legends. All certificates representing any shares of
Stock of the Company subject to the provisions of this Agreement shall have
endorsed thereon substantially the following legends:
(a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO CERTAIN RESTRICTIONS UPON AND OBLIGATIONS WITH
RESPECT TO TRANSFER AND RIGHTS OF REPURCHASE AND RIGHTS OF
FIRST REFUSAL AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY
AND THE ORIGINAL REGISTERED HOLDER, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL OFFICE OF THE COMPANY."
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<PAGE> 5
(b) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT
SUCH REGISTRATION IS NOT REQUIRED."
(c) Any legend required under applicable state
securities laws.
7. Investment Intent: Covenant. In purchasing the Stock,
Purchaser represents to the Company as follows:
(a) Purchaser has had an opportunity to discuss the
business prospects and business plan of the Company with the officers and
directors of the Company. Purchaser has a preexisting personal or business
relationship with the Company or one of its officers, directors or controlling
persons and/or by reason of his business or financial experience he has the
capacity to protect his own interests in connection with the transactions
contemplated by this Agreement. Purchaser further acknowledges that the Stock is
highly speculative and involves a high degree of risk, and represents and
warrants that he is able, without impairing his financial condition, to hold the
Stock for an indefinite period of time and suffer a complete loss of his
investment therein.
(b) Purchaser is acquiring the Stock for investment
and not with a view to or for sale in connection with any distribution of said
Stock or with any present intention of distributing or selling said Stock and he
does not presently have reason to anticipate any change in circumstances or any
particular occasion or event which would cause him to sell said Stock. Purchaser
understands that the Stock has not been registered under the Securities Act of
1933, as amended, (the "Act") and may not be sold or otherwise disposed of
except pursuant to an effective Registration Statement filed under the Act or
pursuant to an exemption from the registration requirements of such Act.
Purchaser acknowledges that the Company is under no obligation to register the
Stock under the Act on his behalf. Purchaser represents and warrants that he
understands that the Stock constitutes restricted securities within the meaning
of Rule 144 promulgated under the Act; that the exemption from registration
under Rule 144 will not be available in any event for at least two years from
the date of purchase and payment for the Stock, and even then will not be
available unless the terms and conditions of Rule 144 are complied with and will
be subject to the limitations on amount set forth therein.
(c) Without limiting the representations and
warranties set forth above, Purchaser agrees he will not make any transfer of
all or any part of the Stock
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<PAGE> 6
unless (i) there is a Registration Statement under the Act in effect with
respect to such transfer and such transfer is made in accordance therewith, or
(ii) Purchaser has furnished the Company an opinion of counsel satisfactory to
the Company and its counsel to the effect that such transfer will not require
registration under the Act. Purchaser agrees that, prior to the closing of the
Company's initial public offering registered under the Act, he will not transfer
any of such securities in a public offering without the Company's prior consent,
even if he is otherwise permitted to transfer them pursuant to Rule 144(k) under
the Act.
8. Lock-up Agreement. In the event the Company sells any of
its securities in an underwritten initial public offering pursuant to a
registration filed pursuant to the Act, and in connection with each registered
offering under the Act within three (3) years of such initial offering,
Purchaser agrees (but only if each officer and director of the Company also
agrees), upon request from the Company or the managing underwriter of such
initial or other public offering, not to sell, make any short sale of, loan,
grant any option for the purchase of, or otherwise dispose of, any of the Stock,
without the prior written consent of the Company or such underwriter, as the
case may be, for such period of time (not to exceed one hundred twenty (120)
days) from the effective date of such registration as the Company or the
underwriter may specify. Purchaser further agrees that the Company may place
stop-transfer notations with the transfer agent of the Stock to enforce this
provision.
9. Miscellaneous.
9.1 Further Assurances. The parties agree to execute such
further instruments and to take such further action as may reasonably be
necessary to carry out the intent of this Agreement, including, if applicable,
execution of the Consent of Spouse attached hereto as Exhibit E.
9.2 Entire Agreement. This Agreement, including any exhibits,
is the entire agreement of the parties with respect to the subject matter hereof
and supersedes all prior oral and written understandings of the parties.
9.3 Notices. Any notice required or permitted hereunder shall
be given in writing and shall be deemed effectively given upon personal delivery
or upon deposit in the United States Post Office, by registered or certified
mail with postage and fees prepaid, addressed to Purchaser at his address shown
on the Company's employment records and to the Company at the address of its
principal corporate offices (attention: President) or at such other address as
such party may designate by ten (10) days' advance written notice to the other
party hereto.
9.4 Assignment of Rights: Binding Upon Successors. The Company
may assign its rights and delegate its duties under Sections 3 and/or 4 hereof.
This
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<PAGE> 7
Agreement shall inure to the benefit of the successors and assigns of the
Company and, subject to the restrictions on transfer herein set forth, be
binding upon Purchaser, his heirs, executors, administrators, successors and
assigns.
9.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California as applied to
contracts between California residents to be wholly performed within the State
of California.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
3DFX INTERACTIVE, INC.
a California corporation
By:______________________________________
Title:___________________________________
PURCHASER
_________________________________________
[Name of Purchaser]
Address [Address of Purchaser]
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<PAGE> 8
EXHIBIT A
FULL RECOURSE PROMISSORY NOTE
$________ Sunnyvale, California
___________, 199_
For value received, the undersigned (the "Maker") promises to pay to
3Dfx Interactive, Inc., a California corporation (the "Company"), or order, at
its principal office, the principal sum of ____________ Dollars ($________)
without interest. Said principal shall be due as follows:
This Note shall be due and payable on __________, 199_. Notwithstanding
the foregoing, this Note shall be immediately due and payable upon the earlier
of the following.: (a) any termination of the employment or association between
the undersigned and the Company or (b) the merger of the Company with or into
another corporation, in which the Company is not the surviving corporation, or
the sale of all or substantially all of the assets of the Company.
All payments are to be made in lawful money of the United States of
America. The privilege is reserved to prepay any portion of the Note at any
time.
Should suit be commenced to collect this Note or any portion thereof,
such sum as the Court may deem reasonable shall be added hereto as attorneys'
fees. The Maker waives presentment for payment, protest, notice of protest, and
notice of non-payment of this Note.
This Note is secured by a pledge of certain shares of the Company's
Common Stock pursuant to a Security Agreement between the Company and the Maker
of even date herewith, and is subject to all the provisions thereof. This Note
is also subject to the terms of a Restricted Stock Purchase Agreement between
the Company and the Maker of even date herewith.
The holder of this Note shall have full recourse against the Maker, and
shall not be required to proceed against the collateral security pledged to
secure this Note in the event of default.
______________________________
[Name of Purchaser]
<PAGE> 9
EXHIBIT B
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made as of the __th day of _______,
199_ between 3Dfx Interactive, Inc., a California corporation ("Pledgee" or the
"Company"), and ____________ ("Pledgor").
Recitals
Pledgor purchased an aggregate of _______ shares of Pledgee's
Common Stock (the "Stock") under a Restricted Stock Purchase Agreement dated
_______, 199_ (the "Purchase Agreement"), between Pledgor and Pledgee. As
payment for the Stock, Pledgor delivered a promissory note (the "Note") in the
total principal amount of _________. The Note and the obligations hereunder are
as set forth in Exhibit A to the Purchase Agreement.
NOW THEREFORE, it is agreed as follows:
1. Creation and Description of Security Interest. In order to
secure Pledgor's obligation to pay the Note in full, Pledgor, pursuant to the
Commercial Code of the State of California, hereby pledges all of the Stock
(herein sometimes referred to as the "Collateral") represented by certificate
number _______.
The pledged Stock (together with an executed blank stock
assignment for use in transferring all or a portion of the Stock to Pledgee if,
as and when required pursuant to this Security Agreement) shall be delivered to
the Secretary of Pledgee, or such other person designated by the Company
("Escrow Agent") to be held pursuant to an Escrow Agreement in the form of
Exhibit D to the Purchase Agreement (the "Escrow Agreement") as security for the
repayment of the Note, and any extensions or renewals thereof.
2. Pledgor's Representations and Covenants. To induce Pledgee
to enter into this Security Agreement, Pledgor represents and covenants to
Pledgee, its successors and assigns, as follows:
(a) Payment of Indebtedness. Pledgor will pay the principal
sum of the Note secured hereby, together with interest thereon, at the time and
in the manner provided in the Note.
(b) Encumbrances. The Stock is not subject to any
encumbrances, defenses and liens other than the security interest granted
hereunder,
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<PAGE> 10
and Pledgor will not further encumber the Stock in any manner without the prior
written consent of Pledgee.
(c) Margin Regulations. In the event that Pledgee's Common
Stock becomes margin-listed by the Federal Reserve Board subsequent to the
execution of this Security Agreement, and Pledgee is classified as a "lender"
within the meaning of the regulations under Part 207 of Title 12 of the Code of
Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee
in making any amendment to the Note or providing any additional collateral as
may be necessary to comply with such regulations.
3. Voting Rights. During the term of this pledge and so long
as all payments of principal and interest are made as they become due under the
terms of the Note, Pledgor shall have the right to vote all of the Stock pledged
hereunder.
4. Stock Adjustments. In the event that during the term of
the pledge any stock dividend, reclassification, readjustment or other changes
declared or made in the capital structure of Pledgee, all new, substituted and
additional shares or other securities issued by reason of any such change shall
be delivered to and held by the Pledgee and Escrow Agent under the terms of this
Security Agreement and the Escrow Agreement in the same manner as the Stock
originally pledged hereunder. In the event of substitution of such securities,
Pledgor and Pledgee shall cooperate and execute such documents as are reasonable
so as to provide for the substitution of such Collateral and, upon such
substitution, references to "Stock" in this Security Agreement shall include the
substituted shares of capital stock of Pledgor as a result thereof.
5. Warrants and Rights. In the event that, during the term
of this pledge, subscription warrants or other rights or options shall be issued
in connection with the pledged Stock, such rights, warrants and options shall be
the property of Pledgor and, if exercised by Pledgor, all new stock or other
securities so acquired by Pledgor as it relates to the pledged Stock then held
by Escrow Agent shall be immediately delivered to Escrow Agent, to be held under
the terms of this Security Agreement in the same manner as the Stock pledged.
6. Default. Pledgor shall be deemed to be in default of the
Note and of this Security Agreement in the event:
(a) Payment of principal or interest on the Note shall be
delinquent for a period of ten (10) days or more; or
(b) Pledgor fails to perform any of the covenants set
forth in the Purchase Agreement or contained in this Security Agreement for a
period of ten (10) days after written notice thereof from Pledgee.
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<PAGE> 11
In the case of an event of default, as set forth above,
Pledgee shall have the right to accelerate payment of the Note upon notice to
Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under
the California Commercial Code.
7. Withdrawal or Substitution of Collateral. Until the
Note has been paid in full, Pledgor shall not sell, withdraw, pledge, substitute
or otherwise dispose of all or any part of the Collateral without the prior
written consent of Pledgee.
8. Term. The within pledge of Stock shall continue until
the payment of all indebtedness secured hereby, at which time the remaining
pledged Stock shall be promptly delivered to Pledgor, subject to the terms of
any other agreement between Pledgor and Pledgee.
9. Insolvency. Pledgor agrees that if a bankruptcy or
insolvency proceeding is instituted by or against him, or if a receiver is
appointed for the property of Pledgor, or if Pledgor makes an assignment for the
benefit of creditors, the entire amount unpaid on the Note shall become
immediately due and payable, and Pledgee may proceed as provided in the case of
default.
10. Escrow Agent Liability. The liability of the Escrow
Agent shall be limited as provided in the Escrow Agreement.
11. Miscellaneous.
(a) Invalidity of Particular Provisions. Pledgor and
Pledgee agree that the enforceability or invalidity of any provision or
provisions of this Security Agreement shall not render any other provision or
provisions herein contained unenforceable or invalid.
(b) Successors or Assigns. Pledgor and Pledgee agree
that all of the terms of this Security Agreement shall be binding on their
respective successors and assigns, and that the term "Pledgor" and the term
"Pledgee" as used herein shall be deemed to include, for all purposes, the
respective designees, successors, assigns, heirs, executors and administrators.
(c) Governing Law. This Agreement shall be governed by
and construed in accordance with the laws of the State of California as applied
to contracts between California residents to be wholly performed within the
State of California.
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<PAGE> 12
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
"PLEDGEE"
3DFX INTERACTIVE, INC.
a California corporation
By:_________________________________________
Title:______________________________________
PURCHASER
____________________________________________
[Name of Purchaser]
Address [Address of Purchaser]
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<PAGE> 13
EXHIBIT D
ESCROW AGREEMENT
_______________, 199_
Secretary
3Dfx Interactive, Inc.
4435 Fortran Drive
San Jose, California 95134
Dear Sir or Madam:
As Escrow Agent for both 3Dfx Interactive, Inc., a California
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement, dated as of _______, 199_ (the "Agreement"), to which
a copy of this Escrow Agreement is attached as Exhibit D, in accordance with the
following instructions:
1. Pledge of Stock. Purchaser has pledged an aggregate of
____________ shares of the Company's Common Stock (the "Stock") to the Company
pursuant to a Security Agreement in the form of Exhibit B to the Agreement
between Purchaser and the Company of even date herewith (the "Security
Agreement") as security for the performance of Purchaser's obligations to the
Company under a note (the "Note") delivered to the Company in connection with
the purchase of the Stock. This pledge shall continue until the Note has been
paid in full.
2. Delivery Upon Default. If an Event of Default shall
occur under the Security Agreement or the Note, you shall, within ten (10) days
of receipt of a written request of an authorized officer of the Company given to
you and Purchaser, deliver the certificate evidencing the Stock and the stock
assignments to the Company to enable the Company to exercise its rights as a
secured party under the Commercial Code of the State of California.
3. Exercise of Purchase Option. In the event the Company
and/or any assignee of the Company (referred to collectively for convenience
herein as the "Company") exercises the Purchase Option set forth in the
Agreement, the Company shall give to Purchaser and you a written notice
specifying the number of shares of stock to be purchased, the purchase price,
and the time for a closing hereunder at the principal office of the Company.
Purchaser and the Company hereby irrevocably
<PAGE> 14
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the number of
shares being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company against the
simultaneous delivery to you of the purchase price (by check or by cancellation
of any debt owed by Purchaser to the Company) for the number of shares of stock
being purchased pursuant to the exercise of the Purchase Option.
4. Deposit of Certificates. Purchaser irrevocably authorizes
the Company to deposit with you any certificates evidencing the Stock to be held
by you hereunder and any additions and substitutions to said shares as defined
in the Agreement and the Security Agreement. Purchaser does hereby irrevocably
constitute and appoint you as his attorney-in-fact and agent for the term of
this escrow to execute with respect to such securities all documents necessary
or appropriate to make such securities negotiable and to complete any
transaction herein contemplated, including but not limited to the filing with
the Department of Corporations of the State of California of an Application for
Consent to Transfer Securities Subject to Legend or Escrow Condition Pursuant to
Section 25151 of the California Corporate Securities Law of 1968, if required.
Subject to the provisions of this Section 3, Purchaser shall exercise all rights
and privileges of a shareholder of the Company while the Stock is held by you.
5. Term. This escrow shall commence upon the date hereof and
shall terminate five (5) years and one month from the date hereof or earlier if
the Company shall give you notice that the Note has been paid in full and the
Shares are no longer subject to the Purchase Option. If at the time of
termination of this escrow you should have in your possession any documents,
securities, or other property belonging to Purchaser, you shall deliver all of
same to Purchaser and shall be discharged of all further obligations hereunder.
6. Provisions Applicable to Escrow Agent. With respect to your
performance of your obligations, the following terms shall apply:
(a) Your duties hereunder may be altered, amended, modified
or revoked only by a writing signed by all of the parties hereto.
(b) You shall be obligated only for the performance of such
duties as are specifically set forth herein and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed by
you to be genuine and to have been signed or presented by the proper party or
parties. You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as
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<PAGE> 15
attorney-in-fact for Purchaser while acting in good faith and in the exercise of
your own good judgment, and any act done or omitted by you pursuant to the
advice of your own attorneys shall be conclusive evidence of such good faith.
(c) You are hereby expressly authorized to disregard any and
all warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(d) You shall not be liable in any respect on account of the
identity, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
(e) You shall be entitled to employ such legal counsel and
other experts as you may deem necessary properly to advise you in connection
with your obligations hereunder, may rely upon the advice of such counsel, and
may pay such counsel reasonable compensation therefor.
(f) Your responsibilities and rights as Escrow Agent hereunder
shall pass to any successor Secretary and/or Assistant Secretary of the Company.
(g) If you reasonably require other or further instruments in
connection with this Escrow Agreement or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
(h) It is understood and agreed that should any dispute arise
with respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction, but you shall be under no duty whatsoever to institute
or defend any such proceedings.
(i) By signing this Escrow Agreement, you become a party
hereto only for the purpose of said Escrow Agreement; you do not become a party
to the Agreement or the Security Agreement.
-3-
<PAGE> 16
7. Notices. Any notice required or permitted hereunder
shall be given in writing and shall be deemed effectively given upon personal
delivery or upon deposit in the United States Post Office, by registered or
certified mail with postage and fees prepaid, addressed to Purchaser at his
address shown on the Company's employment records and to you and the Company at
the address of its principal corporate offices (attention: Secretary and
attention: President, respectively) or at such other address as such party may
designate by ten (10) days prior written notice to the other parties hereto.
8. Successors and Assigns. This instrument shall be
binding upon and inure to the benefit of the parties hereto, and their
respective successors and permitted assigns.
Very truly yours,
3DFX INTERACTIVE, INC.
a California corporation
By:____________________________
Title: Secretary
PURCHASER:
_______________________________
[Signature of Purchaser]
ESCROW AGENT:
_______________________________
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<PAGE> 17
EXHIBIT C
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, I, ____________, hereby sell, assign and
transfer unto_____________________________________________________(__________)
shares of the Common Stock of 3Dfx Interactive, Inc., standing in my name on the
books of said corporation represented by Certificate No. ____ herewith and do
hereby irrevocably constitute and appoint to transfer said stock on the books of
the within-named corporation with full power of substitution in the premises.
Dated: __________, 199_
Signature:
_____________________________
[Signature of Purchaser]
This Assignment Separate from Certificate was executed in
conjunction with the terms of a Restricted Stock Purchase Agreement between the
above assignor and 3Dfx Interactive, Inc., dated __________, 199_.
INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE.
<PAGE> 18
EXHIBIT E
CONSENT OF SPOUSE
I, _______________, spouse of ___________, have read and approved the
foregoing Restricted Stock Purchase Agreement and the exhibits thereto (the
"Agreement"). In consideration of the Company's granting my spouse the right to
purchase the Stock as set forth in the Agreement, I hereby agree to be
irrevocably bound by the Agreement and further agree that any community property
or other such interest shall be similarly bound by the Agreement. I hereby
appoint my spouse as my attorney-in-fact with respect to any amendment or
exercise of any rights under the Agreement.
Dated:______________________, 199_
______________________________
Spouse of Purchaser
<PAGE> 1
EXHIBIT 10.9
TECHNOLOGY DEVELOPMENT AND LICENSE AGREEMENT
This Technology Development and License Agreement (the "AGREEMENT") is
made and entered into as of February 28, 1997 (the "EFFECTIVE DATE"), by and
between Sega Enterprises, Ltd., a Japanese corporation having its principal
place of business at 212, Haneda 1-Chome, Ohta-ku, Tokyo 194, Japan ("SEGA")
and 3Dfx Interactive, Inc. ("3DFX"), a California corporation having its
principal place of business at 4435 Fortran Drive, San Jose, California 95134.
RECITALS
WHEREAS, Sega is in the business of developing, marketing, and
distributing video games for both coin-operated arcade and consumer markets,
video game consoles, peripherals and various other products and services,
throughout the world;
WHEREAS, 3Dfx is in the business of creating advanced 3D graphics
accelerators, including semiconductor chips, hardware, and software, for both
coin-operated arcade and consumer video game markets throughout the world;
WHEREAS, Sega desires that 3Dfx develop for Sega a semiconductor 3D
graphics accelerator [*], and that 3Dfx license to Sega on a limited
exclusive basis the manufacturing rights thereto, including without limitation
for Sega's use with, and distribution in, Sega's forthcoming consumer video
game console product, [*]
WHEREAS, 3Dfx is willing to promote the [*] Console video game
architecture in connection with 3Dfx's 3D graphics technology;
WHEREAS, Sega desires that 3Dfx provide assistance to qualify 3Dfx and
Sega designated foundries to produce the 3D accelerator [*] in commercial
quantities;
WHEREAS, Sega desires to obtain certain licenses from 3Dfx for certain
interface software for the 3Dfx graphic accelerator [*] and certain
hardware to enable manufacturing and support; and
WHEREAS, 3Dfx is willing to perform the development, grant the
licenses, and provide the other assistance required by Sega in connection with
such 3Dfx graphics accelerator [*]:
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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IT IS THEREFORE AGREED AS FOLLOWS:
1. DEFINITIONS
Unless otherwise defined or stated, "days" shall mean calendars days,
"including" shall mean "including without limitation", and the following terms
shall have the meanings stated below:
1.1 "ALPHA VERSION [*]" means a preliminary version of the [*]
Graphics [*] with functionality sufficiently complete and usable to enable
hardware and software engineers to operate, test and evaluate for further
production, and integration, as further set forth in the Specifications.
1.2 "ARCADE TOOL BOX" means 3Dfx's proprietary arcade game
developer software toolbox.
1.3 [*]
1.4 "BETA VERSION [*]" means a preliminary version of the [*]
Graphics [*] with functionality complete and usable in all material
respects, but which is not in a form intended for production in commercial
volumes, as further set forth in the Specifications.
1.5 [*]
1.6 "[*] GRAPHICS [*]" means the 3D graphic accelerator
[*] as provided to Sega for use in the [*] Console, as set forth in the
Specifications, [*]
1.7 "[*] GRAPHICS [*] TECHNOLOGY" means any and all
inventions, works of authorship, technology, know-how, algorithms, methods,
processes, procedures, work-arounds and Intellectual Property Rights relating
to the [*] Graphics [*], exclusive of the Sega Deliverables, Sega Foundry
Deliverables, the [*] Console Technology, and all associated documentation
and all related modifications and derivative works and all Intellectual
Property Rights related thereto.
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE> 3
1.8 "[*] MASK DATA SET" means the manufacturing database and mask
level information to be delivered by 3Dfx to a Sega Foundry or the 3Dfx Foundry
to allow such foundry to manufacture the [*] Graphics [*], as further set
forth in Schedule 1.8.
1.9 [*]
1.10 "DELIVERABLES" means the deliverable items specified for each
Milestone on the Development Schedule.
1.11 "DEVELOPMENT SCHEDULE" means the schedule for the completion
of the Milestones and acceptance of Deliverables as set forth in Schedule 1.10.
1.12 [*]
1.13 "[*] CONSOLE" means a video game console code-named [*],
under development by Sega, including all components, enhancements, plug-ins,
attachments, controllers, input and output devices, cables, connectors,
peripherals and upgrades as further defined in Schedule 1.12.
1.14 "[*] CONSOLE TECHNOLOGY" means any and all inventions, works
of authorship, technology, know-how, algorithms, methods, processes,
procedures, work-arounds and Intellectual Property Rights relating to the [*]
Console.
1.15 "[*] CONSOLE UNIT" means each [*] Graphics [*] purchased
by Sega from the 3Dfx Foundry or a Sega Foundry for use by Sega in a [*]
Console, [*]
1.16 "FOUR CORNER MANUFACTURING PROCESS TEST" means the industry
standard four corner testing process to be used to test the Production Version
[*] produced by the Sega Foundry as further specified in Schedule 1.15.
1.17 "INTELLECTUAL PROPERTY RIGHTS" means any and all rights
existing now or in the future under patent law, copyright law, industrial
design rights law, semiconductor chip and mask work protection law, moral
rights law, trade secret law, trademark law, unfair competition law, publicity
rights law, privacy rights law, and any and all similar proprietary rights, and
any and all renewals, extensions, and restorations thereof, now or
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE> 4
hereafter in force and effect worldwide, including, without limitation, in the
United States and Japan.
1.18 "MILESTONE" means an individual task or set of tasks to be
completed by a certain date as described in the Development Schedule.
1.19 "NET ROYALTIES" means: (i) with respect to per unit royalties,
nondefective per unit amounts reduced by two percent (2%) to take into account
demonstration, internal use, free or sample products, any defective products,
returns, credits, costs of collection; and (ii) with respect to royalties based
on Reference Cost, per unit royalties, net of any royalties which would be due
on (A) a reasonable number of demonstration, free, or sample products, and (B)
returns of defective products; all of the foregoing net of Japanese or other
withholding taxes.
1.20 [*]
1.21 "PRODUCTION VERSION [*]" means the [*] Graphics [*] in
the form intended for production in commercial volume by a 3Dfx Foundry or by a
Sega Foundry utilizing the [*] Mask Data Set provided by 3Dfx.
1.22 "SEGA ACCEPTANCE DATE" means the date that Sega first accepts
the Production Version [*] manufactured by the initial Sega Foundry
pursuant to Section 2.3(a)(iii).
1.23 "SEGA FOUNDRY" means a Sega-designated semiconductor
manufacturing foundry approved by the parties to manufacture the [*] Graphics
[*] in commercial volume in accordance with the provisions of Section 2.3.
1.24 "SEGA FOUNDRY CELL LIBRARIES" means the cell libraries and
other design information of a proposed Sega Foundry, required by 3Dfx to
qualify the fabrication process used at a proposed Sega Foundry and to create
the 3Dfx Mask Data Set to be provided to such Sega Foundry, as further set
forth in Schedule 1.24. The Sega Foundry Cell Libraries must relate to a
fabrication process sufficiently advanced and sophisticated to manufacture the
[*] Graphics [*].
1.25 "SEGA FOUNDRY DELIVERABLES" means, collectively, the Sega
Foundry Design Rules and Sega Foundry Cell Libraries.
1.26 "SEGA FOUNDRY DESIGN RULES" means the specifications,
including (but not limited to) design rules, spice models, and process
parameters of a proposed Sega Foundry, reasonably required by 3Dfx pursuant to
Section 2.3 below, to qualify the
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE> 5
fabrication process used at a proposed Sega Foundry and to create the 3Dfx Mask
Data Set, as further set forth in Schedule 1.26. The Sega Foundry Design Rules
must relate to a fabrication process sufficiently advanced and sophisticated to
manufacture the [*] Graphics [*].
1.27 "SEGA PRODUCTS" [*]
1.28 "SOURCE CODE" means computer programs, instructions and
related material written in a human-readable source language in form capable of
serving as the input to a compiler or assembler program, and in form capable of
being modified, supported and enhanced by programmers reasonably familiar with
the source language.
1.29 "SPECIFICATIONS" or "PRO FORMA SPECIFICATIONS" means the
descriptions of the technical requirements, component parts, features,
functionality, performance criteria, operating conditions, interfaces, data
transfer, processing parameters, and protocols, associated with the [*]
Graphics [*], as set forth in Schedule 1.29.
1.30 "TEST VECTORS" means the test vectors to be supplied by 3Dfx
and approved by Sega (such approval not to be withheld unreasonably) and used
to test specific functionality of the Alpha, Beta, and Production Version
[*]s, as set forth in the Specifications, Schedule 1.30.
1.31. "VERIFICATION TEST GAMES" means the sample games used to test
the Alpha, Beta, and Production Version [*], as set forth in the
Specifications, Schedule 1.31.
1.32 "3DFX FOUNDRY" means the semiconductor manufacturing facility
designated by 3Dfx in Schedule 1.32 to manufacture the [*] Graphics [*]
under this Agreement.
1.32 "3DFX GLIDE API" means 3Dfx's proprietary graphics accelerator
API, as set forth on Schedule 1.33.
1.33 "3DFX GLIDE INTERNALS" means the 3Dfx Glide Software exclusive
of the 3Dfx Glide API.
1.34 "3DFX GLIDE SOFTWARE" means 3Dfx's graphics accelerator driver
software, together with all associated documentation provided by 3Dfx
including, but not limited to, the [*] Glide Programming Manual.
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE> 6
2. DEVELOPMENT AND PROCESS QUALIFICATION PHASE
2.1 DEVELOPMENT. In accordance with the terms of this Section 2,
3Dfx shall develop the [*] Graphics [*] for manufacture in commercial
volume by the 3Dfx Foundry and the Sega Foundry on Sega's behalf, and to
complete all Milestones specified in the Development Schedule. Subject to 3Dfx
completing the Milestones set forth in the Development Schedule, and Sega's
acceptance thereof, Sega shall pay 3Dfx the engineering services charges as
provided in Section 2.8.
2.2 [*] GRAPHICS [*] MANUFACTURED BY THE 3DFX FOUNDRY.
(a) DELIVERY OF MILESTONE DELIVERABLES. 3Dfx shall
complete and deliver to Sega, in accordance with the Development Schedule, the
Alpha Version [*], the Beta Version [*] and the Production Version
[*], all manufactured by the 3Dfx Foundry under the direction of 3Dfx, for
Sega's acceptance testing in accordance with the acceptance procedure set forth
in Section 2.2(b) below. Prior to each delivery, 3Dfx shall have completed all
required testing applicable to such Deliverables to ensure material compliance
with all applicable Specifications.
(b) ACCEPTANCE TESTING.
(i) ACCEPTANCE STANDARDS. Following receipt of
the Deliverables for each Milestone, Sega shall have twenty-one (21) calendar
days (the "VERIFICATION PERIOD") in which to use commercially reasonable
efforts to review, examine and verify such Deliverables and notify 3Dfx of any
material failure thereof to meet the applicable Specifications (a "DELIVERABLE
FAILURE").
(A) ALPHA AND BETA VERSION ACCEPTANCE
STANDARDS. The Alpha and Beta Version [*]s will each be deemed to have met
the applicable Specifications and be accepted by Sega if (i) the Verification
Test Games run successfully with each of the Alpha and the Beta Version
[*]s in a Sega-approved personal computer test environment, [*], which
shall be tested on the [*] Console; and (ii) the applicable set of the Test
Vectors runs successfully with each of the Alpha and the Beta Version [*]s.
(B) PRODUCTION VERSION ACCEPTANCE
STANDARDS. The Production Version will be deemed to have met the applicable
Specifications and be accepted by Sega if it satisfies the Beta Version
Acceptance Standard set forth above and performs in accordance with the
Specifications as verified by the Four Corner Manufacturing Process Test.
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE> 7
(ii) ACCEPTANCE PROCEDURE. Sega agrees to use
commercially reasonable efforts to detect any Deliverable Failure during the
Verification Period, and if Sega discovers any Deliverable Failure, it shall
promptly provide 3Dfx with written notice of such Deliverable Failure,
including all information reasonably available regarding such Deliverable
Failure. Upon receipt of such notice, 3Dfx shall use best efforts, at 3Dfx's
sole cost and expense, to correct any such Deliverable Failure and to resubmit
the corrected applicable Deliverables to Sega as soon as commercially and
technically practicable, but in all cases within one hundred (100) days
following Sega's notification of a Deliverable Failure. If Sega does not
provide 3Dfx with notice of a Deliverable Failure within the Verification
Period, the applicable Deliverable shall be deemed accepted by Sega. Subject to
Sections 2.2(b)(iii) and 2.2(b)(iv) below, 3Dfx shall repeat the process of
correction and resubmission of an applicable Deliverable, subject to additional
Verification Periods, until Sega's acceptance. The parties agree that any
failure by Sega to discover and notify 3Dfx of defects within any Verification
Period shall not negate any of 3Dfx's representations or warranties, nor waive
any of Sega's rights or remedies.
(iii) EXCLUSIVE REMEDIES FOR ALPHA VERSION [*]
DELAY.
(A) PLACEMENT OF SEGA ENGINEERS. In the
event that (1) 3Dfx fails to deliver the Alpha Version [*] (the "ALPHA DELIVERY
DATE" as scheduled in accordance with the Development Schedule) and has not
shipped the [*] Mask Data Set for the Alpha Version [*] to the 3Dfx Foundry
within sixty (60) days of the Alpha Delivery Date, or (2) 3Dfx delivers the
Alpha Version [*] on or before the Alpha Delivery Date, Sega has informed 3Dfx
of a Deliverable Failure, and 3Dfx has not shipped the [*] Mask Data Set for the
corrected Alpha Version [*] to the 3Dfx Foundry within sixty (60) days of such
notification, then Sega may require 3Dfx to allow a team of Sega engineers to
assist the 3Dfx * Graphics [*] design team. 3Dfx will, however, retain the
control of the management of the development obligations under this Agreement.
[*] Sega engineers may be placed on-site at the [*] development team location
(the "3DFX FACILITIES") until the Production Version [*] for the Sega Foundry is
accepted by Sega in accordance with Section 2.3(a)(iii), unless otherwise
requested by 3Dfx and agreed to by Sega. 3Dfx shall cooperate regarding the
placement of Sega engineers at the 3Dfx Facilities, including, but not limited
to, the provision at 3Dfx's expense of sufficient office and lab facilities,
personal computers, and workstations. Sega shall be responsible for salary or
other compensation of such Sega engineers.
(B) 3DFX HOUSE RULES. While working at
the 3Dfx Facilities, all Sega engineers and other personnel shall: (i) at all
times comply with all of 3Dfx's safety, security and mutually agreed
confidentiality policies and procedures; and
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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<PAGE> 8
(ii) limit their activities solely to assisting 3Dfx in the development of the
[*] Graphics [*]. Sega will maintain its standard general liability
insurance to protect against covered damages, costs or fees (including
reasonable attorney's fees) arising out of or relating to any property damage,
bodily injury, sickness, disease or death, caused directly by any negligent act
or omission of any Sega personnel while on premises at the 3Dfx Facility, and
will name 3Dfx as an additional insured under such issuance. All such Sega
personnel shall execute confidentiality agreements reasonably acceptable to
Sega and 3Dfx.
(C) ALPHA TERMINATION REMEDY. In the
event that 3Dfx fails to deliver the Alpha Version [*], in compliance with
the Specifications and acceptance criteria thereof, within one hundred (100)
days of the Alpha Delivery Date, then Sega in its sole discretion may: (i)
terminate the requirement that 3Dfx develop the Alpha Version [*]; or (ii)
determine that 3Dfx should continue its efforts to correct the Alpha Version
[*] by a date determined by Sega. In the event that Sega elects to
terminate the Alpha Version development as provided above, [*]. Provided that
throughout the Alpha Version [*] development, until completed or terminated
as provided above, 3Dfx provides commercially reasonable efforts to complete
such development, the remedies set forth in this Section 2(b)(iii) shall be
Sega's exclusive remedy for delays in Alpha Version [*] development.
(iv) ADDITIONAL REMEDIES: BETA VERSION [*]. If
Sega does not accept the Beta Version [*] pursuant to the procedure set
forth in Section 2.2(b)(ii) by [*] then Sega shall have additional remedies
as follows:
(A) RECOUPMENT OF EXPENSES. Sega may
recoup out of any advances or royalties owed to 3Dfx Sega's expenses incurred
in relation to 2.2(b)(iii)(A); and
(B) REDUCTION OF MANUFACTURING ROYALTY.
Sega may reduce the Manufacturing Royalty to be paid by Sega to 3Dfx for the
first [*] Console Units under Section 4.1 hereof, such reduction to be in
the amount of [*] U.S. for each [*] Console Unit; and
(C) FREE COST REDUCTION PROJECT. Sega
may require 3Dfx to perform, at no cost or expense to Sega, the work necessary
to complete the first "Cost Reduction Project", as defined in Section 2.4
hereof; and
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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(D) PLACEMENT OF SEGA ENGINEERS. Subject
to the conditions of Section 2.2(b)(iii)(B), Sega may require 3Dfx to allow a
team of Sega engineers to assist the [*] [*] [*] [*] design team,
whether or not Sega has done so previously pursuant to Section 2.2(b)(iii).
3Dfx will, however, retain the control of the management of the development
obligations under this Agreement. [*] such Sega engineers may be placed
on-site at the [*] Facilities until the Production Version [*] for the
Sega Foundry is accepted by Sega in accordance with Section 2.3(a)(iii), unless
otherwise requested by 3Dfx and agreed to by Sega. 3Dfx shall cooperate
regarding the placement of Sega engineers at the 3Dfx Facilities, including,
but not limited to, the provision at 3Dfx's expense of sufficient office and
lab facilities, personal computers, and workstations. Sega shall be responsible
for salary or other compensation of such Sega engineers.
(E) TERMINATION FOR BETA DELAY. In the
event that Sega has not accepted the Beta Version [*] by [*], [*]
then Sega may terminate the Agreement without obligation to make any further
payments of any kind to 3Dfx and seek recovery of damages caused to Sega by the
delay in the delivery of the Beta Version [*], provided, however, that any
term of this Agreement notwithstanding, 3Dfx's liability to Sega for such
damages shall not exceed [*] the engineering services charges paid by Sega to
3Dfx under this Agreement. In addition, if Sega terminates the Agreement as
provided above, Sega may exercise the rights described in Section 3.2(e).
Provided that throughout the Beta Version [*] development, until completed
or terminated as provided above, 3Dfx provides commercially reasonable efforts,
including without limitation, that 3Dfx makes no reductions in staffing or
other resources, to complete such development, the remedies set forth in this
Section 2.2(b)(iv) shall be Sega's exclusive remedy for delays in Beta version
[*] development. In the event that 3Dfx does not provide commercially
reasonable efforts, by (for example) reducing staffing or other resources, or
otherwise, to complete such development, the remedies set forth in this Section
2.2(b)(iv) shall cease to be exclusive.
2.3 DEVELOPMENT TARGETED FOR SEGA FOUNDRY.
(a) SEGA FOUNDRY QUALIFICATION. Sega shall have the right
to designate a Sega Foundry to manufacture the [*] Graphics [*], subject
only to such Sega Foundry satisfying reasonable requirements for qualification
to manufacture. As set forth in this Section 2.3, 3Dfx shall timely evaluate,
in accordance with the Development Schedule, or as otherwise agreed in writing
by the parties, the reasonable requirements for the proposed Sega Foundry to
manufacture the [*] Graphics [*] on a commercial basis, and, 3Dfx will
promptly review and reasonably qualify the Sega Foundry to manufacture the [*]
Graphics [*].
(i) EVALUATION OF PROPOSED SEGA FOUNDRY
DELIVERABLES.
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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Within a reasonable time after the Effective Date, Sega shall cause the proposed
Sega Foundry to deliver to 3Dfx the Sega Foundry Deliverables. Within a
reasonable time of receipt thereof, subject to the Development Schedule, 3Dfx
shall commence evaluating the fabrication process set forth in the Sega Foundry
Design Rules to determine whether such process is adequate to manufacture the
[*] Graphics [*] in a form that functions in conformance with the
Specifications. 3Dfx shall complete the evaluation of the fabrication and
quality assurance process [*] provided that 3Dfx receives reasonable cooperation
from the proposed Sega Foundry. As part of such evaluation process, 3Dfx may
require, at 3Dfx's expense, (A) that the proposed Sega Foundry allow 3Dfx to
send its personnel to visit the proposed Sega Foundry facilities (subject to
3Dfx's agreement to reasonable confidentiality and security procedures), and (B)
that the proposed Sega Foundry manufacture and provide to 3Dfx for evaluation
certain 3Dfx specified semiconductor chips. If qualification of the proposed
Sega Foundry is feasible, 3Dfx shall use reasonable efforts to assist the
proposed Sega Foundry achieving qualification. If qualification of the proposed
Sega Foundry is not feasible, Sega shall propose an alternative Sega Foundry,
and the parties shall repeat the foregoing evaluation process (including, if
necessary Sega's proposal of additional Sega Foundries), until, with 3Dfx's
reasonable assistance, a proposed Sega Foundry is deemed qualified.
(ii) PORT OF [*] GRAPHICS [*] TO PROPOSED SEGA
FOUNDRY. Within a reasonable time of 3Dfx providing written notice to Sega that
it is probable that the proposed Sega Foundry will be able to manufacture the
[*] Graphics [*] in a form that functions in conformance with the
Specifications, 3Dfx shall commence porting the [*] Graphics [*] to the
manufacturing process specified in the Sega Foundry Design Rules for the
proposed Sega Foundry. Such porting may include 3Dfx, at its sole discretion,
incorporating the Sega Foundry Cell Libraries into the * Mask Data Set to be
used by the proposed Sega Foundry.
(iii) ACCEPTANCE OF PRODUCTION VERSION. Upon
completion of such port, 3Dfx shall deliver the [*] Mask Data Set directly to
the proposed Sega Foundry for the sole purpose of allowing such proposed Sega
Foundry to fabricate the Production Version [*] on a trial basis. No [*]
Mask Data Set will be provided to Sega. Sega will use commercially reasonable
efforts to cause the proposed Sega Foundry to provide samples of the Production
Version [*] to 3Dfx no later than the date specified in the Development
Schedule for the Production Version acceptance testing in accordance with
Section 2.2(b) above. Upon Sega's providing written notice to 3Dfx of Sega's
acceptance of such Production Version [*] manufactured by such proposed
Sega Foundry, the proposed Sega Foundry shall be deemed a Sega Foundry.
(iv) FOUNDRY AGREEMENT. As part of the
qualification process, 3Dfx will require and Sega will cause each proposed Sega
Foundry to execute confidentiality and/or foundry manufacturing agreements in a
form to be negotiated in good faith between Sega and 3Dfx, covering the
proposed Sega Foundry's use of the
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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[*] Mask Data Set and other 3Dfx Confidential Information, and the
manufacturing of the [*] Graphics [*]. Such agreements shall contain terms
at least as protective of 3Dfx's Intellectual Property Rights as the terms and
conditions of this Agreement, and shall include a term allowing 3Dfx reasonable
rights to audit the Sega Foundry's records of units of the [*] Graphics [*]
shipped to Sega.
(e) PROPOSED SEGA FOUNDRY DELAYS. Any delay, except for
delays caused by 3Dfx, in a proposed Sega Foundry delivering the Sega Foundry
Deliverables or other evaluation materials, or the Production Version [*]s,
to 3Dfx, shall, at 3Dfx's discretion and upon written notice to Sega, result in
an extension of all directly affected Milestone completion dates set forth on
the Development Schedule by a period of time less than or equal to such delay.
(f) ADDITIONAL SEGA FOUNDRY OR PROCESS QUALIFICATION.
(i) SEGA REQUEST, PAYMENT AND PERFORMANCE. Sega
may request in writing that the parties arrange for [*] Sega Foundry
to manufacture the [*] Graphics [*]. In such event, Sega shall pay 3Dfx an
engineering services charge, to be negotiated in good faith by the parties, for
3Dfx to perform an evaluation and qualification of such proposed Sega Foundry
(such engineering services charge to be at least as favorable to Sega as the
lowest amount charged by 3Dfx for similar work, and not to exceed a reasonable
price). All such evaluation and qualification work shall be performed in
accordance with the provisions of this Section 2.3. [*]
(ii) QUALIFICATION OF NEW PROCESS AS A COST
REDUCTION PROJECT. If the manufacturing process set for the in the Sega Foundry
Design Rules for the proposed Sega Foundry is reasonably considered by 3Dfx to
be a new process generation from either (A) the current fabrication process in
use at the 3Dfx Foundry for the manufacture of the [*] Graphics [*]s, or
(B) the fabrication process described in the Sega Foundry Design Rules for the
initial Sega Foundry, then any such additional evaluation and qualification
work performed by 3Dfx under this subsection (f) shall be counted as a Cost
Reduction Project under Section 2.4 below.
2.4 COST REDUCTION DESIGN EFFORTS. [*]
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OMITTED PORTIONS.
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[*]
2.5 DOCUMENTATION FOR [*] GRAPHICS CHIPSET. 3Dfx hereby agrees to
prepare and deliver to Sega, in accordance with Schedule 2.5 ("Documentation
Requirements") and the Milestones set forth on the Development Schedule for
3Dfx's draft and final versions of the [*] Glide Programming Reference Manual.
3Dfx shall be responsible and bear all costs for translating the [*] Glide
Programming Reference Manual from English to Japanese. 3Dfx shall deliver the
final English version of the [*] Glide Programming Reference Manual
simultaneously to both Sega and 3Dfx's Japanese translator. Sega shall be
responsible for the English to Japanese tranlsations of all other documents
(including the Specifications) that 3Dfx is obligated to deliver to Sega under
this Agreement. At no additional cost to Sega, 3Dfx shall review for accuracy
the first version of the first Japanese translation Sega prepares of the
Specifications, and 3Dfx shall make timely, written recommendations to Sega
regarding changes and corrections to be made thereto. Subject to the licenses
granted by 3Dfx to Sega, 3Dfx shall be the owner of all such derivative works
of all documents provided to Sega under this Agreement (including the [*] Glide
Programming Reference Manual and the Specifications), including any such
derivative works prepared by Sega. For the duration of the license granted to
Sega in Section 3.2, 3Dfx grants a non-exclusive, royalty-free license to Sega
(i) to use, reproduce, modify, and create derivative works of the [*] Glide
Programming Reference Manual and Specifications for all permitted uses under
this Agreement in connection with the licenses granted to Sega under Section 3,
and (ii) to distribute with Sega Products the [*] Glide Programming Reference
Manual and derivative works thereof prepared by Sega. Sega herby assigns to
3Dfx all right, title, and
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interest in and to any derivative works prepared by Sega of the [*] Glide
Programming Reference Manual and the Specifications, and agrees to execute all
documents and assist 3Dfx in all actions necessary to implement such
assignment.
2.6 [*] DEVELOPMENT BOARDS. Upon Sega's order and request, and
subject to 3Dfx's standard sales terms and conditions, 3Dfx shall supply Sega,
within sixty (60) days of Sega's order, up to [*] at a cost of the lesser of:
(i) [*] per board or (ii) the lowest 3Dfx customer price irrespective of volume.
All such [*] shall contain [*] and shall otherwise meet or exceed the
specifications listed in Schedule 2.6.
2.7 SPECIFICATIONS AND DESIGN REVIEW. The Pro Forma Specifications
shall be attached hereto as Schedule 1.29 as of the Effective Date of this
Agreement. Within five (5) days following the Effective Date, 3Dfx shall deliver
to Sega the Specifications, which shall in all material respects be consistent
with the Pro Forma Specifications. No changes to the Specifications shall be
made unless agreed to in writing by the parties. On or before [*], the parties
shall meet to discuss any proposed changes to the Specifications for Beta
Version production (the "BETA DESIGN REVIEW"). During the Beta Design Review and
for seven (7) days thereafter, the parties agree to negotiate in good faith any
changes to be made to the Specifications which would not reasonably cause any
material increase in the cost or difficulty of, or the time required to
complete, 3Dfx's development effort; and (iii) 3Dfx and Sega shall negotiate in
good faith to reach agreement regarding any increase in cost (based upon
most-favored pricing) or schedule (based upon commercial best efforts) arising
from changes not covered by Subsection (ii) above.
2.8 PAYMENT OF ENGINEERING SERVICES CHARGES FOR DEVELOPMENT PHASE.
As full and complete consideration (except for any contingent payments under
Section 2.9) for the development by 3Dfx of the [*] Graphics [*],
completion by 3Dfx of all of its development tasks and obligations under this
Agreement, Sega shall pay to 3Dfx interim payments totaling the sum of [*] in
engineering services charges according to the following Milestone schedule:
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MILESTONE INTERIM PAYMENT
Signing of Agreement between Sega and 3Dfx $ 1,550,000 U.S.
[*] [*]
[*] [*]
[*] [*]
[*] [*]
All interim payments above shall be due within twenty-one (21) days following
the date of Sega's acceptance of each Milestone. Sega and 3Dfx agree that the
above payments include full compensation to 3Dfx for the production and delivery
to Sega, both at 3Dfx's expense, following Sega's acceptance of the relevant
Deliverables, of all Alpha, Beta, and Production Version [*] samples, [*]
The Alpha, Beta, and Production Version [*] Samples may be manufactured by
either the Sega or 3Dfx Foundry and shall be delivered according to the
development Schedule. Sega may order additional Alpha, Beta, or Production
Version [*] samples from any remaining prototype wafers, at a cost not to
exceed 3Dfx's actual costs. [*]
2.9 ON-TIME DELIVERY BONUS. With respect to each of the specified
versions of the [*] Graphics [*] listed below, Sega shall pay 3Dfx a bonus
for on-time delivery ("On-Time Delivery Bonus"), in the amounts listed below,
provided that: (a) 3Dfx delivers all Deliverables relating to such versions in
acceptable form on or before the Milestone delivery data specified in the
Development Schedule; and (b) Sega accepts such Deliverables upon the initial
submission and testing of such Deliverables under Section 2.2.
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DELIVERABLE ON-TIME DELIVERY BONUS
[*]
[*] [*]
[*]
Any On-Time delivery Bonuses earned by 3Dfx shall be paid to 3Dfx within
twenty-one (21) days of Sega's acceptance of each Deliverable.
3. LICENSES TO [*] GRAPHICS CHIPSET AND RELATED SOFTWARE
3.1 OWNERSHIP. As between the parties hereto, and subject to the
licenses granted to Sega herein, 3Dfx shall retain ownership of all of its
existing 3D graphics technology, the 3Dfx Glide Software, [*], and the Arcade
Toolbox, in existence as of the Effective Date of this Agreement, the [*]
Graphics [*] Technology, the Alpha, Beta, and Production Versions, the [*]
Graphics [*] Technology, the Alpha, Beta, and Production Versions, the [*]
Graphics [*], the Specifications, the [*] Mask Data Set (exclusive of the Sega
Foundry Deliverables), and all associated documentation and all related
modifications and derivative works, and all Intellectual Property Rights related
thereto (the "3Dfx Technology"). Subject to 3Dfx's rights to the 3Dfx
Technology, Sega shall retain all rights to the [*] Console Technology, the Sega
Deliverables (as defined in Section 3.4(a)), and all associated documentation
and all related modifications and derivative works, and all Intellectual
Property Rights related thereto. Sega grants 3Dfx no license of any kind in or
to the [*] Console Technology.
3.2 [*] GRAPHICS [*] LICENSE
(a) GRANT OF LICENSE. 3Dfx hereby grants to Sega, and
Sega hereby accepts, a royalty-bearing, worldwide license, including a license
under, all Intellectual Property Rights owned or licensable by 3Dfx; [*]
(b) LIMITATIONS AND RESERVATION OF RIGHTS. Sega shall
not, and shall not cause or authorize any third party, including but not
limited to a Sega Foundry, to sell, lease, license, sublicense, or otherwise
provide the [*] Graphics [*] as stand-
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alone components. Sega shall not reverse engineer, nor authorize a third party
to reverse engineer, the [*] Graphics [*] or * Mask Data Set to determine
the internal functioning of the [*] Graphics [*]. No license or right is
granted, by implication or otherwise to Sega, under any Intellectual Property
Rights now or hereafter owned or controlled by 3Dfx except for licenses and
rights expressly granted in this Agreement.
(c) LIMITED EXCLUSIVITY CONFERRED ON SEGA. [*]
(d) LIMITED EXCLUSIVITY CONFERRED ON 3DFX. Sega hereby
agrees that, for a period of three (3) years following the Sega Acceptance
Date, provided that 3Dfx is not in breach of its obligations under this
Agreement, Sega will not incorporate any 3D video graphics accelerator other
than the [*] Graphics [*] into the [*] Console.
(e) LIMITED COVENANT OF NONASSERTION.
(i) COVENANT. 3Dfx will not assert against Sega
any claim of infringement or misappropriation of its Intellectual Property
Rights embodied in the technical information concerning how the [*] Graphics
[*] communicates with the [*] Console or other Sega products, such as
external communications protocols or bus specifications, [*]
(ii) LIMITATION. Without limitation of the
licenses granted by 3Dfx to Sega, and as provided under this Section 3.2(e),
3Dfx reserves and retains the right to assert against Sega claims of
infringement or misappropriation of any of 3Dfx's Intellectual Property Rights
(including Intellectual Property Rights in the [*] Interface
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OMITTED PORTIONS.
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Information). The covenant of non-assertion set forth in this Section 3.2(e)
does not constitute a license to Sega or any third party of any 3Dfx
Intellectual Property Rights in the [*] Graphics [*] or the individual [*] or
[*], except as otherwise provided in this Section 3.2.
3.3 SOFTWARE LICENSES.
(a) 3DFX GLIDE AND [*] SOFTWARE.
(i) LICENSE GRANTS BY 3DFX. 3Dfx hereby grants to
Sega, and Sega hereby accepts, a nonexclusive, royalty-free, worldwide license
including a license under all Intellectual Property Rights owned or licensable
by 3Dfx: (i) to use and copy the Source Code of the 3Dfx Glide Software and
[*] for internal use solely in the development, manufacture and support of Sega
Products, (ii) to use, copy, distribute, and sublicense to third parties, under
a standard form software license agreement at least as protective of 3Dfx's
rights in the Driver Software as the terms and conditions of this Agreement, the
rights to use, copy, and distribute the Driver Software in binary form solely
for use in connection with Sega Products; and (iii) to adapt, modify, customize,
or otherwise transform the 3Dfx Glide Internals solely for use with Sega
Products; provided that (A) no such adaptations, customizations, modifications
or transformations alter, change, modify, or otherwise affect the operation or
functioning of the 3Dfx Glide API, and (B) that Sega agrees to make such
adaptations, customizations, modifications and transformations available to 3Dfx
as provided under subsection (ii)(C) below.
(ii) LIMITATIONS.
(A) Sega may not use, and may not
authorize a third party to use, the Source Code of the 3Dfx Glide Software to
reverse engineer the [*] Graphics [*];
(B) Sega shall have no right to
transfer, sublicense or otherwise convey the Source Code of the 3Dfx Glide
Software to any third party; and
(C) Sega agrees that, provided 3Dfx is
not in breach of this Agreement, Sega shall deliver to 3Dfx on an "as is" basis
copies of Source Code for all adaptations, customization, modifications,
transformations, or derivative works of the 3Dfx Glide API developed by Sega
with 3Dfx's consent; and Sega grants, and 3Dfx hereby accepts, a nonexclusive,
nontransferable, license to use, copy, modify, distribute and make derivative
works from any adaptations, modifications, or other changes to the 3Dfx Glide
API, made by Sega. The parties agree to negotiate in good faith regarding the
possibility of delivery by Sega and licensing to 3Dfx of any adaptations,
modifications, or other changes to the 3Dfx Glide Internals, made by Sega.
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(b) ARCADE TOOL BOX. 3Dfx hereby grants to Sega, and Sega
hereby accepts, a nonexclusive, royalty-free, unrestricted, worldwide license
to adapt, modify, customize, or otherwise transform, and to distribute and
sublicense the Arcade Tool Box, including without limitation, the Source Code
thereof. Except as otherwise agreed in writing, 3Dfx will have no obligation to
provide Sega or any sublicensee of Sega with support for the Arcade Tool Box or
any enhancements, improvements or modifications to the Arcade Tool Box.
(c) EVALUATION OF 3DFX GLIDE API FOR [*] CONSOLE. Sega
agrees to promptly evaluate the 3Dfx Glide API after delivery thereof for use
as a standard graphics API for use with the [*] Graphics [*] in the [*]
Console. Sega shall advise 3Dfx of its decision regarding the Glide API no
latter than the date specified on the Development Schedule.
[*]
(d) DRIVER SOFTWARE SUPPORT. For a period [*]
Sega's acceptance of the Production Version, 3Dfx, at no
additional cost to Sega, will provide Sega with maintenance and technical
support for the unmodified Driver Software to enable Sega to support its [*]
Console customers in accordance with the Driver Software Support Profile
attached as Schedule 3.3(d). Such maintenance and support shall include: all
changes, upgrades, or enhancements to the Driver Software developed
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OMITTED PORTIONS.
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and made available in the ordinary course of business by 3Dfx and 3Dfx's prompt
correction of all material errors known by 3Dfx or brought to its attention by
Sega or third parties. 3Dfx shall have no obligation to support Sega customers
directly.
3.4 SEGA DELIVERABLES AND SEGA FOUNDRY DELIVERABLES.
(a) OWNERSHIP AND LICENSE TO SEGA DELIVERABLES. As
between the parties hereto, Sega shall retain ownership of all Sega technology,
designs, specifications, code, interfaces and protocols (collectively, "SEGA
DELIVERABLES") it supplies to 3Dfx for development of the [*] Graphics [*],
including all Intellectual Property Rights related thereto, whether or not
embodied in the [*] Console, [*] Console Technology, or Sega Foundry
Deliverables. Sega grants, and 3Dfx accepts, a limited, non-exclusive license
solely during the term of this Agreement, to use internally the Sega
Deliverables solely to develop and support the [*] Graphics [*] for Sega,
and otherwise perform its obligations hereunder.
(b) SEGA FOUNDRY DELIVERABLE LICENSE. Subject to the
terms and conditions of this Agreement and a Foundry Agreement as specified in
Section 2.3(a)(iv), Sega agrees to cause the Sega Foundry to grant 3Dfx a
worldwide, non-exclusive, non-transferable, royalty-free license to (i) use the
Sega Foundry Deliverables solely to qualify the Sega Foundry under Section 2.3,
and (ii) incorporate the Sega Foundry Deliverables into the [*] Graphics
[*] and resulting [*] Mask Data set solely to provide same to the Sega
Foundry to manufacture such [*] Graphics [*] on behalf of Sega.
(c) LICENSE RELATING TO SEGA ENGINEERS. With respect to
any developments, improvements, inventions, enhancements or discoveries
("FIXES") made by Sega engineers at the 3Dfx Facilities pursuant to Section
2.2(b)(iii)(A) or Section 2.2(b)(iv)(D), which are provided to 3Dfx and reduced
to a writing, Sega hereby grants to 3Dfx a limited, non-exclusive, worldwide,
royalty-free, perpetual, irrevocable license including a license under all
Intellectual Property Rights owned by Sega and embodied in the Fixes (i) to
use, reproduce, modify, and make derivative works of such Fixes, (ii) subject
to the restrictions of this Agreement, to manufacture, have manufactured,
distribute, and sublicense the Fixes, and derivatives thereof, as embodied in
the * Graphics [*] or derivatives thereof; and (iii) the unlimited right
to sublicense to third parties (with the right to further sublicense to any
level of tiers) all of the rights set forth in subsections (i) and (ii)
immediately above.
3.5 PROPRIETARY MARKS AND MARKING REQUIREMENTS. Subject to Sega's
prior written approval as to form, size and location, which approval shall not
be unreasonably withheld, Sega will not delete or alter in any material manner
the Intellectual Property Rights markings of 3Dfx, and its suppliers, if any,
appearing on or in any 3Dfx product delivered to Sega. Sega agrees to (i)
reproduce and display such markings on each copy it
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makes of any 3Dfx product, and (ii) place in the documentation accompanying the
[*] Console the phrase: "3D graphics accelerated by 3Dfx."
4. [*] MANUFACTURING ROYALTIES
4.1 [*] CONSOLE MANUFACTURING ROYALTIES. As consideration for
the license to manufacture and distribute the [*] Graphics [*] as a
component of the [*] Console, Sega shall pay Net Royalties to 3Dfx, based
upon the cumulative volume of [*] Units ("MANUFACTURING ROYALTIES"),
according to the following schedule:
NUMBER OF [*] UNITS
MANUFACTURING ROYALTY
[*]
[*]
4.2 [*] CONSOLE ROYALTY PREPAYMENT. Within thirty (30) days
following the Sega Acceptance Date, Sega shall pay to 3Dfx a royalty advance in
the amount of [*] U.S. (the "FIRST ADVANCE"), to be credited against the
Manufacturing Royalties due in the aggregate under Sections 4.1 and 4.4.
Thereafter, on the first anniversary of the Sega Acceptance Date, if the
aggregate amount of the First Advance plus all additional Manufacturing
Royalties payable by Sega to 3Dfx under Sections 4.1 and 4.4 combined is less
than a total of [*] U.S., then Sega shall pay 3Dfx an additional royalty
advance (the "SECOND ADVANCE") in an amount such that the total of the First
Advance, the Manufacturing Royalties paid as of the first anniversary of the
Sega Acceptance Date, and the Second Advance is equal to [*] U.S. If the
applicable per unit Manufacturing Royalty is reduced pursuant to Section
2.2(b)(iv) for late delivery by 3Dfx of the Beta Version, then the First
Advance required under this Section 4.2 shall be reduced to [*] U.S., and the
threshold amount for purposes of any Second Advance shall be reduced to [*]
U.S.
4.3 3DFX REFERENCE COSTS. 3Dfx shall publish, not less than once
each calendar quarter, a reference cost [*] such reference cost to be based on
the then-current lowest purchase price that 3Dfx pays to the 3Dfx Foundry or
that 3Dfx is quoted from the Sega Foundry (the "REFERENCE COST"). For a period
of three (3) years from the date of Sega's acceptance of the Production Version
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[*], 3Dfx shall establish the Reference Cost once each calendar quarter,
based upon the lowest purchase price paid by any third party to 3Dfx [*]
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[*]
4.5 PAYMENT TERMS, REPORTING, AND AUDITS
(a) PAYMENT TERMS.
(i) [*] CONSOLE ROYALTIES. Sega shall make all
payments due to 3Dfx under Section 4.1 within forty-five (45) days of the end
of each calendar quarter based on the number of [*] Units purchased and
accepted by Sega during each calendar quarter.
[*]
(iii) INTEREST. Payments made after the due date
shall bear interest at one percent (1%) over the prime rate offered by the Bank
of America.
(b) PAYMENT REPORTS AND RECORDS. Within forty-five (45)
days after the close of each quarter ending March 31, June 30, September 30 and
December 31, Sega will deliver to 3Dfx a report which will provide all
information reasonably necessary for computation and/or confirmation of (i) the
payments, if any, due or credited to 3Dfx for such quarterly period, and (ii)
the number of [*] Consoles manufactured in such quarterly period and the
number of [*] Graphics [*]s incorporated into [*] Games. Sega will
maintain reasonable records to support payments required under this Agreement,
regarding purchases of the [*] Units and manufacture of [*] Consoles and
the use of [*] Graphics [*]s in [*] Games.
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(c) AUDIT. At 3Dfx's sole cost and expense (except as
provided below), an internationally recognized independent certified public
accounting firm selected by 3Dfx, subject to Sega's reasonable approval and
consent and execution of a confidentiality agreement acceptable to Sega, may,
upon reasonable notice and during normal business hours, inspect the records of
Sega on which such reports are based no more than once annually during this
Agreement to determine any over payments or underpayments. If, upon performing
such audit, it is determined that Sega has underpaid 3Dfx by an amount greater
than five percent (5%) of the payments due 3Dfx in the period being audited,
Sega will bear all reasonable expenses and costs of such audit and shall
immediately make full payment of the shortfall, plus interest at one percent
(1%) over the prime rate offered by the Bank of America. Sega shall be entitled
to all reports and work papers of the auditor and any overpayment shall be
corrected promptly via a refund by 3Dfx, or at Sega's sole option, via a credit
against future Sega payments.
5. LICENSES TO SEGA [*] GAMES
5.1 PORTING OF SEGA GAMES. Sega and 3Dfx agree to the terms and
conditions of this Section 5 regarding the possible porting to the 3Dfx Glide
API, and the possible bundling by 3Dfx with 3Dfx hardware, of certain
coin-operated arcade or consumer console video game software, which is owned or
licensable by Sega and not subject to any conflicting grant of rights in favor
of any third parties ("SEGA GAMES"), for distribution by 3Dfx solely as bundled
product in the personal computer ("[*]") market. 3Dfx hereby acknowledges that
Sega has previously granted to Sega Entertainment the right of first refusal to
port certain Sega video games for use on [*] hardware.
(a) GRANT OF LICENSE. Provided that 3Dfx maintains its 3D
technology [*] graphics product at performance levels equal to or exceeding the
performance of competitive products, Sega agrees to offer 3Dfx a nonexclusive,
nontransferable, royalty-free license, to be exercised by 3Dfx in its sole
discretion at its sole expense, to port up to [*] Sega Games each year for a
period of three years from the date of this Agreement (the "PORTABLE SEGA
GAMES"), solely to port such Portable Sega Games to the then-current 3Dfx Glide
API solely for release as bundled, retail [*] software products bundled with
3Dfx [*]-based graphics hardware products. Sega shall consider in good faith any
selection request of 3Dfx as to the Portable Sega Games to be ported, provided
that the final decision with respect to such selection shall be Sega's, in its
sole discretion. Sega may, in its sole discretion and in lieu of the foregoing
license to 3Dfx, port up to [*] Portable Sega Games per year, porting them to
the then-current 3Dfx Glide API for release by 3Dfx solely as bundled retail [*]
Software products bundled with 3Dfx [*]-based graphics hardware products.
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(b) OPTIMIZATION EFFORTS. U.S. Each party agrees that
whenever it is the party undertaking the porting of Portable Sega Games under
this Section 5, it shall use diligent efforts to optimize the ported Portable
Sega Games for advanced features of the 3Dfx [*] graphics product, and to
maintain optimizations or functions specific to the * Graphics [*]
provided that such functions are supported in the then-current 3Dfx [*] graphics
product.
5.2 BUNDLING RIGHTS. During the term of the rights granted under
this Section 5, Sega shall offer 3Dfx a right of first negotiation for the
rights to bundle Sega Games other than the Portable Sega Games with 3Dfx [*]
graphics hardware. The Sega Games covered by this Section 5.2 shall be limited
to Sega Games that Sega has the right to port to [*] hardware and bundle, and as
to which the right of negotiation hereunder does not conflict with any other
rights granted by Sega to third parties.
(a) With respect to any covered Sega Products, 3Dfx's
right of first negotiation shall commence upon the earlier of Sega's public
announcement, which shall be copied to 3Dfx, or notice to 3Dfx, of its
intention to release such Sega Game for the [*] market. The parties agree to
negotiate in good faith for thirty (30) days following Sega's announcement
notice, provided that if the parties are unable to reach agreement during such
thirty-day period, Sega may negotiate with and contract with any other party
for bundling of the applicable Sega Game. Sega's obligation to negotiate during
the thirty-day period is conditioned upon 3Dfx providing Sega with an
acknowledgment of interest within seven (7) days after 3Dfx's receipt of Sega's
announcement or notice.
(b) If, within six (6) months after Sega's announcement
or notice as to any covered Sega Game (and provided that 3Dfx gave Sega notice
of its interest pursuant to Section 5.2(a)), Sega has not contracted for the
bundling of such Sega Game, and Sega it not under any conflicting obligations
to any third party, and Sega receives an offer from a third party to bundle
such Sega Game with [*] hardware utilizing 3Dfx graphics products, Sega will
(unless prohibited by the terms of the pending offer or any other obligations)
allow 3Dfx the opportunity to meet or better the pending offer and negotiate
with Sega for fifteen (15) days to reach agreement. If the parties do not reach
agreement within 15 days, Sega shall have no further obligation to negotiate
with 3Dfx as to such Sega Game.
5.4 TERMS OF LICENSE. The rights granted under this Section 5
shall commence upon the Sega Acceptance Date and shall continue, subject to the
terms hereof, for three years.
5.6 INDEPENDENT OBLIGATIONS. Each party acknowledges that this
Section 5 is intended as an independent agreement and in no event will the
performance or breach of
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
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this Section 5 affect in any way the parties' performance or obligations under
the other terms of this Agreement. In the event of a breach of this Section 5,
the non-breaching party's right to terminate shall only operate to terminate
this Section 5 without any effect on the other terms of this Agreement. Any
claim for damages for breach under this Section 5 shall be limited by Section
8.5.2.
6. DESIGN INTEGRATION, 3DFX TECHNICAL SUPPORT, AND UPDATES.
6.1 [*] CONSOLE DESIGN INTEGRATION. 3Dfx shall provide reasonable
consultation and assistance to Sega, and Sega's third-party component
developers, at no charge, for the integration of the [*] Graphics [*] into
the [*] Console. The scope of such consultation and assistance shall include,
upon Sega's request, periodic telephonic, e-mail, and written consultation, and
[*] engineering assistance at locations designated by Sega. Sega agrees to pay
3Dfx's reasonable travel and accommodation expenses for on-site assistance, and
3Dfx's engineering services charges at 3Dfx's most-favored customer rates for
[*] engineering assistance [*].
6.2 TECHNICAL SUPPORT. For [*] after Sega's acceptance
of the Production Version [*], 3Dfx shall provide technical, quality
assurance, and engineering assistance to Sega with respect to the [*] Graphics
[*] in accordance with the 3Dfx [*] Support Profile to be negotiated in
good faith between the parties, in connection with supporting Sega's [*]
Console customers; provided, however, that 3Dfx has no obligation to provide
any support for additional [*] terms for a fee to be negotiated in
good faith, provided that Sega is then continuing to ship substantial
commercial quantities of Sega Products which incorporate the [*] Graphics
[*].
6.3 FOUNDRY SUPPORT. 3Dfx shall use commercially reasonable
efforts to provide assistance to the 3Dfx Foundry and Sega Foundries to enable
the 3Dfx Foundry and Sega Foundries to meet the cost and yield targets defined
in Schedule 6.3.
6.4 NO UPDATES. Without limiting 3Dfx's warranty, support and
other obligations under this Agreement, 3Dfx has no obligation to deliver to
Sega updates, improvements, modifications, or further developments relating to
the [*] Graphics [*] unless pursuant to a Cost Reduction Project or as
otherwise agreed by the parties in writing.
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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7. PURCHASING
Sega shall purchase all units of the [*] Graphics [*] required to
manufacture the [*] Console [*] from the Sega Foundries or the 3Dfx Foundry.
3Dfx makes no warranty or representation as to the price per unit quantity of
units available, or quality of manufacture, of [*] Graphics [*] manufactured by
the Sega Foundries or the 3Dfx Foundry. All purchases by Sega of units of the
[*] Graphics [*] shall be subject to the terms and conditions of separate
agreements reached by and between Sega and the foundries; provided, however,
that 3Dfx will take all steps required to authorize the 3Dfx Foundry and
qualified Sega Foundries to sell units of the [*] Graphics [*] to Sega.
8. REPRESENTATIONS, WARRANTIES AND GENERAL COVENANTS
8.1 REPRESENTATIONS AND WARRANTIES OF 3DFX. 3Dfx covenants,
represents and warrants all of the following:
8.1.1 Beginning on the date of Sega's acceptance of the Production
Version [*], continuing [*] (the "WARRANTY PERIOD"), the [*] Graphics [*], and
all Deliverables, portions or components related thereto shall be free of
material defects and operate in all material respects in conformance with the
Specifications and other requirements of this Agreement (any failure thereof, a
"DESIGN DEFECT"). In the event that Sega notifies 3Dfx of any Design Defects,
3Dfx shall use best efforts to diligently correct any such nonconformities by
(i) revising the [*] Mask Data Set and providing such revised [*] Mask Data Set
to the 3Dfx Foundry and the Sega Foundries, and (ii) providing to Sega software
work-arounds or patches for existing defective [*] Graphics [*]s. If, as a
result of Design Defects, Sega replaces defective [*], whether in Sega's
possession or by recall, 3Dfx shall pay the 3Dfx Foundry or Sega Foundries for
all manufacturing and shipping costs in order to deliver to Sega royalty-free,
corrected replacements for such [*]; provided, however, that 3Dfx shall have no
replacement liability with regard to Design Defects which Sega detected during
its testing of the [*] Console internally or by independent prospective and
actual software developers for the [*] Console, and which Sega did not report to
3Dfx upon detection. Except as provided above, 3Dfx shall not be responsible for
the cost of any product recall, for replacement of defective [*] Graphics [*]s
or components thereof, nor for a refund of any royalties paid by Sega. 3Dfx
shall not be liable to Sega for manufacturing defects caused by the 3Dfx Foundry
or Sega Foundries, nor the costs for any product recall or replacement of any
[*] Graphics [*] resulting therefrom. The remedies set forth in this Section
shall be Sega's sole and exclusive remedy for Design Defects.
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8.1.2 The [*] Graphics [*] will conform to the Specifications,
and all components of the * Graphics [*] will operate together as an
integrated subsystem. [*]
8.1.3 The [*] Graphics [*] as provided by 3Dfx will not contain
any undocumented material features of any kind whatsoever.
8.1.4 All services rendered by 3Dfx in connection with this
Agreement shall be provided in a timely manner in accordance with the highest
professional standards and practices, and 3Dfx's personnel performing such work
shall have the requisite expertise and ability to perform the tasks assigned to
them.
8.1.5 3Dfx has full authority to execute and deliver this Agreement
and to consummate the transactions contemplated hereby, and this Agreement will
not violate any other agreement to which 3Dfx is or becomes a party nor any
law, court order or decree to which 3Dfx is subject.
8.1.6 The [*] Graphics [*] shall not infringe the Intellectual
Property Rights, exclusive of patent rights, of any third party as may now or
in the future exist, and 3Dfx has the right to grant all of the licenses to
Sega hereunder, free from all claims, liens, security interests or other
encumbrances. To the best of 3Dfx's knowledge, the [*] Graphics [*] shall
not infringe the patent rights of any third party as may now or in the future
exist. 3Dfx shall not place on any of such software any liens, security
interests or other encumbrances that would in any manner affect Sega's licenses
under this Agreement.
8.1.7 Neither the [*] Graphics [*], nor the Driver Software (nor
any portion thereof) contains or shall contain, at the time of installation,
any timer, clock, counter, or other limiting design or routine, nor (to the
best of 3Dfx's knowledge) any virus, that causes or could cause any Sega
Product (or any portion thereof) to become erased, inoperable, impaired, or
otherwise incapable of being used in the full manner for which it was designed
and licensed (including, without limitation, any design or routine that would
impede copying thereof) after being used or copied a certain number of times,
or after the lapse of a certain period of time, or after the occurrence or
lapse of any similar triggering factor or event. Furthermore, neither the [*]
Graphics [*] nor Driver Software contains or shall contain, any virus,
limiting design, or routine that causes or
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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could cause them or any of them to become erased, inoperable, impaired, or
otherwise incapable of being used in the full manner for which it was designed
and licensed pursuant to this Agreement solely because it has been installed on
or moved to a hardware unit or system that has a serial number, model number,
or other identification different from the identification of the one on which
it was originally installed.
8.1.8 The [*] Graphics [*] and Driver Software developed by 3Dfx
will not abruptly end or provide invalid or incorrect results during operation
prior to, on or after January 1, 2000, or when given a valid date containing
century, year, month, and day. For purposes hereof, a failure to "operate
accurately" exists if any one or more of the following properties or
capabilities is lacking: (i) execution of calculations using dates with a
four-digit year; (ii) functionality (including both on-line and batch)
including, but not limited to, entry, inquiry, maintenance, and update, to
support four-digit year processing; (iii) interfaces and reports that support
four-digit year processing; (iv) successful transition, without human
intervention, into the year 2000 using the correct system date (e.g.,
01104/2000); (v) after transition to the year 2000, continued processing with a
four-digit year without human intervention; (vi) calculation of leap year
correctly; and (vii) provision of correct results in forward and backward data
calculation spanning century boundaries, including the conversion of previous
years currently stored as two digits.
8.1.9 Except for any license or other payments to be made by 3Dfx
for certain inbound elements of the 3Dfx Technology, no fees, licenses or
commissions are due or payable to any broker, finder, or other third party in
connection with this Agreement.
8.2 REPRESENTATIONS AND WARRANTIES OF SEGA. Sega convenants,
represents and warrants all of the following:
8.2.1 Sega has full corporate authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby,
and this Agreement will not violate any other agreement to which Sega is or
becomes a party nor any law, court order or decree to which Sega is subject.
8.2.2 All technology, designs, specifications, code,
interfaces and protocols developed internally by Sega, licensed by Sega to 3Dfx
hereunder, and which are incorporated into [*] Graphics [*], do not
infringe the Intellectual Property Rights, exclusive of patent rights, of any
third party when incorporated into Sega Products, and Sega has the right to
grant all of the licenses to 3Dfx hereunder, free from all claims, liens,
security interests or other encumbrances. To the best of Sega's knowledge, all
technology, designs, specifications, code, interfaces and protocols developed
internally by Sega, licensed by Sega to 3Dfx hereunder, and which are
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
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[*]=CONFIDENTIAL TREATMENT REQUESTED
incorporated into [*] Graphics [*], do not infringe the patent rights of
any third party when incorporated into Sega Products.
8.3 GENERAL COVENANTS. Neither party shall make representations,
warranties, or guarantees to anyone with respect to the specifications,
features, capabilities or operations of the other's products or services that
are inconsistent with or in addition to this Agreement and such other party's
published literature. Neither party shall make modifications, enhancements or
changes to the other's products except as permitted hereunder nor shall it
permit any of its respective agents, employees, or representatives to make any
such modifications, enhancements or changes without the other's prior written
consent. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES
ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY,
INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A
PARTICULAR PURPOSE AND NONINFRINGEMENT.
8.4 LIMITATIONS OF LIABILITY.
8.4.1 EXCEPT AS OTHERWISE SPECIFIED IN THIS AGREEMENT,
NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INDIRECT, SPECIAL, INCIDENTAL, OR EXEMPLARY DAMAGES
(INCLUDING WITHOUT LIMITATION, LOST PROFITS, LOSS OF ANTICIPATED BUSINESS, LOSS
OF DATA, OR BUSINESS LOSSES) EVEN IF SUCH DAMAGES ARE FORESEEABLE, AND EVEN IF
THE BREACHING PARTY HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES
OCCURRING. THE LIMITS OF THIS SECTION 8.4.1 SHALL NOT PRECLUDE CLAIMS FOR
ACTUAL AND DIRECT DAMAGES, INCLUDING WITHOUT LIMITATION EXPENSES AND CHARGES
INCURRED BY A PARTY AS A RESULT OF THE OTHER PARTY'S BREACH AND EXPENSES AND
CHARGES TO MITIGATE DAMAGES RESULTING FROM THE OTHER PARTY'S BREACH.
8.4.2 SUBJECT TO THE LIMITATIONS OF SECTION 8.4.1 ABOVE,
AND EXCEPT WITH RESPECT TO INDEMNIFICATION UNDER SECTIONS 9.1 AND 9.2, CLAIMS
ARISING FROM INTENTIONAL BREACH, WILLFUL OR INTENTIONAL MISCONDUCT OR GROSS
NEGLIGENCE, EACH PARTY'S LIABILITY TO THE OTHER FOR DAMAGES CLAIMS SHALL BE
LIMITED TO [*].
8.5 SURVIVAL. The covenants, representations and warranties
contained in this Section 8 shall survive the termination or expiration of this
Agreement.
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
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9. INDEMNIFICATION AND INSURANCE
9.1 INDEMNIFICATION BY 3DFX. Subject to the terms of Section 9.3
below, 3Dfx shall defend, indemnify and hold Sega harmless from and against any
and all losses, damages, liability, and reasonable attorneys', expert witness,
or court fees and costs, and any other reasonable costs and expenses arising
from any claims, demands, suits, causes of action, or any other action brought
by any third party alleging infringement of any Intellectual Property Right. In
the defense or settlement of any claim for Intellectual Property Rights
infringement, 3Dfx may obtain for Sega and all customers and users of affected
Sega Products the right to continue using and licensing the allegedly
infringing materials, or replace or modify same so that they become
non-infringing, provided that 3Dfx pays all costs incurred by Sega associated
with such replacement or modification and any modifications required to other
components.
9.2 INDEMNIFICATION BY SEGA. Subject to the terms of Section 9.3
below, Sega shall indemnify and hold 3Dfx harmless from and against any and all
losses, damages, liability, reasonable attorneys', expert witness, or court
fees and costs, and any other reasonable costs and expenses arising from any
claims, demands, suits, causes of action, or any other action brought by any
third party alleging infringement of any Intellectual Property Right other than
as a result of 3Dfx's exercise of its rights under the license granted under
Section 3.4(c), but excluding any claim which is covered by 3Dfx's
indemnification of Sega in Section 9.1. In the defense or settlement of any
claim for Intellectual Property Rights infringement, Sega may obtain for 3Dfx
the right to continue using and licensing the allegedly infringing materials,
or replace or modify same so that they become non-infringing. Notwithstanding
any provision in this Agreement to the contrary, Sega shall have no liability
or obligation to 3Dfx with respect to a court judgment that an exploitation or
use of anything provided by Sega to 3Dfx hereunder, in combination with any
3Dfx Technology, infringes any Intellectual Property Rights of any third party,
provided that such exploitation or use alone (not in combination with any 3Dfx
Technology) would not infringe such third party's Intellectual Property Rights.
9.3 INDEMNIFICATION PROCEDURES. Neither party will have any
obligation to indemnify the other party under Section 9.1 or 9.2, as the case
may be, unless: (A) the indemnifying party is promptly notified of a potential
claim by the party seeking indemnification; (B) the indemnifying party has sole
control of the defense and settlement (subject to reasonable consent of the
indemnified party) of the claims sought to be indemnified; and (C) the party
seeking indemnification provides the indemnifying party with reasonable
assistance, at the indemnifying party's expense, in the defense and settlement
of the claim sought to be indemnified. Each party shall have the right to
participate in the defense and/or settlement of such actions or proceedings at
their own expense with counsel of their own choosing.
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9.4 INSURANCE OBLIGATIONS. Throughout the term of this Agreement
and for two (2) years thereafter, 3Dfx shall purchase and maintain (and shall
pay all premiums and deductibles related to) commercial liability insurance,
including errors and omissions insurance, and products liability (with a
vendor's endorsement in favor of Sega) naming Sega as an additional insured and
stipulating that the coverage afforded additional insureds is primary and any
insurance maintained by additional insureds shall be excess only and
non-contributing with the coverage provided under that policy. Sega agrees it
shall maintain product liability coverage with respect to its distribution of
[*] Units.
10. TERM AND TERMINATION
10.1 TERM. the terms of this Agreement shall commence upon the
Effective Date and shall continue in full force and effect until terminated as
provided in Section 10.2 below.
10.2 TERMINATION. The parties shall have the right to terminate
this Agreement in whole or in part as follows:
10.2.1 Provided that, during the Development Phase, 3Dfx
provides commercially reasonable efforts, including without limitation that
3Dfx makes no reductions in staffing or other resources, to complete such
development. Sega may terminate this Agreement in whole or in part based upon a
development failure by 3Dfx only as provided in Section 2;
10.2.2 Sega may terminate if 3Dfx materially breaches any of
its other obligations under this Agreement (except with respect to Section 5
and except as otherwise provided in Section 2) and 3Dfx may terminate if Sega
materially breaches any of its obligations under this Agreement (except with
respect to Section 5) and such breach shall continue uncured for a period of
forty-five (45) days after the breaching party's receipt of written notice from
the non-breaching party;
10.2.3 Either party may terminate in the event of the filing
by or against the other party of a proceeding under any bankruptcy or similar
law, unless such proceeding is dismissed, within forty-five (45) days from the
date of filing; the making by the other party of a proceeding for dissolution
or liquidation, unless such proceeding is dismissed within forty-five (45) days
from the date of filing; the appointment of a receiver, trustee or custodian
for all or part of the assets of the other party, unless such appointment or
application is revoked or dismissed within forty-five (45)days from the date
thereof; the attempt by the other party to make any adjustment, settlement or
extension of its debts with its creditors generally; or the insolvency of the
other party.
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10.2.4 Under no circumstances, including the pendency of any
dispute, may 3Dfx terminate, suspend or limit its performance hereunder or
withhold or disable any Deliverables unless and until Sega has agreed in
writing to such termination, suspension or limitation or until a court of
competent jurisdiction orders otherwise; provided, however, that during that
time, Sega continues to pay any undisputed charges required to be paid under
Section 2 of this Agreement.
10.3 EFFECT OF TERMINATION
10.3.1 EFFECT OF TERMINATION FOR DEVELOPMENT FAILURE. Upon
termination of this Agreement under Section 10.2.1, all rights and obligations
of the parties under this Agreement, including all licenses granted to either
party hereunder, shall terminate, except for the rights and obligations of the
parties under Sections 3.2(f) (Limited Covenant of Nonassertion), 10 (Term and
Termination), and 12 (Confidentiality) which shall survive the termination of
this Agreement. Except as necessary to fulfill the surviving terms, each party
shall immediately return to the other all Confidential Information,
Deliverables and technology, including without limitation the Sega Technology
and 3Dfx Technology.
10.3.2 EFFECT OF TERMINATION FOR BREACH.
(a) SEGA'S BREACH. Upon any termination of this
Agreement under Sections 10.2.2 or 10.2.3 for Sega's breach, all licenses
granted to Sega under Section 3 (Licenses) shall terminate as provided in
subsection (b) below and each party shall immediately return to the other all
Confidential Information, Deliverables and technology, including without
limitation the Sega Technology and 3Dfx Technology. All licenses granted by
Sega to third parties shall survive according to their terms, and any licenses
granted to 3Dfx under Section 5.2 (License to Bundle Sega [*] Games, if any)
shall survive according to their terms.
(b) SEGA TRANSITION PROCEDURE. After termination
due to Sega's breach:
(i) Sega can continue to utilize [*]
[*] in its inventory to manufacture [*] Consoles, [*] and distribute [*] until
its inventory of [*] and such finished products is exhausted, provided that
Sega has paid all undisputed royalty amounts owed in relation to such chips
and products;
(ii) The licensee in Section 3.2(a) to
the [*] Graphics [*] will terminate on the later of (a) Sega's receipt of
all orders for [*]
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placed prior to the effective date of termination of this Agreement, or (b)
Sega's receipt of one final order of [*] within one month of the effective date
of termination of this Agreement, provided, however that Sega pays all
undisputed royalties owed in relation to such chips and provided that Sega can
utilize the chips in the manufacture of [*] Consoles, [*] [*], utilizing such
chips until its inventory of [*] and [*]s and such finished products is
exhausted, provided that Sega has paid all undisputed royalty amounts owed in
relation to such chips and products.
(iv) The license in Section 3.3 to the
3Dfx Glide and [*] will terminate [*] after Sega's last shipment of [*]
Consoles, [*] . Any sublicenses granted to third parties will continue
indefinitely provided that the third parties are in compliance with the
terms of the sublicense.
(c) 3DFX'S BREACH. Upon any termination of this
Agreement under Sections 10.2.2 or 10.2.3 for 3Dfx's breach or 3Dfx's financial
condition, all licenses granted to Sega under Section 3 (Licenses) shall
survive according to their terms; provided, however, that the limited
exclusivity granted to 3Dfx under Subsection 3.2(e) shall terminate
immediately. The limited exclusivity in favor of Sega under Subsection 3.2(d)
shall survive such termination provided Sega is distributing [*] Graphics
[*]s, and only as long as Sega is distributing [*] Graphics [*]s in
commercial quantities.
(d) SURVIVALS. Upon any termination of this
Agreement under Section 10.2.2 or 10.2.23, the rights and obligations of the
parties under Sections 4 ([*] Manufacturing Royalties), 8 (Warranties,
General Covenants and Limitations of Liability), 9 (Indemnification and
Insurance), 10 (Term and Termination), 12 (Confidentiality), and 13 (General
Provisions), shall survive such termination, provided that in the event of
termination resulting from 3Dfx's breach, Sega shall be entitled to offset
against any Manufacturing Royalties all of its damages arising directly from
such breach.
11. TAX, DUTIES AND OTHER CHARGES
Sega shall be solely responsible for any sales, use, gross receipts,
value-added, excise, property or other tax, tariff, duty or assessment and
income taxes and related interest and penalties collected, levied or imposed by
national governments, state or provincial governments, local governments, or
any subdivision of the foregoing and arising out of or related to the amounts
paid to 3Dfx by Sega hereunder with the exception of taxes on 3Dfx's net
income.
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THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
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12. CONFIDENTIALITY
12.1 PRIORITY OVER PRIOR NDA. The terms of this Agreement shall
supersede and replace control in the event of any conflict between any and all
terms or provisions of a previously executed non-disclosure agreement between
the parties with respect to the subject matter of this Agreement.
12.2 DEFINITION. 3Dfx and Sega acknowledge that, in the course of
performing their respective obligations hereunder, each may obtain information
relating to the other and the other's products that is of a confidential and
proprietary nature to such other party ("CONFIDENTIAL INFORMATION"). Such
Confidential Information includes without limitation the [*] Graphics [*]
Technology, the Source Code of the Driver Software, the Sega Deliverables,
Fixes, [*] Console Technology, the Sega Foundry Deliverables, trade secrets,
know-how, formulas, compositions of matter, inventions, techniques, processes,
programs, diagrams, schematics, technical information, customer and financial
information, sales and marketing plans and the terms of this Agreement.
12.3 CONFIDENTIALITY OBLIGATION. Each of Sega and 3Dfx agrees, that
it will (a) use the other party's Confidential Information only in connection
with fulfilling its obligations and exercising its rights and licenses under
this Agreement; (b) hold the other party's Confidential Information in strict
confidence and exercise due care with respect to its handling and protection,
consistent with its own policies concerning protection of its care, (c) not
disclose, divulge, or publish the other party's Confidential Information except
to such of its responsible employees, subcontractors, sublicenses and
consultants (collectively, "PERSONNEL") who have a bona fide need to know to
the extent necessary to fulfill such party's obligations under this Agreement;
and (d) instruct all such Personnel not to disclose the other party's
Confidential Information to third parties, without the prior written permission
of the other party. Each party shall require all Personnel who shall come into
contact with the Confidential Information of the other party to execute a
confidentiality agreement at least as protective of the rights in such
Confidential Information as the terms and conditions of this Agreement, prior
to such Personnel being given access to any Confidential Information.
12.4 EXCEPTIONS. The obligations set forth in Section 12.3 above
will not apply to either party's Confidential Information which (i) is or
becomes public knowledge without the fault or action of the recipient party, or
the breach of any confidentiality obligation; (ii) the recipient party can
document was independently developed by it without use of Confidential
Information of the other party; or (iii) the recipient party can document was
already known to it prior to the receipt of the other party's Confidential
Information.
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12.5 DISCLOSURE UNDER THE LAW. If either party is required to
disclose any Confidential Information pursuant to an order under law, it shall
use its reasonable efforts to give the party owning the Confidential
Information sufficient notice of such required disclosure to allow the party
owning the Confidential Information reasonable opportunity to object to and
take necessary legal action to prevent such disclosure.
13. GENERAL PROVISIONS
13.1 JOINT PRESS RELEASE. The parties agree to issue a joint press
release regarding the relationship contemplated by this Agreement, and shall
mutually agree on the contact and timing thereof.
13.2 NON-SOLICITATION OF EMPLOYEES. During the term of this
Agreement and for a period of one (1) year after any expiration or termination
of this Agreement for any reason other than 3Dfx's breach, both parties'
agreement not to directly solicit for employment any employee or independent
contractor of the other party involved in the development, sale or marketing of
the subject matter of this Agreement. Such prohibition shall not extend to
advertisements customarily placed in media circulated to the public.
13.3 ASSIGNMENT. Neither party shall assign or otherwise transfer
this Agreement in whole or in part, or any of the rights and obligations
hereunder, either voluntarily or by operation of law, except to its
subsidiaries or affiliates in which such party has at least a fifty percent
(50%) equity interest or voting control, while the party has such equity
interest or voting control, without the prior written consent of the other,
which consent shall not be withheld unreasonably. In the event that either
party merges with another corporation, the merging party shall cause the
corporation resulting from such merger to be bound by, and assume the
obligations of, this Agreement.
13.4 FORCE MAJEURE. Neither Sega nor 3Dfx shall be deemed to be in
default or have breached any provision of this Agreement solely as a result of
any delay, failure in performance or interruption of service resulting directly
or indirectly from any act of God, civil or military authority, civil
disturbance, war, laws, regulations, acts or orders of any government or agency
or official thereof, or any other occurrences beyond the party's reasonable
control.
13.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
13.6 WAIVER. No waiver of any provision of this Agreement or of any
rights or obligations of either party hereunder shall be effective unless in
writing and signed by the
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party or parties waiving compliance, and any such waiver shall be effective
only in the specific instance and for the specific purpose stated in such
writing.
13.7 NOTICES. Except as otherwise specified herein, all notices,
requests, demands or communications required hereunder shall be in writing,
delivered personally, or sent by first class mail, postage prepaid, or by
completed facsimile or e-mail transmission to the parties at their respective
addresses first set forth in this Agreement (or at such other address as shall
be given in writing by either of the parties to the other in accordance with
this Section 13.7). All notices, requests, demands, orders or communications
shall be deemed effective upon receipt in accordance with this Section 13.7.
13.8 NO JOINT VENTURE. The execution and delivery of this Agreement
shall not be deemed to confer any rights or remedies upon, nor obligate any of
the parties hereto, to any person or entity other than such parties. Nothing in
this Agreement shall cause or be deemed to cause the parties to be partners or
joint venturers with, or agent or employees of, each other. The parties are
independent contractors, and neither party shall have any right or power to
create any obligation or responsibility on behalf of the other party.
13.9 GOVERNING LAW. This Agreement and the rights and obligations
of the parties hereunder shall not be governed by the United Nations Convention
on Contracts for the International Sale of Goods, the application of which is
expressly excluded by the parties hereto. This Agreement shall be governed by,
and construed and enforced in accordance with the laws of the State of
California regardless of the choice of law rules of such state or any other
jurisdiction. All disputes arising out of this Agreement shall be subject to
the exclusive jurisdiction of either the state or federal courts located in San
Jose, California, and the parties agree and submit to the personal and
exclusive jurisdiction and venue of these courts.
13.10 ENTIRE AGREEMENT. No representations, warranties or
agreements, oral or written, express or implied, have been made to any party
hereto, except as expressly provided herein. This Agreement shall be binding
upon the respective parties hereto and their permitted successors and permitted
assigns. In the event that any provision hereof is found invalid or
unenforceable pursuant to judicial decree or decision, the remainder of this
Agreement shall remain valid and enforceable according to its terms. This
Agreement constitutes the entire understanding and agreement between the
parties regarding the subject matter of this Agreement, and supersedes all
other prior written and oral communications regarding this transaction, and may
not be altered, modified or amended except by a written amendment executed by
both parties.
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IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
officers to execute this Agreement as of the date set forth below.
SEGA ENTERPRISES LTD.
By: . . . . . . . . . . . . . . . . . . . . . . . .
Name: . . . . . . . . . . . . . . . . . . . . . . . .
Title: . . . . . . . . . . . . . . . . . . . . . . . .
Date: . . . . . . . . . . . . . . . . . . . . . . . .
3DFX INTERACTIVE, INC.
By: . . . . . . . . . . . . . . . . . . . . . . . .
Name: . . . . . . . . . . . . . . . . . . . . . . . .
Title: . . . . . . . . . . . . . . . . . . . . . . . .
Date: . . . . . . . . . . . . . . . . . . . . . . . .
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SCHEDULE 1.29
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FBI-2
Revision 1.5
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SEGA CONFIDENTIAL
SCHEDULE 2.1
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SEGA CONFIDENTIAL
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SEGA CONFIDENTIAL
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[*] = CONFIDENTIAL TREATMENT REQUESTED
SCHEDULE 2.2
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<PAGE> 47
[*] = CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 48
SCHEDULE 2.5
DOCUMENTATION REQUIREMENTS
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<PAGE> 49
SCHEDULE 2.6
VOODOO GRAPHICS(TM) PART NO.
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<PAGE> 50
SCHEDULE 3.3(D)
DRIVER SOFTWARE SUPPORT PROFILE
3Dfx shall provide technical support to Sega for the Driver Software, including
that 3Dfx shall use its best efforts to provide prompt response to and
correction of all reported bugs, errors or defects. Bugs, errors and defects
will be classified and corrected as follows:
"Severity 1" means bugs or errors in the Driver Software which
may cause loss of data or system crashes. 3Dfx shall commence
investigation and correction of each Severity 1 bug or error
within one (1) business day after receipt from Sega of a
report of such bug or error (or if 3Dfx otherwise becomes
aware of same) and shall continuously devote available
resources of not less than one full time individual (including
extended hours) every day until such bug or error is
corrected.
"Severity 2" means bugs or errors which impair the operation
of a major feature. 3Dfx shall commence investigation or
correction of such Severity 2 bug or error (or if 3Dfx
otherwise becomes aware of same) and shall devote available
business hours of not less than one Project Personnel full
time during normal business hours to correct such bug or error
or provide a work-around as soon as possible.
"Severity 3" means bugs or errors which impair the operation
of a minor feature or cause inconvenience or annoyance. 3Dfx
shall correct same or provide a work-around within fourteen
(14) calendar days following receipt from Sega of such bugs or
errors.
3Dfx shall give Sega prompt notice of any bugs, errors or
defects of which 3Dfx becomes aware.
<PAGE> 51
SCHEDULE 6.2
3DFX [*] SUPPORT PROFILE
[TO BE NEGOTIATED AND ATTACHED]
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SCHEDULE 6.3
[*] = CONFIDENTIAL TREATMENT REQUESTED
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<PAGE> 1
EXHIBIT 10.10
MASTER EQUIPMENT LEASE AGREEMENT
Agreement No. _______ Dated: January 1, 1996
LESSOR: MMC/GATX PARTNERSHIP NO. I, a California general partnership
("Lessor"), c/o GATX Capital Corporation, as Agent, Four Embarcadero
Center, Suite 2200, San Francisco, California 94111
LESSEE: 3D/FX INTERACTIVE, INC., a California corporation ("Lessee")
ADDRESS: 415 Clyde Avenue, Suite 105, Mountain View, California 94043
IN CONSIDERATION of the mutual covenants contained herein, the parties agree as
follows:
1. LEASE. Lessor leases to Lessee and Lessee leases from Lessor the
personal property described in each Equipment Schedule executed pursuant hereto,
subject to the terms and conditions of this Master Equipment Lease Agreement
("Master Lease") and the applicable Lease Line Schedule (defined below). The
"Equipment" (as defined in the Lease Line Schedules) is being leased for
commercial or business purposes only, and not for personal, home, or family
purposes. The parties agree that each Lease is a "finance lease" under the
Uniform Commercial Code (as in effect in the State of California during the term
of the Lease and referred to hereafter as the "UCC").
2. LEASE LINE SCHEDULE. "Lease Line Schedule" means a Lease Line
Schedule in the form of EXHIBIT A-L or EXHIBIT A-2 signed by Lessor and Lessee
and incorporating by reference the terms and provisions of this Master Lease.
3. EQUIPMENT SCHEDULES. "Equipment Schedule" means an Equipment
Schedule in the form of EXHIBIT B-1 or EXHIBIT B-2 signed by Lessor and Lessee
and incorporating, by reference, the terms and provisions of this Master Lease
and the applicable Lease Line Schedule. Each Equipment Schedule shall constitute
a separate and independent lease (a "Lease"); the original of such Lease shall
consist of the signed Equipment Schedule and a copy of the Master Lease and
applicable Lease Line Schedule. Capitalized terms used, but not defined, in this
Master Lease have the meanings given to such terms in the applicable Lease Line
Schedule or Equipment Schedule, as the case may be.
4. TERM AND RENTALS.
(a) ACCEPTANCE. The Lease shall commence with respect to
Equipment described on an Equipment Schedule upon the Acceptance Date. The
"Acceptance Date" shall be the date upon which Lessee executes a Delivery and
Acceptance Certificate in the form of EXHIBIT C.
(b) TERM AND PAYMENT OF RENT. The lease term for the Equipment
shall be the "Lease Term" set forth in the applicable Equipment Schedule which
shall commence on the "Commencement Date" (as defined in the applicable Lease
Line Schedule). Lessee agrees to pay to Lessor the "Rental Payments" for the
Lease Term, in the amounts and at the times set forth in the applicable
Equipment Schedule.
(c) INTERIM PERIOD. If an Acceptance Date does not fall on a
Commencement Date, then Lessee agrees to pay to Lessor "Interim Rent" for the
period commencing on the Acceptance Date through and including the day preceding
the Commencement Date (the "Interim Period"). The Interim Rent payment for the
Interim Period shall accrue at the "Interim Rate" (as defined in the applicable
Lease Line Schedule) and shall be due and payable in full on the Commencement
Date.
(d) LEASE TERMINATION. Lessee may terminate the Lease at the
expiration of the Lease Term or any renewal term (the "Lease Termination") by
submitting to Lessor a Notice of Election in the form of EXHIBIT D. If a
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Notice of Election is not submitted by Lessee to Lessor during the "Advance
Notice Period" (as defined in the Lease Line Schedule), then the Lease Term or
any renewal Term will be automatically extended for an additional period equal
to the "Automatic Extension Period" (as defined in the Lease Line Schedule). The
Lease will continue to automatically extend until Lessee submits to Lessor a
Notice of Election. The Lease may only be terminated as expressly provided in
this Section, in the applicable Lease Line Schedule or in the applicable
Equipment Schedule. Lessee agrees to continue paying rent for the Equipment in
the amount of the Rental Payment set forth in the applicable Equipment Schedule
until the later of (i) the expiration of the Lease Term, any renewal term and
any Automatic Extension Period and (ii) either (A) the purchase option price is
paid pursuant to SECTION 6(A), or (B) a mutually agreed renewal of the Lease
takes effect pursuant to SECTION 6(B), or (C) the Equipment is returned in the
manner and condition prescribed in SECTION 6(C), in each case after delivery of
a Notice of Election.
(e) NET LEASE. Each Equipment Schedule shall be a net lease,
and Lessee's obligation to pay all rent and other sums thereunder shall be
absolute and unconditional, and shall not be subject to any abatement,
reduction, setoff, defense, counterclaims, interruption, deferment or
recoupment, for any reason whatsoever.
5. LATE FEE. Lessee shall pay a late charge on any rent payments
or other sums due hereunder which are past due, in the amount specified in the
applicable Lease Line Schedule, payable on demand. In addition, interest shall
accrue daily at the "Default Rate" (as defined in the Lease Line Schedule), or
if such rate exceeds the maximum rate allowed by law, then at such maximum rate,
and shall be payable on demand.
6. LEASE TERMINATION OPTIONS. Upon Lease Termination, Lessee will
have the option to purchase the Equipment or renew the term of the Lease as set
forth below. Lessee shall specify its election of a Lease Termination Option in
the Notice of Election.
(a) PURCHASE OPTION. If Lessee exercises the option to purchase, then,
provided no Event of Default has occurred and is then continuing, Lessee shall
at the expiration of the Lease Term, renewal term or extension, as the case may
be, purchase the Equipment. The purchase price shall be the Equipment's then
fair market value ("FMV") or as may be otherwise provided in a particular Lease
Line Schedule. FMV, as applied to a purchase option, shall be determined by
Lessor based on the price a willing buyer would pay and a willing seller would
accept (neither buyer nor seller being under compulsion to act) for the
Equipment as installed and in use, giving due consideration to its condition,
utility, revenue-producing capability, and replacement costs. If Lessee fails to
agree with Lessor's good faith determination of the FMV, Lessee shall
nevertheless pay Lessor's invoice and provide Lessor with a written request for
a determination of the FMV with or prior to such payment. Within ten (10) days
after such request Lessor and Lessee shall agree on an appraiser to determine
the FMV or, lacking such agreement, shall each tender the name of an appraiser.
The appraiser(s) shall, within thirty (30) days, either agree on the FMV or
select a third appraiser, to form a committee to determine the FMV.
Determination by the appraiser(s) shall be final and binding on both parties.
Within fifteen (15) days after such determination, Lessor shall refund any
excess received over the FMV, and/or Lessee shall pay any additional amount of
the FMV above the amount previously paid. Each party shall bear the fees and
expenses of any appraiser which it names and share equally the fees and expenses
of any appraiser(s) jointly selected. If the appraised FMV is within 5% of the
amount invoiced by Lessor, then Lessee shall pay all appraiser fees and
expenses. The purchase option price shall be paid not later than the last day of
the Lease Term.
(b) RENEWAL. If Lessee exercises the option to renew this Lease, such
renewal shall be upon the terms and conditions of this Master Lease and the
applicable Lease Line Schedule, for a rental period and rental amount to be
agreed upon by Lessee and Lessor.
7. USE; MAINTENANCE.
(a) Lessee, at its expense, shall make all necessary site
preparations and cause the Equipment to be operated in accordance with any
applicable operating manuals and manufacturer's instructions. Notwithstanding
any
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transfer or assignment by Lessor and provided Lessee is not in default
hereunder, Lessee shall have the right to quietly possess and use the Equipment
as provided herein without interference by Lessor, its assigns or any other
third party claiming through or under Lessor.
(b) Lessee shall effect and bear the expense of all necessary
repair, maintenance, operation and replacements required to be made to maintain
the Equipment in good condition, reasonable wear and tear excepted, and to
comply with all domestic and international laws to which the use and operation
of the Equipment may be or become subject. All replacement Equipment and parts
furnished in connection with such maintenance or repair shall immediately become
the property of Lessor and part of the Equipment for all purposes hereof. All
such maintenance, repair and replacement sen ices shall be immediately paid for
and discharged by Lessee with the result that no lien under any applicable laws,
will attach to the Equipment as a result of the performance of such services or
the provision of any such material, except mechanic's liens not based on
delinquent payments which the Lessee may contest in good faith.
8. INSURANCE. Lessee shall obtain and maintain for the Lease Term
(and any renewal term or extension), at its own expense, (a) "all risk"
insurance against loss or damage to the Equipment, (b) commercial general
liability insurance (including contractual liability, products liability and
completed operations coverage) reasonably satisfactory to Lessor, and (c) such
other insurance against such other risks of loss and with such terms, as shall
in each case be reasonably satisfactory to or reasonably required by Lessor (as
to carriers, amounts and otherwise). The amount of the "all risk" insurance
shall be greater than or equal to the Stipulated Loss Value (as defined in
Section 9 below) of all Equipment outstanding under the Lease Line Schedules and
must otherwise be reasonably satisfactory to Lessor as of each anniversary date
of this Lease. Any increase in the amount of such insurance coverage reasonably
requested by Lessor shall be put into effect on the next succeeding renewal date
of such insurance.
Each "all risk" policy shall: (i) name Lessor as sole loss payee with
respect lo the Equipment, (ii) provide for each insurer's waiver of its right of
subrogation against Lessor and Lessee, and (iii) shall waive set-off,
counterclaim or offset against Lessor.
Each liability policy shall name Lessor as an additional insured and
provide that such insurance shall have cross-liability and severability of
interest endorsements (which shall not increase the aggregate policy limits of
Lessee's insurance).
All insurance policies shall provide that Lessee's insurance shall be
primary without a right of contribution of Lessor's insurance, if any, or any
obligation on the part of Lessor to pay premiums of Lessee! and shall contain a
clause requiring the insurer to give Lessor at least 30 days' prior written
notice of its cancellation (other than cancellation for non-payment for which 10
days' notice shall be sufficient. Lessee shall on or prior to the date of the
first effective Equipment Schedule and prior to each policy renewal, furnish to
Lessor certificates of insurance or other evidence satisfactory to Lessor that
such insurance coverage is in effect. Lessee further agrees to give Lessor
prompt notice of any damage to, or loss of, the Equipment, or any part thereof.
9. LOSS OR DAMAGE. If any items of Equipment shall become lost,
stolen, destroyed, or damaged beyond repair for any reason, or in the event of
condemnation, confiscation, seizure or requisition of title to or use of such
items (collectively, an "Event of Loss"), Lessee shall promptly pay to Lessor
the applicable Stipulated Loss Value of the Equipment subject to the Event of
Loss. Upon payment by Lessee of the Stipulated Loss Value, Lessor will transfer
to Lessee, "AS IS, WHERE IS, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all
of Lessor's right, title and interest, if any, in such items of Equipment. The
"Stipulated Loss Value" payable by Lessee under this Lease shall be an amount
equal to the product of (a) Lessor's Cost of the affected Equipment and (b) the
percentage set forth in the table attached to the applicable Lease Line Schedule
as Annex A opposite the Rental Payment number next following the Event of Loss.
Stipulated Loss Values and Rental Payments shall not be prorated.
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10. TITLE, INSPECTION AND LOCATION.
(a) TITLE. Lessor and Lessee confirm their intent that title
(if an ) to the Equipment shall remain in Lessor (or its successors and assigns)
exclusively. If requested by Lessor, Lessee will affix plates or markings on the
Equipment and on any operating manuals and manufacturer's instructions
indicating the interests of Lessor and its assigns therein, and Lessee will not
allow any other indicia of ownership or other interest in the Equipment to be
placed on the Equipment. Lessee shall not sell, assign, grant a security
interest in, sublet, pledge, hypothecate or otherwise encumber or suffer a lien
upon or against this Lease or the Equipment.
(b) INSPECTION. Lessor (through any of its officers, employees
or agents) shall have the right to inspect the Equipment during regular business
hours, with reasonable notice, and in compliance with Lessee's reasonable
security procedures; provided, that such inspections will be conducted no more
often than every six (6) months unless an Event of Default, or event which, with
notice or lapse of time or both, would become an Event of Default, has occurred
and is continuing.
(c) LOCATION. In the case of Equipment other than mobile
Equipment, Lessee may move such Equipment from the installation address shown on
the Equipment Schedule (or any other location for which Lessee has complied with
this provision) only if (i) the new location is within the continental United
States, and (ii) Lessee gives prior written notice of the relocation and
provides UCC-I financing statements, landlord waivers or such other
documentation as Lessor reasonably requests to protect its interest in the
Equipment. In the case of mobile equipment (including, without limitation,
lap-top computers), Lessee agrees to obtain from the person using such mobile
Equipment and deliver to Lessor, an Acknowledgment in the form of EXHIBIT F.
(d) Lessee shall keep copies of all operating manuals and
manufacturer's instructions with respect to the Equipment in good condition at
the locations specified in Section 10(c).
11. LESSEE'S REPRESENTATIONS, WARRANTIES AND WAIVERS. Upon
execution of the Master Lease and each Equipment Schedule, Lessee warrants and
represents the following:
(a) Lessee is a corporation duly organized, validly existing
and in good standing under the laws of its state of incorporation. Lessee has
full power and authority and all necessary licenses and permits to carry on its
business as presently conducted, to own or hold under lease its properties and
to enter into this Master Lease, each Lease Line Schedule and each Equipment
Schedule and to perform its obligations thereunder; and Lessee is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the character of its properties or the nature of its
business or the performance of its obligations under this Master Lease, the
Lease Line Schedules and any Equipment Schedules requires such qualification,
except for such jurisdictions in which failure to qualify would not have a
material adverse effect on Lessee.
(b) The execution and delivery by Lessee of this Master Lease,
the Lease Line Schedules and each Equipment Schedule and the performance by
Lessee of its obligations thereunder have been duly authorized by all necessary
corporate action on the part of Lessee; and do not and will not contravene the
provisions of or constitute a default (either with or without notice or lapse of
time, or both) under, or result in the creation of any lien upon, the Equipment
or any property of Lessee under any indenture, mortgage, contract or other
instrument to which Lessee is a party or by which Lessee or its properties is
bound.
(c) No consent or approval of, giving of notice to,
registration with, or taking of any other action by, any state, federal, foreign
or other governmental commission, agency or regulatory authority or any other
person or entity is required for the consummation or performance by Lessee of
the transactions contemplated under this Master Lease, the Lease Line Schedules
and each Equipment Schedule.
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<PAGE> 5
(d) This Master Lease, the Lease Line Schedules and each
Equipment Schedule, when executed by Lessee, constitute legal, valid and binding
agreements of Lessee enforceable against Lessee in accordance with their terms,
except as limited by any bankruptcy, insolvency, reorganization, or other
similar laws of general application affecting the enforcement of creditor or
Lessor rights.
(e) There are no actions, suits or proceedings pending or
threatened against or affecting Lessee or any property of Lessee in any court,
before any arbitrator of any kind or before or by any federal state, municipal
or other government department, commission, board, bureau, agency or
instrumentality (collectively "Governmental Body"), which, if adversely
determined, would materially adversely affect the business, financial condition,
assets, or operations of Lessee, or adversely affect the ability of Lessee to
perform its obligations under this Master Lease, the Lease Line Schedules and
each Equipment Schedule; and Lessee is not in default with respect to any order
of any court, arbitrator or Governmental Body or with respect to any material
loan agreement, debt instrument or contract with a supplier or customer of
Lessee, except as disclosed in writing to Lessor.
(f) To the extent permitted by applicable law, Lessee waives
any and all rights and remedies to: (i) cancel this Lease; (ii) repudiate this
Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v)
recover damages from Lessor for any breaches of warranty or for any other reason
other than breach by Lessor of the covenant of quiet enjoyment as set forth in
Section 7(a) hereof; (vi) claim a security interest in the Equipment in Lessee's
possession or control for any reason; (vii) deduct from Rental Payments all or
any part of any claimed damages resulting from Lessor's default, if any, under
this Lease; (viii) accept partial delivery of the Equipment; (ix) "cover" by
making any purchase or lease of or contract to purchase or lease equipment in
substitution for Equipment designated in the Lease; (x) recover any direct,
general, special, incidental, indirect, exemplary or consequential damages, for
any reason whatsoever; and (xi) obtain specific performance, replevin, detinue,
sequestration, claim and delivery or the like for any Equipment identified to
this Lease. To the extent permitted by applicable law, Lessee also waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's
damages or which may otherwise limit or modify any of Lessor's rights or
remedies.
12. ASSIGNMENT BY LESSOR. LESSEE ACKNOWLEDGES THAT LESSOR MAY
SELL, ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY
PART OF ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT
NOTICE TO OR CONSENT OF LESSEE. Upon Lessor's written notice to Lessee that this
Lease, or the right to the Rental Payments hereunder, have been assigned, Lessee
shall, if requested, pay directly to Lessor's assignee without abatement,
deduction or set-off amounts which become due hereunder. Lessee waives and
agrees it will not assert against Lessor's assignee any counterclaim or set-off
in any action for rent under the Lease. Upon the assignment of this Lease,
Lessor's assignee shall have and be entitled to exercise any and all rights and
remedies (but none of the obligations) of lessor hereunder, and all references
herein to Lessor shall include Lessor's assignee. Lessee acknowledges that any
assignment or transfer by Lessor does not materially change Lessee's duties or
obligations under this Lease nor materially increase the burdens or risks
imposed on Lessee.
13. ASSIGNMENT BY LESSEE. LESSEE MAY NOT, WITHOUT LESSOR IS PRIOR
WRITTEN CONSENT, (;) ASSIGN THIS LEASE, WHETHER BY OPERATION OF LAW OR
OTHERWISE, OR SUBLEASE THE EQUIPMENT OR ANY PART THEREOF OR (;;) ASSIGN, GRANT A
SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE
AND INTEREST IN AND TO THIS LEASE OR THE EQUIPMENT. In the event Lessee makes an
assignment, sublease or other transfer (to which Lessor has consented), Lessee
shall not thereby be relieved of its duties and obligations hereunder, for which
it shall remain fully responsible and liable (independent of its assignee).
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<PAGE> 6
14. TAXES.
(a) Lessee shall comply with all applicable federal, state,
local, foreign and international laws, regulations and orders relating to this
Lease. Lessee assumes liability for, and shall pay when due, and on a net
after-tax basis shall indemnify and defend Lessor against, all federal, state,
local, foreign and international fees, taxes and government charges (including,
without limitation, interest and penalties) of any nature imposed upon or in any
way relating to Lessor, Lessee, any item of Equipment or this Lease, except
federal, state and local taxes on or measured by Lessor's net income (other than
any such tax which is in substitution for or relieves Lessee from the payment of
taxes it would otherwise be obligated to pay to or reimburse Lessor for as
herein provided). Lessee shall at its expense file when due with the appropriate
authorities any and all tax and similar returns and reports required to be filed
with respect thereto or, if requested by Lessor, notify Lessor of all such
requirements and furnish Lessor with all information required for Lessor to
effect such filings, which filings shall also be at Lessee's expense. Any fees,
taxes or other charges paid by Lessor upon failure of Lessee to make such
payments shall at Lessor's option become immediately due from Lessee to Lessor.
(b) This Lease has been entered into on the assumption that
Lessor shall be entitled to all deductions, credits, and other tax benefits as
are provided in the Internal Revenue Code of 1986, including amendments as may
occur (the "Code"), to an owner of property including, without limitation,
depreciation deductions and interest deductions with respect to any debts
incurred to finance the purchase of the Equipment. If, as a result of any acts,
omissions or misrepresentations by Lessee, Lessor's projected after-tax economic
return resulting from ownership and lease of the Equipment is reduced, then
Lessee's Rental Payments shall be increased in an amount (based on Lessor's
reasonable calculations) sufficient to provide the same net after-tax economic
return as if such acts or omissions had not occurred. Appropriate increases
shall also be made in the applicable Stipulated Loss Values for this Lease. In
the event the Equipment is sold by Lessor to another party, the net after-tax
economic returns considered shall be those of such other party.
15. EQUIPMENT WARRANTIES. Lessee acknowledges that (i) Lessee has
selected the supplier of the Equipment, (ii) Lessor acquired the goods or the
right to possession and use of the goods in connection with the Lease, and (iii)
Lessee received a copy of the contract by which Lessor acquired the Equipment or
the right to possession and use of the Equipment before signing the a particular
Lease. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE EQUIPMENT
AND DISCLAIMS THE SAME. Lessor shall have no liability for any damages, whether
direct, indirect, general, special, incidental, exemplary or consequential,
incurred b, Lessee as a result of an), defect or malfunction of the Equipment.
Lessee shall look solely to the Equipment supplier for any and all claims
related to the Equipment. Lessor assigns to Lessee, for and during the Lease
Term, any warranty on the Equipment provided by the supplier. Lessor and Lessee
agree that all limitations on remedies and liability contained in this Lease
represent a reasonable allocation of risks that is part of the fundamental
bargain between the parties.
16. EVENTS OF DEFAULT. An Event of Default shall occur if Lessee
(i) fails to pay any Rental Payment or other payment required under the Lease
when due and such failure continues for a period of five (5) days after written
notice from Lessor; or (ii) fails to perform or observe any other covenant,
condition or agreement to be performed or observed by it or breaches any
provision contained in the Lease or in any other document furnished to Lessor in
connection herewith, and such failure or breach continues for a period of thirty
(30) days after written notice from Lessor; or (iii) without Lessor's consent,
attempts to assign this Lease or sell, transfer, encumber, part with possession,
or sublet any item of Equipment; or (iv) makes any representation or warranty
herein or in any document furnished by Lessor in connection herewith, which
shall have been materially false or inaccurate when made or at the time to which
such representation or warranty relates; or (v) shall commit an act of
bankruptcy or become insolvent or bankrupt or make an assignment for the benefit
of creditors or consent to the appointment of a Trustee or Receiver or either
shall be appointed for Lessee or for a substantial part of its property without
its consent, or bankruptcy reorganization, or insolvency proceedings shall be
instituted by or against Lessee,
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<PAGE> 7
and, if instituted against Lessee, shall not be vacated or dismissed within
sixty (60) days. Any Event of Default shall be deemed material and a substantial
impairment of Lessor's interests for the purposes of this Lease, the UCC, and
any other applicable law.
17. REMEDIES. Upon the occurrences of any Events of Default and at
any time thereafter. provided such Event of Default is then continuing, Lessor
may, in its discretion, do any one or more of the following:
(a) cancel any or all Leases which reference this Master Lease
or the Lease Line Schedule, upon notice to Lessee;
(b) recover any accrued and unpaid Rental Payments and other
amounts which are due and owing under the Leases so canceled on the Rental
Payment Date immediately preceding the date on which Lessor obtains possession
of the Equipment (or such earlier date as judgment is entered in favor of
Lessor) (the "Determination Date"), plus interest at the Default Rate;
(c) with or without canceling this Lease, recover (i) such
Stipulated Loss Value as of the Rental Payment Date immediately preceding the
Determination Date, and (ii) the amount of any loss or reduction of tax benefits
which Lessor anticipated it would receive if the Lease continued for its full
Lease Term;
(d) recover any amounts due under any indemnity then
determinable, plus interest at the Default Rate;
(e) require that Lessee provide the return and certification
of the Equipment in accordance with Section 6(c) hereof;
(f) enter the premises where such Equipment is located and
take immediate possession of and remove the same, all without liability to
Lessor or its agents for such entry, except for costs incurred for any physical
damage to the premises caused by Lessor or its agents for such entry;
(g) sell any or all of the Equipment at public or private
sale, with or without notice to Lessee or advertisement, or otherwise dispose
of, hold, use, operate, lease to others or keep idle such Equipment, all free
and clear of any rights of Lessee and without any duty to account to Lessee for
such action or inaction or for any proceeds with respect thereto; and
(h) exercise any other right or remedy , which may be
available to it under the UCC or other applicable law including the right to
recover damages for the breach hereof.
In addition, Lessee shall be liable for, and reimburse Lessor for, all
reasonable legal fees and all commercially reasonable costs and expenses
incurred by Lessor as a result of the foregoing defaults or the exercise of
Lessor's remedies, including without limitation recovering possession of the
Equipment, selling or leasing the Equipment (including broker's and sales
representative's fees and commissions), and placing any Equipment in the
condition and obtaining the certificate required by Section 6(c) hereof. No
remedy referred to in this Section is intended to be exclusive. but each shall
be cumulative and in addition to any other remedy referred to above or otherwise
available to Lessor at la\v or in equity. No express or implied waiver by Lessor
of any default shall constitute a waiver of any other default by Lessor, or a
waiver of any of Lessor's rights.
18. INDEMNIFICATION. Lessee assumes liability for, and shall pay
when due, and shall indemnify, reimburse and hold each Indemnified Person
(defined below) harmless from and against all Claims (defined below), directly
or indirectly relating to or arising out of the acquisition, use. manufacture,
purchase, shipment, transportation, delivery, installation, lease or sublease,
ownership, operation. possession, control, storage, return or condition of any
item of Equipment (regardless of whether such item of Equipment is at the time
in the possession
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<PAGE> 8
of Lessee), the falsity of any non-tax representation or warranty of Lessee or
Lessee's failure to comply with the terms of the Lease during the Lease Term.
The foregoing indemnity shall cover, without limitation, (i) any Claim in
connection with a design or other defect (latent or patent) in any item of
Equipment, (ii) any Claim for infringement of any patent, copyright, trademark
or other intellectual property right, or (iii) any Claim for negligence or
strict or absolute liability in tort; provided, however, that Lessee shall not
indemnify Lessor for any liability incurred by Lessor as a direct and sole
result of Lessor's gross negligence or willful misconduct.
"Claim" means all liabilities, losses, damages, actions, suits,
demands, claims of any kind and nature (including, without limitation, claims
relating to environmental discharge, cleanup or compliance), and all costs and
expenses whatsoever to the extent they may be incurred or suffered by an
Indemnified Person in connection therewith (including, without limitation,
reasonable attorneys' fees and expenses), fines, penalties (and other charges of
applicable governmental authorities), licensing fees relating to any item of
Equipment, damage to or loss of use of property (including, without limitation,
consequential or special damages to third parties or damages to Lessee's
property), or bodily injury to or death of any person (including, without
limitation, any agent or employee of Lessee).
"Indemnified Person" means Lessor (including without limitation, each
of its partners) and each of their respective successors, assigns, agents,
officers, directors, shareholders, partners, servants, agents and employees.
Such indemnities shall continue in full force and effect,
notwithstanding the expiration or termination of this Lease. Upon Lessor's
written demand, Lessee shall assume and diligently conduct, at its sole cost and
expense, the entire defense of any Indemnified Person against any indemnified
Claim described in this Section 18. Lessee shall not settle or compromise any
Claim against or involving Lessor without first obtaining Lessor's written
consent thereto, which consent shall not be unreasonably withheld. Lessee shall
give Lessor prompt notice of any occurrence, event or condition in connection
with which Lessor may be entitled to indemnification hereunder. The provisions
of this Section 18 are in addition to, and not in limitation of, the provisions
of Section 14(b).
19. NOTICES. Any notices or demands required or permitted hereunder
shall be given to the parties in writing and by personal delivery, regular or
certified mail. facsimile or telegram at the address set forth in the Lease Line
Schedule or to such other address as the parties may hereafter substitute by
written notice given in the manner prescribed in this Section. Such notices or
demands shall be deemed given upon receipt in the case of personal delivery and
upon mailing or transmission in the case of mail, facsimile or telegram. Lessee
agrees to provide Lessor with thirty (30) days' prior written notice of (a) any
merger or consolidation with or into any other business organization, (b) any
sale, lease or other disposition of assets not in the ordinary course of
business, and (c) any other material change in Lessee's financial structure or
ownership.
20. FURTHER ASSURANCES. Lessee will promptly execute and deliver to
Lessor such further reasonable documents and take such further reasonable action
as Lessor may request in order to more effectively carry out the intent and
purpose of this Lease or an assignment of Lessor's interest herein.
21. MISCELLANEOUS. This Lease shall be binding upon and inure to the
benefit of the parties hereto, their permitted successors and assigns. Any
provision of the Lease which is unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof; and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction; provided,
however, that to the extent that the provisions of any such applicable law can
be waived, they are waived by Lessee. Time is of the essence with respect to the
Lease. Lessee expressly assumes liability for and agrees to indemnify and defend
and hold Lessor harmless from and against any breach by Lessee of any
representation, warranty or covenant made by Lessee herein and in connection
therewith to pay and reimburse Lessor for the payment of any and all expenses,
including reasonable attorney fees incurred by Lessor in connection with or as
the result of any such breach. The captions set forth herein are for convenience
only and shall not define or limit any of the terms hereof. THIS LEASE SHALL
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IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES.
LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING
FROM THIS LEASE. THIS LEASE SHALL BECOME EFFECTIVE AND BINDING ON THE PARTIES,
THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, AND SHALL BE DEEMED EXECUTED
AND PERFORMED IN THE STATE OF CALIFORNIA, WHEN THE RELATED EQUIPMENT SCHEDULES
ARE ACCEPTED BY LESSOR LESSEE CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE
STATE COURTS OF CALIFORNIA FOR THE RESOLUTION OF ANY DISPUTES HEREUNDER
22. AMENDMENTS, MODIFICATIONS, WAIVERS. NONE OF THE PROVISIONS OF THIS
LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY LESSOR
AND LESSEE.
INITIALS _________ (LESSEE) INITIALS _________ (LESSEE)
LESSEE: LESSOR:
3D/FX INTERACTIVE, INC. By:MMC/GATX PARTNERSHIP NO. I
By GATX Capital Corporation, as Agent
By:________________________________ By:_____________________________________
Name:______________________________ Name:___________________________________
Title:_____________________________ Title:__________________________________
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LEASE LINE SCHEDULE NO. 01, dated January 1, 1996 ("Lease Line Schedule"),
to
MASTER EQUIPMENT LEASE AGREEMENT NO.___, dated January 1, 1996 ("Master Lease"),
by and between
MMC/GATX PARTNERSHIP NO. I, a California general partnership("Lessor") and
3D/FX INTERACTIVE, INC., a California corporation ("Lessee").
(All capitalized terms not otherwise defined herein shall have the meanings
given to such terms in the Master Lease.)
IN CONSIDERATION of the mutual covenants contained herein, the parties agree as
follows:
LEASE LINE. The total Lessor's Cost of all units of Equipment under all
Equipment Schedules pursuant to Lease Line Schedule No. 01 and 02, both dated
March 31, 1995, to Master Equipment Lease Agreement No. ___, dated January 1,
1996, shall not exceed $l,000,000.00 (the "Commitment"). "Lessor's Cost" means,
with respect to a unit of Equipment, the total cost to Lessor of purchasing such
unit, as indicated on the applicable Equipment Schedule. Lessor's obligation to
fund Equipment Schedules under the Commitment shall terminate on December 31,
1996 (the "Commitment Termination Date"). The minimum Lessor's Cost for each
Delivery & Acceptance Certificate shall be $10,000.00. There shall be no more
than one Equipment Schedule in any month.
RENTAL FACTOR. The Rental Factor for each Equipment Schedule will be
based upon an implicit interest rate equal to the prime lending rate as quoted
in The Wall Street Journal ten business days prior to the Commencement Date for
such Equipment Schedule (the "Prime Rate") plus 200 basis points. If on such
date the Prime Rate is other than 8.5%, then the Rental Factor for that
Equipment Schedule will be adjusted upward or downward basis point for basis
point to maintain an implicit interest rate equal to the Prime Rate plus 200
basis points. Once the Lease Term commences for any Equipment Schedule, there
will be no further adjustments to the Rental Factor for such Equipment Schedule.
The Rental Payment under a particular Equipment Schedule shall be an amount
equal to the product of (a) the Rental Factor and (b) the aggregate Lessor's
Cost of Equipment subject to such Equipment Schedule.
INTERIM RATE. The Interim Rate used to calculate the daily Interim Rent
shall be equal to the Rental Factor for each Equipment Schedule divided by
thirty (30). The Interim Period as defined in the Master Lease shall be modified
to start on the date the Equipment is delivered to and accepted by the Lessee
and the Lessor's Cost of Equipment is advanced by Lessor.
ADVANCE RENT. Upon execution of each Summary Equipment Schedule under
this Lease Line Schedule, Lessee shall pay to Lessor advance rent equal to the
product of the Lessor's Cost and the Rental Factor ("Advance Rent"), to be
applied toward the last Rental Payment due from Lessee to Lessor under each
Equipment Schedule.
EXPENSES. Lessee agrees to reimburse Lessor for a total of up to
Fifteen Hundred Dollars ($1,500.00) of expenses incurred in connection with the
negotiation and documentation of this transaction, promptly upon receipt of an
invoice together with appropriate back-up.
ELIGIBLE EQUIPMENT. All equipment financed under an Equipment Schedule
shall be Eligible Equipment. "Eligible Equipment" means the following types of
equipment to the extent acceptable to Lessor:
Various new and used computers, peripherals, analytical and test
equipment, laboratory equipment and furniture, office furniture and equipment
and other equipment as mutually agreed between Lessee and Lessor, together with
all replacements, parts, cables. repairs, additions and accessories incorporated
therein or affixed thereto and all operating manuals and manufacturer's
instructions (collectively hereinafter called the "Equipment"). Such
replacements, parts, cables, repairs, additions and accessories shall (whether
or not purchased by Lessor) be
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<PAGE> 11
considered part of the Equipment for all purposes and, when installed in or
attached to the Equipment (unless otherwise agreed), be or become the property
of the Lessor except such external, stand-alone accessories acquired by Lessee
which may be removed without damage to the equipment which shall be the property
of the Lessee. Except as otherwise specifically provided or the context so
requires, the term "Equipment" includes operating system or other bundled
software which is delivered on or with the Equipment or is included on the
Equipment Schedules.
COMMENCEMENT DATE. The "Commencement Date" for each Equipment Schedule
shall be the first day of the calendar month following the Acceptance Date for
the items of Equipment subject to such Equipment Schedule. If the Acceptance
Date is the first day of a calendar month, then the Commencement Date shall be
the Acceptance Date.
LEASE TERMINATION OPTIONS. Notwithstanding anything to the contrary in
Section 6 of the Master Lease, upon Lease Termination (as defined in the Master
Lease), Lessee will have, with respect to all but not less than all of the
Equipment governed by this Lease Line Schedule, the option to (a) purchase the
Equipment from Lessor for the lesser of its Fair Market Value or fifteen percent
(15% ) of the Lessor's Cost or (b) renew the Lease.
ADVANCE NOTICE PERIOD. The "Advance Notice Period" shall be at least
ninety (90) days, but not more than 180 days, prior to Lease Termination (as
defined in the Master Lease) of Equipment Schedule No. 1 to this Lease Line
Schedule.
AUTOMATIC EXTENSION PERIOD. The "Automatic Extension Period" shall
equal three (3) months and affects each Equipment Schedule under this Lease Line
Schedule.
INSURANCE. The amount of commercial general liability insurance (other
than products liability coverage and completed operations insurance) required
under the Master Lease shall be at least $1,000,000 per occurrence. The amount
of the products liability and completed operations insurance under the Master
Lease shall be at least $1,000,000 per occurrence; provided however, that Lessee
shall not be required to obtain products liability and completed operations
insurance until the occurrence of the first shipment of a product to a customer.
FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as
available, but in any event within twenty (20) days after the end of each month,
a company prepared balance sheet, income statement and cash flow statement
covering Lessee's operations during such period, certified by an officer of
Lessee reasonably acceptable to Lessor; (b) as soon as practicable after the end
of each fiscal year, and in any event within one hundred twenty (120) days
Lessee will provide Lessor with consolidated balance sheets of Lessee and its
subsidiaries, if any, as at the end of each fiscal year, and consolidated
statements of operations and consolidate statements of cash flows of the Lessee
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles, all in reasonable detail certified by
independent public auditors of recognized national standing selected by Lessee;
provided, however, that until the Lessee shall have revenues in excess of
$10,000,000, such financial statements may be reviewed but not audited; (c)
promptly upon becoming available, copies of all statements, reports, budgets,
sales projections, operating plans and notices sent or made available generally
by Lessee to its security holders; (d) immediately upon receipt of notice
thereof, a report of any material legal actions pending or threatened against
Lessee; and (e) such other financial information as Lessor may reasonably
request from time to time.
MAINTENANCE SERVICE CONTRACTS. Lessee shall obtain and keep in effect
at all times during the Lease Term (and any renewal or extension thereof),
maintenance service contracts covering the Equipment with the Equipment supplier
or with suppliers of maintenance services approved by Lessor, such approval not
to be unreasonably withheld.
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INSTALLATION, HANDLING AND DELIVERY CHARGES. Any handling and delivery
charge to cover all Equipment transportation, rigging, drayage, packing,
installation and handling to and from vendor's plant and upon return to Lessor's
designated location shall be paid by Lessee.
MISCELLANEOUS TAXES. Without limitation of the provisions of the Master
Lease, Lessee agrees to pay and to indemnify Lessor for any sales or use tax and
any property tax in connection with the sale, lease or use of the Equipment.
LATE FEE. Lessee shall pay a late charge on any rent payments or other
sums due hereunder which are past due, in an amount equal to 2 % of the past due
amount, payable on demand.
DEFAULT RATE. The Default Rate of interest on late payments shall be
fifteen percent (15%) per annum.
NOTICES. All notices shall be addressed as follows:
If to Lessor:
MMC/GATX Partnership No. I
c/o GATX Capital Corporation, Agent
Four Embarcadero Center, Suite 2200
San Francisco, CA 94111
Attn: Contract Administration
phone: (415) 955-3200
Fax: (415) 955-3444
With a copy of required financial information to:
MEIER MITCHELL & COMPANY
4 Orinda Wy, Suite 200-B
Orinda, California 94563
Attn: Contract Administration
Phone: (510) 254-9520
Fax (415)254-9528
If to Lessee:
3D/fx Interactive, Inc.
415 Clyde Avenue, Suite. 105
Mountain View, CA 94043
Attn: Gary Martin
Phone: (415) 934-2400
Fax (415) 934-2424
CONDITIONS TO THE FIRST EQUIPMENT SCHEDULE. On or prior to the date of
execution of the first Equipment Schedule under this Lease Line Schedule, Lessor
shall have received in form and substance satisfactory to Lessor, each of the
following:
A Warrant substantially in the form of EXHIBIT H to the Master Lease.
A legal opinion of Lessee's legal counsel in form and substance
reasonably satisfactory to Lessor, covering the matters set forth in
EXHIBIT G to the Master Lease.
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Copies, certified by the Secretary or Assistant Secretary or Chief
Financial Officer of Lessee, of: (i) the Articles of Incorporation and
By-Laws of Lessee (as amended to the date of the Lease) and (ii) the
resolutions adopted by l~e's board of directors authorizing the
execution and delivery of this Lease, the Lease Line Schedule, the
Equipment Schedules, the Warrant and the other documents referred in
this Lease Line Schedule and the performance by Lessee of its
obligations in such documents.
Evidence of the insurance coverage required by SECTION 8 of the Master
Lease.
All necessary consents of shareholders and other third parties with
respect to the subject matter of the Master Lease, the Lease Line
Schedule, the Equipment Schedules and the Warrant.
Payment of the Advance Rent.
CONDITIONS TO ALL FUNDINGS UNDER ALL EQUIPMENT SCHEDULES. On or prior to
each funding under each Equipment Schedule under this Lease Line Schedule, each
of the following conditions shall have been satisfied:
No Event of Default or event which, with notice or lapse of time or
both, would become an Event of Default, has occurred and is continuing.
Lessor shall have received all necessary or desirable estoppel
certificates and UCC filings, releases or terminations.
Lessor shall have received a landlord waiver and consent in
substantially the form of EXHIBIT E to the Master Lease with respect to
each equipment location. Until such landlord waiver has been provided
Lessor will not finance any Equipment that in its sole opinion may or
may not be a fixture.
There shall not have occurred (i) any material adverse change to the
general affairs, management, results of operations, condition
(financial or otherwise) or prospects of Lessee, whether or not arising
from transactions in the ordinary course of business, or (ii) any
material adverse deviation by Lessee from the business plan of Lessee
presented to and not disapproved by Lessor, since the date of the
Master Lease.
Lessee shall have delivered to Lessor an Equipment Schedule covering
the appropriate funding period.
The aggregate of Lessor's Cost of all Units subject to each Equipment
Schedule and all Equipment Schedules previously made subject to the
Master Lease which consist of computer software and/or equipment
manufactured specially for Lessee shall not exceed 25% of the total
Lessor's Cost of Equipment funded.
Lessee shall have delivered to Lessor (i) in the case of a
sale-leaseback, copies of invoices, canceled checks or other proof of
payment, a Bill of Sale, a Delivery and Acceptance Certificate, and any
UCC filings or other notices deemed necessary or desirable in
connection with the sale-leaseback or (ii) at Lessor's request, in the
case of a purchase of new equipment in excess of $2S,000 from an
equipment vendor, a Purchase Order and Invoice Assignment and a
Delivery and Acceptance Certificate.
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All terms and conditions in the Equipment Schedule shall have been
satisfied by the Acceptance Date for the Equipment under such Equipment
Schedule.
All other documents as Lessor shall have reasonably requested.
LESSEE: LESSOR:
3D/FX INTERACTIVE, INC. By:MMC/GATX PARTNERSHIP NO. I
By GATX Capital Corporation, as Agent
By:________________________________ By:__________________________________
Name:______________________________ Name:________________________________
Title:_____________________________ Title:_______________________________
ANNEX A - Stipulated Loss Value Table
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EXHIBIT 10.11
MASTER EQUIPMENT LEASE AGREEMENT
Agreement No. 101 Dated: March 31, 1995
LESSOR: LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited
partnership ("Lessor") 100 Drakes Landing Road, Suite 260,
Greenbrae, California 94904
LESSEE: 3D/FX INTERACTIVE, INC., a California corporation ("Lessee")
ADDRESS: 415 Clyde Avenue, Suite 105, Mountain View, California 94043
IN CONSIDERATION of the mutual covenants contained herein, the parties agree as
follows:
1. LEASE. Lessor leases to Lessee and Lessee leases from Lessor
the personal property described in each Equipment Schedule executed pursuant
hereto, subject to the terms and conditions of this Master Equipment Lease
Agreement ("Master Lease") and the applicable Lease Line Schedule (defined
below). The "Equipment" (as defined in the Lease Line Schedules) is being leased
for commercial or business purposes only, and not for personal, home, or family
purposes. The parties agree that each Lease is a "finance lease" under the
Uniform Commercial Code (as in effect in the State of California during the term
of the Lease and referred to hereafter as the "UCC").
2. LEASE LINE SCHEDULE. "Lease Line Schedule" means a Lease Line
Schedule in the form of EXHIBIT A-L or EXHIBIT A-2 signed by Lessor and Lessee
and incorporating by reference the terms and provisions of this Master Lease.
3. EQUIPMENT SCHEDULES. "Equipment Schedule" means an Equipment
Schedule in the form of EXHIBIT B-1 or EXHIBIT B-2 signed by Lessor and Lessee
and incorporating, by reference, the terms and provisions of this Master Lease
and the applicable Lease Line Schedule. Each Equipment Schedule shall constitute
a separate and independent lease (a "Lease"); the original of such Lease shall
consist of the signed Equipment Schedule and a copy of the Master Lease and
applicable Lease Line Schedule. Capitalized terms used, but not defined, in this
Master Lease have the meanings given to such terms in the applicable Lease Line
Schedule or Equipment Schedule, as the case may be.
4. TERM AND RENTALS.
(a) ACCEPTANCE. The Lease shall commence with respect to
Equipment described on an Equipment Schedule upon the Acceptance Date. The
"Acceptance Date" shall be the date upon which Lessee executes a Delivery and
Acceptance Certificate in the form of EXHIBIT C.
(b) TERM AND PAYMENT OF RENT. The lease term for the Equipment
shall be the "Lease Term" set forth in the applicable Equipment Schedule which
shall commence on the "Commencement Date" (as defined in the applicable Lease
Line Schedule). Lessee agrees to pay to Lessor the "Rental Payments" for the
Lease Term, in the amounts and at the times set forth in the applicable
Equipment Schedule.
(c) INTERIM PERIOD. If an Acceptance Date does not fall on a
Commencement Date, then Lessee agrees to pay to Lessor "Interim Rent" for the
period commencing on the Acceptance Date through and including the day preceding
the Commencement Date (the "Interim Period"). The Interim Rent payment for the
Interim Period shall accrue at the "Interim Rate" (as defined in the applicable
Lease Line Schedule) and shall be due and payable in full on the Commencement
Date.
(d) LEASE TERMINATION. Lessee may terminate the Lease at the
expiration of the Lease Term or any renewal term (the "Lease Termination") by
submitting to Lessor a Notice of Election in the form of EXHIBIT D. If a
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Notice of Election is not submitted by Lessee to Lessor during the "Advance
Notice Period" (as defined in the Lease Line Schedule), then the Lease Term or
any renewal Term will be automatically extended for an additional period equal
to the "Automatic Extension Period" (as defined in the Lease Line Schedule). The
Lease will continue to automatically extend until Lessee submits to Lessor a
Notice of Election. The Lease may only be terminated as expressly provided in
this Section, in the applicable Lease Line Schedule or in the applicable
Equipment Schedule. Lessee agrees to continue paying rent for the Equipment in
the amount of the Rental Payment set forth in the applicable Equipment Schedule
until the later of (i) the expiration of the Lease Term, any renewal term and
any Automatic Extension Period and (ii) either (A) the purchase option price is
paid pursuant to SECTION 6(a), or (B) a mutually agreed renewal of the Lease
takes effect pursuant to SECTION 6(b), or (C) the Equipment is returned in the
manner and condition prescribed in SECTION 6(c), in each case after delivery of
a Notice of Election.
(e) NET LEASE. Each Equipment Schedule shall be a net lease,
and Lessee's obligation to pay all rent and other sums thereunder shall be
absolute and unconditional, and shall not be subject to any abatement,
reduction, setoff, defense, counterclaims, interruption, deferment or
recoupment, for any reason whatsoever.
5. LATE FEE. Lessee shall pay a late charge on any rent payments
or other sums due hereunder which are past due, in the amount specified in the
applicable Lease Line Schedule, payable on demand. In addition, interest shall
accrue daily at the "Default Rate" (as defined in the Lease Line Schedule), or
if such rate exceeds the maximum rate allowed by law, then at such maximum rate,
and shall be payable on demand.
6. LEASE TERMINATION OPTIONS. Upon Lease Termination, Lessee will
have the option to purchase the Equipment or renew the term of the Lease as set
forth below. Lessee shall specify its election of a Lease Termination Option in
the Notice of Election.
(a) PURCHASE OPTION. If Lessee exercises the option to
purchase, then, provided no Event of Default has occurred and is then
continuing, Lessee shall at the expiration of the Lease Term, renewal term or
extension, as the case may be, purchase the Equipment. The purchase price shall
be the Equipment's then fair market value ("FMV") or as may be otherwise
provided in a particular Lease Line Schedule. FMV, as applied to a purchase
option, shall be determined by Lessor based on the price a willing buyer would
pay and a willing seller would accept (neither buyer nor seller being under
compulsion to act) for the Equipment as installed and in use, giving due
consideration to its condition, utility, revenue-producing capability, and
replacement costs. If Lessee fails to agree with Lessor's good faith
determination of the FMV, Lessee shall nevertheless pay Lessor's invoice and
provide Lessor with a written request for a determination of the FMV with or
prior to such payment. Within ten (10) days after such request Lessor and Lessee
shall agree on an appraiser to determine the FMV or, lacking such agreement,
shall each tender the name of an appraiser. The appraiser(s) shall, within
thirty (30) days, either agree on the FMV or select a third appraiser, to form a
committee to determine the FMV. Determination by the appraiser(s) shall be final
and binding on both parties. Within fifteen (15) days after such determination,
Lessor shall refund any excess received over the FMV, and/or Lessee shall pay
any additional amount of the FMV above the amount previously paid. Each party
shall bear the fees and expenses of any appraiser which it names and share
equally the fees and expenses of any appraiser(s) jointly selected. If the
appraised FMV is within 5% of the amount invoiced by Lessor, then Lessee shall
pay all appraiser fees and expenses. The purchase option price shall be paid not
later than the last day of the Lease Term.
(b) RENEWAL. If Lessee exercises the option to renew this
Lease, such renewal shall be upon the terms and conditions of this Master Lease
and the applicable Lease Line Schedule, for a rental period and rental amount to
be agreed upon by Lessee and Lessor.
7. USE; MAINTENANCE.
(a) Lessee, at its expense, shall make all necessary site
preparations and cause the Equipment to be operated in accordance with any
applicable operating manuals and manufacturer's instructions. Notwithstanding
any
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transfer or assignment by Lessor and provided Lessee is not in default
hereunder, Lessee shall have the right to quietly possess and use the Equipment
as provided herein without interference by Lessor, its assigns or any other
third party claiming through or under Lessor.
(b) Lessee shall effect and bear the expense of all necessary
repair, maintenance, operation and replacements required to be made to maintain
the Equipment in good condition, reasonable wear and tear excepted, and to
comply with all domestic and international laws to which the use and operation
of the Equipment may be or become subject. All replacement Equipment and parts
furnished in connection with such maintenance or repair shall immediately become
the property of Lessor and part of the Equipment for all purposes hereof. All
such maintenance, repair and replacement services shall be immediately paid for
and discharged by Lessee with the result that no lien under any applicable laws,
will attach to the Equipment as a result of the performance of such services or
the provision of any such material, except mechanic's liens not based on
delinquent payments which the Lessee may contest in good faith.
8. INSURANCE. Lessee shall obtain and maintain for the Lease Term
(and any renewal term or extension), at its own expense, (a) "all risk"
insurance against loss or damage to the Equipment, (b) commercial general
liability insurance (including contractual liability, products liability and
completed operations coverage) reasonably satisfactory to Lessor, and (c) such
other insurance against such other risks of loss and with such terms, as shall
in each case be reasonably satisfactory to or reasonably required by Lessor (as
to carriers, amounts and otherwise). The amount of the "all risk" insurance
shall be greater than or equal to the Stipulated Loss Value (as defined in
Section 9 below) of all Equipment outstanding under the Lease Line Schedules and
must otherwise be reasonably satisfactory to Lessor as of each anniversary date
of this Lease. Any increase in the amount of such insurance coverage reasonably
requested by Lessor shall be put into effect on the next succeeding renewal date
of such insurance.
Each "all risk" policy shall: (i) name Lessor as sole loss payee with
respect lo the Equipment, (ii) provide for each insurer's waiver of its right of
subrogation against Lessor and Lessee, and (iii) shall waive set-off,
counterclaim or offset against Lessor.
Each liability policy shall name Lessor as an additional insured and
provide that such insurance shall have cross-liability and severability of
interest endorsements (which shall not increase the aggregate policy limits of
Lessee's insurance).
All insurance policies shall provide that Lessee's insurance shall be
primary without a right of contribution of Lessor's insurance, if any, or any
obligation on the part of Lessor to pay premiums of Lessee! and shall contain a
clause requiring the insurer to give Lessor at least 30 days' prior written
notice of its cancellation (other than cancellation for non-payment for which 10
days' notice shall be sufficient. Lessee shall on or prior to the date of the
first effective Equipment Schedule and prior to each policy renewal, furnish to
Lessor certificates of insurance or other evidence satisfactory to Lessor that
such insurance coverage is in effect. Lessee further agrees to give Lessor
prompt notice of any damage to, or loss of, the Equipment, or any part thereof.
9. LOSS OR DAMAGE. If any items of Equipment shall become lost,
stolen, destroyed, or damaged beyond repair for any reason, or in the event of
condemnation, confiscation, seizure or requisition of title to or use of such
items (collectively, an "Event of Loss"), Lessee shall promptly pay to Lessor
the applicable Stipulated Loss Value of the Equipment subject to the Event of
Loss. Upon payment by Lessee of the Stipulated Loss Value, Lessor will transfer
to Lessee, "AS IS, WHERE IS, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all
of Lessor's right, title and interest, if any, in such items of Equipment. The
"Stipulated Loss Value" payable by Lessee under this Lease shall be an amount
equal to the product of (a) Lessor's Cost of the affected Equipment and (b) the
percentage set forth in the table attached to the applicable Lease Line Schedule
as Annex A opposite the Rental Payment number next following the Event of Loss.
Stipulated Loss Values and Rental Payments shall not be prorated.
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10. TITLE, INSPECTION AND LOCATION.
(a) TITLE. Lessor and Lessee confirm their intent that title
(if an ) to the Equipment shall remain in Lessor (or its successors and assigns)
exclusively. If requested by Lessor, Lessee will affix plates or markings on the
Equipment and on any operating manuals and manufacturer's instructions
indicating the interests of Lessor and its assigns therein, and Lessee will not
allow any other indicia of ownership or other interest in the Equipment to be
placed on the Equipment. Lessee shall not sell, assign, grant a security
interest in, sublet, pledge, hypothecate or otherwise encumber or suffer a lien
upon or against this Lease or the Equipment.
(b) INSPECTION. Lessor (through any of its officers, employees
or agents) shall have the right to inspect the Equipment during regular business
hours, with reasonable notice, and in compliance with Lessee's reasonable
security procedures; provided, that such inspections will be conducted no more
often than every six (6) months unless an Event of Default, or event which, with
notice or lapse of time or both, would become an Event of Default, has occurred
and is continuing.
(c) LOCATION. In the case of Equipment other than mobile
Equipment, Lessee may move such Equipment from the installation address shown on
the Equipment Schedule (or any other location for which Lessee has complied with
this provision) only if (i) the new location is within the continental United
States, and (ii) Lessee gives prior written notice of the relocation and
provides UCC-I financing statements, landlord waivers or such other
documentation as Lessor reasonably requests to protect its interest in the
Equipment. In the case of mobile equipment (including, without limitation,
lap-top computers), Lessee agrees to obtain from the person using such mobile
Equipment and deliver to Lessor, an Acknowledgment in the form of EXHIBIT F.
(d) Lessee shall keep copies of all operating manuals and
manufacturer's instructions with respect to the Equipment in good condition at
the locations specified in Section 10(c).
11. LESSEE'S REPRESENTATIONS, WARRANTIES AND WAIVERS. Upon
execution of the Master Lease and each Equipment Schedule, Lessee warrants and
represents the following:
(a) Lessee is a corporation duly organized, validly existing
and in good standing under the laws of its state of incorporation. Lessee has
full power and authority and all necessary licenses and permits to carry on its
business as presently conducted, to own or hold under lease its properties and
to enter into this Master Lease, each Lease Line Schedule and each Equipment
Schedule and to perform its obligations thereunder; and Lessee is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the character of its properties or the nature of its
business or the performance of its obligations under this Master Lease, the
Lease Line Schedules and any Equipment Schedules requires such qualification,
except for such jurisdictions in which failure to qualify would not have a
material adverse effect on Lessee.
(b) The execution and delivery by Lessee of this Master Lease,
the Lease Line Schedules and each Equipment Schedule and the performance by
Lessee of its obligations thereunder have been duly authorized by all necessary
corporate action on the part of Lessee; and do not and will not contravene the
provisions of or constitute a default (either with or without notice or lapse of
time, or both) under, or result in the creation of any lien upon, the Equipment
or any property of Lessee under any indenture, mortgage, contract or other
instrument to which Lessee is a party or by which Lessee or its properties is
bound.
(c) No consent or approval of, giving of notice to,
registration with, or taking of any other action by, any state, federal, foreign
or other governmental commission, agency or regulatory authority or any other
person or entity is required for the consummation or performance by Lessee of
the transactions contemplated under this Master Lease, the Lease Line Schedules
and each Equipment Schedule.
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(d) This Master Lease, the Lease Line Schedules and each
Equipment Schedule, when executed by Lessee, constitute legal, valid and binding
agreements of Lessee enforceable against Lessee in accordance with their terms,
except as limited by any bankruptcy, insolvency, reorganization, or other
similar laws of general application affecting the enforcement of creditor or
Lessor rights.
(e) There are no actions, suits or proceedings pending or
threatened against or affecting Lessee or any property of Lessee in any court,
before any arbitrator of any kind or before or by any federal state, municipal
or other government department, commission, board, bureau, agency or
instrumentality (collectively "Governmental Body"), which, if adversely
determined, would materially adversely affect the business, financial condition,
assets, or operations of Lessee, or adversely affect the ability of Lessee to
perform its obligations under this Master Lease, the Lease Line Schedules and
each Equipment Schedule; and Lessee is not in default with respect to any order
of any court, arbitrator or Governmental Body or with respect to any material
loan agreement, debt instrument or contract with a supplier or customer of
Lessee, except as disclosed in writing to Lessor.
(f) To the extent permitted by applicable law, Lessee waives
any and all rights and remedies to: (i) cancel this Lease; (ii) repudiate this
Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v)
recover damages from Lessor for any breaches of warranty or for any other reason
other than breach by Lessor of the covenant of quiet enjoyment as set forth in
Section 7(a) hereof; (vi) claim a security interest in the Equipment in Lessee's
possession or control for any reason; (vii) deduct from Rental Payments all or
any part of any claimed damages resulting from Lessor's default, if any, under
this Lease; (viii) accept partial delivery of the Equipment; (ix) "cover" by
making any purchase or lease of or contract to purchase or lease equipment in
substitution for Equipment designated in the Lease; (x) recover any direct,
general, special, incidental, indirect, exemplary or consequential damages, for
any reason whatsoever; and (xi) obtain specific performance, replevin, detinue,
sequestration, claim and delivery or the like for any Equipment identified to
this Lease. To the extent permitted by applicable law, Lessee also waives any
rights now or hereafter conferred by statute or otherwise which may require
Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's
damages or which may otherwise limit or modify any of Lessor's rights or
remedies.
12. ASSIGNMENT BY LESSOR. LESSEE ACKNOWLEDGES THAT LESSOR MAY
SELL, ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY
PART OF ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT
NOTICE TO OR CONSENT OF LESSEE. Upon Lessor's written notice to Lessee that this
Lease, or the right to the Rental Payments hereunder, have been assigned, Lessee
shall, if requested, pay directly to Lessor's assignee without abatement,
deduction or set-off amounts which become due hereunder. Lessee waives and
agrees it will not assert against Lessor's assignee any counterclaim or set-off
in any action for rent under the Lease. Upon the assignment of this Lease,
Lessor's assignee shall have and be entitled to exercise any and all rights and
remedies (but none of the obligations) of lessor hereunder, and all references
herein to Lessor shall include Lessor's assignee. Lessee acknowledges that any
assignment or transfer by Lessor does not materially change Lessee's duties or
obligations under this Lease nor materially increase the burdens or risks
imposed on Lessee.
13. ASSIGNMENT BY LESSEE. LESSEE MAY NOT, WITHOUT LESSOR IS PRIOR
WRITTEN CONSENT, (;) ASSIGN THIS LEASE, WHETHER BY OPERATION OF LAW OR
OTHERWISE, OR SUBLEASE THE EQUIPMENT OR ANY PART THEREOF OR (;;) ASSIGN, GRANT A
SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE
AND INTEREST IN AND TO THIS LEASE OR THE EQUIPMENT. In the event Lessee makes an
assignment, sublease or other transfer (to which Lessor has consented), Lessee
shall not thereby be relieved of its duties and obligations hereunder, for which
it shall remain fully responsible and liable (independent of its assignee).
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14. TAXES.
(a) Lessee shall comply with all applicable federal, state,
local, foreign and international laws, regulations and orders relating to this
Lease. Lessee assumes liability for, and shall pay when due, and on a net
after-tax basis shall indemnify and defend Lessor against, all federal, state,
local, foreign and international fees, taxes and government charges (including,
without limitation, interest and penalties) of any nature imposed upon or in any
way relating to Lessor, Lessee, any item of Equipment or this Lease, except
federal, state and local taxes on or measured by Lessor's net income (other than
any such tax which is in substitution for or relieves Lessee from the payment of
taxes it would otherwise be obligated to pay to or reimburse Lessor for as
herein provided). Lessee shall at its expense file when due with the appropriate
authorities any and all tax and similar returns and reports required to be filed
with respect thereto or, if requested by Lessor, notify Lessor of all such
requirements and furnish Lessor with all information required for Lessor to
effect such filings, which filings shall also be at Lessee's expense. Any fees,
taxes or other charges paid by Lessor upon failure of Lessee to make such
payments shall at Lessor's option become immediately due from Lessee to Lessor.
(b) This Lease has been entered into on the assumption that
Lessor shall be entitled to all deductions, credits, and other tax benefits as
are provided in the Internal Revenue Code of 1986, including amendments as may
occur (the "Code"), to an owner of property including, without limitation,
depreciation deductions and interest deductions with respect to any debts
incurred to finance the purchase of the Equipment. If, as a result of any acts,
omissions or misrepresentations by Lessee, Lessor's projected after-tax economic
return resulting from ownership and lease of the Equipment is reduced, then
Lessee's Rental Payments shall be increased in an amount (based on Lessor's
reasonable calculations) sufficient to provide the same net after-tax economic
return as if such acts or omissions had not occurred. Appropriate increases
shall also be made in the applicable Stipulated Loss Values for this Lease. In
the event the Equipment is sold by Lessor to another party, the net after-tax
economic returns considered shall be those of such other party.
15. EQUIPMENT WARRANTIES. Lessee acknowledges that (i) Lessee has
selected the supplier of the Equipment, (ii) Lessor acquired the goods or the
right to possession and use of the goods in connection with the Lease, and (iii)
Lessee received a copy of the contract by which Lessor acquired the Equipment or
the right to possession and use of the Equipment before signing the a particular
Lease. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE EQUIPMENT
AND DISCLAIMS THE SAME. Lessor shall have no liability for any damages, whether
direct, indirect, general, special, incidental, exemplary or consequential,
incurred b, Lessee as a result of an), defect or malfunction of the Equipment.
Lessee shall look solely to the Equipment supplier for any and all claims
related to the Equipment. Lessor assigns to Lessee, for and during the Lease
Term, any warranty on the Equipment provided by the supplier. Lessor and Lessee
agree that all limitations on remedies and liability contained in this Lease
represent a reasonable allocation of risks that is part of the fundamental
bargain between the parties.
16. EVENTS OF DEFAULT. An Event of Default shall occur if Lessee
(i) fails to pay any Rental Payment or other payment required under the Lease
when due and such failure continues for a period of five (5) days after written
notice from Lessor; or (ii) fails to perform or observe any other covenant,
condition or agreement to be performed or observed by it or breaches any
provision contained in the Lease or in any other document furnished to Lessor in
connection herewith, and such failure or breach continues for a period of thirty
(30) days after written notice from Lessor; or (iii) without Lessor's consent,
attempts to assign this Lease or sell, transfer, encumber, part with possession,
or sublet any item of Equipment; or (iv) makes any representation or warranty
herein or in any document furnished by Lessor in connection herewith, which
shall have been materially false or inaccurate when made or at the time to which
such representation or warranty relates; or (v) shall commit an act of
bankruptcy or become insolvent or bankrupt or make an assignment for the benefit
of creditors or consent to the appointment of a Trustee or Receiver or either
shall be appointed for Lessee or for a substantial part of its property without
its consent, or bankruptcy reorganization, or insolvency proceedings shall be
instituted by or against Lessee,
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and, if instituted against Lessee, shall not be vacated or dismissed within
sixty (60) days. Any Event of Default shall be deemed material and a substantial
impairment of Lessor's interests for the purposes of this Lease, the UCC, and
any other applicable law.
17. REMEDIES. Upon the occurrences of any Events of Default and at
any time thereafter. provided such Event of Default is then continuing, Lessor
may, in its discretion, do any one or more of the following:
(a) cancel any or all Leases which reference this Master Lease
or the Lease Line Schedule, upon notice to Lessee;
(b) recover any accrued and unpaid Rental Payments and other
amounts which are due and owing under the Leases so canceled on the Rental
Payment Date immediately preceding the date on which Lessor obtains possession
of the Equipment (or such earlier date as judgment is entered in favor of
Lessor) (the "Determination Date"), plus interest at the Default Rate;
(c) with or without canceling this Lease, recover (i) such
Stipulated Loss Value as of the Rental Payment Date immediately preceding the
Determination Date, and (ii) the amount of any loss or reduction of tax benefits
which Lessor anticipated it would receive if the Lease continued for its full
Lease Term;
(d) recover any amounts due under any indemnity then
determinable, plus interest at the Default Rate;
(e) require that Lessee provide the return and certification
of the Equipment in accordance with Section 6(c) hereof;
(f) enter the premises where such Equipment is located and
take immediate possession of and remove the same, all without liability to
Lessor or its agents for such entry, except for costs incurred for any physical
damage to the premises caused by Lessor or its agents for such entry;
(g) sell any or all of the Equipment at public or private
sale, with or without notice to Lessee or advertisement, or otherwise dispose
of, hold, use, operate, lease to others or keep idle such Equipment, all free
and clear of any rights of Lessee and without any duty to account to Lessee for
such action or inaction or for any proceeds with respect thereto; and
(h) exercise any other right or remedy , which may be
available to it under the UCC or other applicable law including the right to
recover damages for the breach hereof.
In addition, Lessee shall be liable for, and reimburse Lessor for, all
reasonable legal fees and all commercially reasonable costs and expenses
incurred by Lessor as a result of the foregoing defaults or the exercise of
Lessor's remedies, including without limitation recovering possession of the
Equipment, selling or leasing the Equipment (including broker's and sales
representative's fees and commissions), and placing any Equipment in the
condition and obtaining the certificate required by Section 6(c) hereof. No
remedy referred to in this Section is intended to be exclusive. but each shall
be cumulative and in addition to any other remedy referred to above or otherwise
available to Lessor at la\v or in equity. No express or implied waiver by Lessor
of any default shall constitute a waiver of any other default by Lessor, or a
waiver of any of Lessor's rights.
18. INDEMNIFICATION. Lessee assumes liability for, and shall pay
when due, and shall indemnify, reimburse and hold each Indemnified Person
(defined below) harmless from and against all Claims (defined below), directly
or indirectly relating to or arising out of the acquisition, use. manufacture,
purchase, shipment, transportation, delivery, installation, lease or sublease,
ownership, operation. possession, control, storage, return or condition of any
item of Equipment (regardless of whether such item of Equipment is at the time
in the possession
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of Lessee), the falsity of any non-tax representation or warranty of Lessee or
Lessee's failure to comply with the terms of the Lease during the Lease Term.
The foregoing indemnity shall cover, without limitation, (i) any Claim in
connection with a design or other defect (latent or patent) in any item of
Equipment, (ii) any Claim for infringement of any patent, copyright, trademark
or other intellectual property right, or (iii) any Claim for negligence or
strict or absolute liability in tort; provided, however, that Lessee shall not
indemnify Lessor for any liability incurred by Lessor as a direct and sole
result of Lessor's gross negligence or willful misconduct.
"Claim" means all liabilities, losses, damages, actions, suits,
demands, claims of any kind and nature (including, without limitation, claims
relating to environmental discharge, cleanup or compliance), and all costs and
expenses whatsoever to the extent they may be incurred or suffered by an
Indemnified Person in connection therewith (including, without limitation,
reasonable attorneys' fees and expenses), fines, penalties (and other charges of
applicable governmental authorities), licensing fees relating to any item of
Equipment, damage to or loss of use of property (including, without limitation,
consequential or special damages to third parties or damages to Lessee's
property), or bodily injury to or death of any person (including, without
limitation, any agent or employee of Lessee).
"Indemnified Person" means Lessor (including without limitation, each
of its partners) and each of their respective successors, assigns, agents,
officers, directors, shareholders, partners, servants, agents and employees.
Such indemnities shall continue in full force and effect,
notwithstanding the expiration or termination of this Lease. Upon Lessor's
written demand, Lessee shall assume and diligently conduct, at its sole cost and
expense, the entire defense of any Indemnified Person against any indemnified
Claim described in this Section 18. Lessee shall not settle or compromise any
Claim against or involving Lessor without first obtaining Lessor's written
consent thereto, which consent shall not be unreasonably withheld. Lessee shall
give Lessor prompt notice of any occurrence, event or condition in connection
with which Lessor may be entitled to indemnification hereunder. The provisions
of this Section 18 are in addition to, and not in limitation of, the provisions
of Section 14(b).
19. NOTICES. Any notices or demands required or permitted
hereunder shall be given to the parties in writing and by personal delivery,
regular or certified mail. facsimile or telegram at the address set forth in the
Lease Line Schedule or to such other address as the parties may hereafter
substitute by written notice given in the manner prescribed in this Section.
Such notices or demands shall be deemed given upon receipt in the case of
personal delivery and upon mailing or transmission in the case of mail,
facsimile or telegram. Lessee agrees to provide Lessor with thirty (30) days'
prior written notice of (a) any merger or consolidation with or into any other
business organization, (b) any sale, lease or other disposition of assets not in
the ordinary course of business, and (c) any other material change in Lessee's
financial structure or ownership.
20. FURTHER ASSURANCES. Lessee will promptly execute and deliver
to Lessor such further reasonable documents and take such further reasonable
action as Lessor may request in order to more effectively carry out the intent
and purpose of this Lease or an assignment of Lessor's interest herein.
21. MISCELLANEOUS. This Lease shall be binding upon and inure to
the benefit of the parties hereto, their permitted successors and assigns. Any
provision of the Lease which is unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof; and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction; provided,
however, that to the extent that the provisions of any such applicable law can
be waived, they are waived by Lessee Time is of the essence with respect to the
Lease. Lessee expressly assumes liability for and agrees to indemnify and defend
and hold Lessor harmless from and against any breach by Lessee of any
representation, warranty or covenant made by Lessee herein and in connection
therewith to pay and reimburse Lessor for the payment of any and all expenses,
including reasonable attorney fees incurred by Lessor in connection with or as
the result of any such breach. The captions set forth herein are for convenience
only and shall not define or limit any of the terms hereof. THIS LEASE SHALL IN
ALL
8
<PAGE> 9
RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE
OF CALIFORNIA, WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES. LESSOR AND
LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM THIS
LEASE. THIS LEASE SHALL BECOME EFFECTIVE AND BINDING ON THE PARTIES, THEIR
RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, AND SHALL BE DEEMED EXECUTED AND
PERFORMED IN THE STATE OF CALIFORNIA, WHEN THE RELATED EQUIPMENT SCHEDULES ARE
ACCEPTED BY LESSOR LESSEE CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE
STATE COURTS OF CALIFORNIA FOR THE RESOLUTION OF ANY DISPUTES HEREUNDER
22. AMENDMENTS, MODIFICATIONS, WAIVERS. NONE OF THE PROVISIONS OF
THIS LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY
LESSOR AND LESSEE.
INITIALS _________ (LESSEE) INITIALS _________ (LESSEE)
LESSEE: LESSOR:
3D/FX INTERACTIVE, INC. By: LIGHTHOUSE CAPITAL PARTNERS,
L.P., its general partner
By: __________________________ By: LIGHTHOUSE CAPITAL PARTNERS,
L.P., its general partner
Name: ________________________
By: ___________________________
Title: _______________________
Name: _________________________
Date: ________________________
Title: ________________________
9
<PAGE> 10
EXHIBIT A-1
LEASE LINE SCHEDULE NO. 01, dated March 31, 1995 ("Lease Line Schedule"),
to
MASTER EQUIPMENT LEASE AGREEMENT NO. 101, dated March 31, 1995 ("Master Lease"),
by and between
LIGHTHOUSE CAPITAL PARTNERS, LP., a Delaware limited partnership
("Lessor") and 3D/FX INTERACTIVE, INC., a California corporation ("Lessee").
(All capitalized terms not otherwise defined herein shall have the meanings
given to such terms in the Master Lease.)
IN CONSIDERATION of the mutual covenants contained herein, the parties agree as
follows:
LEASE LINE. The total Lessor's Cost of all units of Equipment under all
Equipment Schedules pursuant to Lease Line Schedule No. 01 and 02, both dated
March 31, 1995, to Master Equipment Lease Agreement No. 101, dated March 31,
1995, shall not exceed $l,000,000.00 (the "Commitment"). "Lessor's Cost" means,
with respect to a unit of Equipment, the total cost to Lessor of purchasing such
unit, as indicated on the applicable Equipment Schedule. Lessor's obligation to
fund Equipment Schedules under the Commitment shall terminate on June 30, 1996
(the "Commitment Termination Date"). The minimum Lessor's Cost for each Delivery
& Acceptance Certificate shall be $10,000.00.
RENTAL FACTOR. The Rental Factor for each Equipment Schedule will be
based upon an implicit interest rate equal to the prime lending rate as quoted
in The Wall Street Journal ten business days prior to the Commencement Date for
such Equipment Schedule (the "Prime Rate") plus 300 basis points. If on such
date the Prime Rate is other than 9 %, then the Rental Factor for that Equipment
Schedule will be adjusted upward or downward basis point for basis point to
maintain an implicit interest rate equal to the Prime Rate plus 300 basis
points. Once the Lease Term commences for any Equipment Schedule, there will be
no further adjustments to the Rental Factor for such Equipment Schedule. The
Rental Payment under a particular Equipment Schedule shall be an amount equal to
the product of (a) the Rental Factor and (b) the aggregate Lessor's Cost of
Equipment subject to such Equipment Schedule.
INTERIM RATE. The Interim Rate used to calculate the daily Interim Rent
shall be equal to the Rental Factor for each Equipment Schedule divided by
thirty (30). The Interim Period as defined in the Master Lease shall be modified
to start on the date the Equipment is delivered to and accepted by the Lessee
and the Lessor's Cost of Equipment is advanced by Lessor.
ADVANCE RENT. Upon execution of each Summary Equipment Schedule under
this Lease Line Schedule, Lessee shall pay to Lessor advance rent equal to the
product of the Lessor's Cost and the Rental Factor ("Advance Rent"), to be
applied toward the last Rental Payment due from Lessee to Lessor under each
Equipment Schedule.
EXPENSES. Lessee agrees to reimburse Lessor for a total of up to
Fifteen Hundred Dollars ($ 1,500.00) of expenses incurred in connection with the
negotiation and documentation of this transaction, promptly upon receipt of an
invoice together with appropriate back-up.
ELIGIBLE EQUIPMENT. All equipment financed under an Equipment Schedule
shall be Eligible Equipment. "Eligible Equipment" means the following types of
equipment to the extent acceptable to Lessor:
Various new and used computers, peripherals, analytical and test
equipment, laboratory equipment and furniture, office furniture and equipment
and other equipment as mutually agreed between Lessee and Lessor.
1
<PAGE> 11
...together with all replacements, parts, cables. repairs, additions and
accessories incorporated therein or affixed thereto and all operating manuals
and manufacturer's instructions (collectively hereinafter called the
"Equipment"). Such replacements, parts, cables, repairs, additions and
accessories shall (whether or not purchased by Lessor) be considered part of the
Equipment for all purposes and, when installed in or attached to the Equipment
(unless otherwise agreed), be or become the property of the Lessor except such
external, stand-alone accessories acquired by Lessee which may be removed
without damage to the equipment which shall be the property of the Lessee.
Except as otherwise specifically provided or the context so requires, the term
"Equipment" includes operating system or other bundled software which is
delivered on or with the Equipment or is included on the Equipment Schedules.
COMMENCEMENT DATE. The "Commencement Date" for each Equipment Schedule
shall be the first day of the calendar month following the Acceptance Date for
the items of Equipment subject to such Equipment Schedule. If the Acceptance
Date is the first day of a calendar month, then the Commencement Date shall be
the Acceptance Date.
LEASE TERMINATION OPTIONS. Notwithstanding anything to the contrary in
Section 6 of the Master Lease, upon Lease Termination (as defined in the Master
Lease), Lessee will have, with respect to all but not less than all of the
Equipment governed by this Lease Line Schedule, the option to (a) purchase the
Equipment from Lessor for the lesser of its Fair Market Value or fifteen percent
(15% ) of the Lessor's Cost or (b) renew the Lease.
ADVANCE NOTICE PERIOD. The "Advance Notice Period" shall be at least
ninety (90) days, but not more than 180 days, prior to Lease Termination (as
defined in the Master Lease) of Equipment Schedule No. 1 to this Lease Line
Schedule.
AUTOMATIC EXTENSION PERIOD. The "Automatic Extension Period" shall
equal three (3) months and affects each Equipment Schedule under this Lease Line
Schedule.
INSURANCE. The amount of commercial general liability insurance (other
than products liability coverage and completed operations insurance) required
under the Master Lease shall be at least $1,000,000 per occurrence. The amount
of the products liability and completed operations insurance under the Master
Lease shall be at least $1,000,000 per occurrence; provided however, that Lessee
shall not be required to obtain products liability and completed operations
insurance until the occurrence of the first shipment of a product to a customer.
FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as
available, but in any event within twenty (20) days after the end of each month,
a company prepared balance sheet, income statement and cash flow statement
covering Lessee's operations during such period, certified by an officer of
Lessee reasonably acceptable to Lessor; (b) as soon as practicable after the end
of each fiscal year, and in any event within one hundred twenty (120) days
Lessee will provide Lessor with consolidated balance sheets of Lessee and its
subsidiaries, if any, as at the end of each fiscal year, and consolidated
statements of operations and consolidate statements of cash flows of the Lessee
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles, all in reasonable detail certified by
independent public auditors of recognized national standing selected by Lessee;
provided, however, that until the Lessee shall have revenues in excess of
$10,000,000, such financial statements may be reviewed but not audited; (c)
promptly upon becoming available, copies of all statements, reports, budgets,
sales projections, operating plans and notices sent or made available generally
by Lessee to its security holders; (d) immediately upon receipt of notice
thereof, a report of any material legal actions pending or threatened against
Lessee; and (e) such other financial information as Lessor may reasonably
request from time to time.
MAINTENANCE SERVICE CONTRACTS. Lessee shall obtain and keep in effect
at all times during the Lease Term (and any renewal or extension thereof),
maintenance service contracts covering the Equipment with the Equipment
2
<PAGE> 12
supplier or with suppliers of maintenance services approved by Lessor, such
approval not to be unreasonably withheld.
INSTALLATION, HANDLING AND DELIVERY CHARGES. Any handling and delivery
charge to cover all Equipment transportation, rigging, drayage, packing,
installation and handling to and from vendor's plant and upon return to Lessor's
designated location shall be paid by Lessee.
MISCELLANEOUS TAXES. Without limitation of the provisions of the Master
Lease, Lessee agrees to pay and to indemnify Lessor for any sales or use tax and
any property tax in connection with the sale, lease or use of the Equipment.
LATE FEE. Lessee shall pay a late charge on any rent payments or other
sums due hereunder which are past due, in an amount equal to 2 % of the past due
amount, payable on demand.
DEFAULT RATE. The Default Rate of interest on late payments shall be
fifteen percent (15%) per annum.
NOTICES. All notices shall be addressed as follows:
If to Lessor:
Lighthouse Capital Partners, L.P.
100 Drake's Landing, Suite 260
Greenbrae, CA 94904
Attn: Contract Administration
Phone: (415) 925-3370
Fax: (415) 925-3387
If to Lessee:
3D/fx Interactive, Inc.
415 Clyde Avenue, Suite 105
Mountain View, CA 94043
Attn: Ross Q. Smith
Phone: (415) 934-2400
Fax: (415) 934-2424
CONDITIONS TO THE FIRST EQUIPMENT SCHEDULE. On or prior to the date of
execution of the first Equipment Schedule under this Lease Line Schedule, Lessor
shall have received in form and substance satisfactory to Lessor, each of the
following:
A Warrant substantially in the form of EXHIBIT H to the Master
Lease.
A legal opinion of Lessee's legal counsel in form and
substance reasonably satisfactory to Lessor, covering the
matters set forth in EXHIBIT C to the Master Lease.
Copies, certified by the Secretary or Assistant Secretary or
Chief Financial Officer of Lessee, of: (i) the Articles of
Incorporation and By-Laws of Lessee (as amended to the date of
the Lease) and (ii) the resolutions adopted by Lessee's board
of directors authorizing the execution and delivery of this
Lease, the Lease Line Schedule, the Equipment Schedules, the
Warrant and the other documents referred in this Lease Line
Schedule and the performance by Lessee of its obligations in
such documents.
Evidence of the insurance coverage required by SECTION 8 of
the Master Lease.
3
<PAGE> 13
All necessary consents of shareholders and other third parties
with respect to the subject matter of the Master Lease, the
Lease Line Schedule, the Equipment Schedules and the Warrant.
Payment of the Advance Rent.
Conditions to all findings under all Equipment Schedules. On
or prior to each funding under each Equipment Schedule under
this Lease Line Schedule, each of the following conditions
shall have been satisfied:
No Event of Default or event which, with notice or lapse of
time or both, would become an Event of Default, has occurred
and is continuing.
Lessor shall have received all necessary or desirable estoppel
certificates and UCC filings, releases or terminations.
Lessor shall have received a landlord waiver and consent in
substantially the form of EXHIBIT E to the Master Lease with
respect to each equipment location, provided that Lessee shall
have until the earlier of (i) the execution of a lease for its
corporate headquarters or (ii) June 30, 1995, to provide such
landlord waiver. Until such landlord waiver has been provided
Lessor will not finance any Equipment that in its sole opinion
may or may not be a fixture.
There shall not have occurred (i) any material adverse change
to the general affairs, management, results of operations,
condition (financial or otherwise) or prospects of Lessee,
whether or not arising from transactions in the ordinary
course of business, or (ii) any material adverse deviation by
Lessee from the business plan of Lessee presented to and not
disapproved by Lessor, since the date of the Master Lease.
Lessee shall have delivered to Lessor an Equipment Schedule
covering the appropriate funding period.
Lessee shall have delivered to Lessor (i) in the case of a
sale-leaseback, copies of invoices, canceled checks or other
proof of payment, a Bill of Sale, a Deliver,' and Acceptance
Certificate, and any UCC filings or other notices deemed
necessary or desirable in connection with the sale leaseback
or (ii) at Lessor's request, in the case of a purchase of new
equipment in excess of $25,000 from an equipment vendor, a
Purchase Order and Invoice Assignment and a Delivery and
Acceptance Certificate.
4
<PAGE> 14
All terms and conditions in the Equipment Schedule shall have
been satisfied by the Acceptance Date for the Equipment under
such Equipment Schedule.
All other documents as Lessor shall have reasonably requested.
LESSEE: LESSOR:
3D/FX INTERACTIVE, INC. By: LIGHTHOUSE CAPITAL PARTNERS,
L.P., its general partner
By: ___________________________ By: LIGHTHOUSE CAPITAL PARTNERS,
L.P., its general partner
Name: _________________________
By: _________________________________
Title: ________________________
Name: _______________________________
Date: _________________________
Title: ______________________________
1
<PAGE> 1
EXHIBIT 10.12
July 1, 1996
Gary Martin
Chief Financial Officer
3D/fx Interactive, Inc.
415 Clyde Ave., Suite 105
Mountain View, CA 94043
Dear Gary:
Silicon Valley Bank ("Bank") is pleased to commit the following loans ("Loans")
to 3D/fx Interactive, Inc. ("Borrower") under the terms and conditions in this
letter. This letter is not meant to be, nor shall it be construed as, an attempt
to define all of the terms and conditions of the loans. The following is a
summary of the basic points of our proposal:
CREDIT FACILITY: A. $4,000,000 Revolving Accounts Receivable
Line of Credit, with the full amount of the
facility available for the issuance of
letters of credit.
B. $2,000,000 Term Loan.
MATURITY: A. 12 months from execution of loan documents.
B. Draw-Down Period: 6 months from execution of
loan documents. Repayment Period: 18 months
following Draw-Down Period.
COLLATERAL: First priority security interest in all corporate
assets. Facilities will be cross defaulted and
cross-collateralized.
INTEREST RATE: A. Prime Rate plus 0.50%, floating.
B. OPTION 1: Prime Rate plus 1.50%,
floating. This option carries
no prepayment penalty.
OPTION 2: Draw period - Prime Rate
plus 1.50%, floating.
Repayment - Fixed rate of 400
basis points above the current
yield given on US Treasury
securities of equal maturity.
The rate will be set at the
conclusion of the draw period.
This option carries a
prepayment penalty.
LOAN FEE: A. $20,000 (0.5%), due upon acceptance of
commitment.
B. $10,000 (0.5%), due upon acceptance of
commitment.
WARRANTS: A. None.
B. None.
<PAGE> 2
3D/fx Interactive, Inc.
Commitment Letter
Page -2-
BORROWING FORMULA: A. Lesser of Facility amount or 75% of standard
eligible* accounts receivable Borrower may
increase borrowing base availability by
pledging cash & equivalents in the amount of
100% of any request exceeding eligible A/R
base.
*Standard ineligibles will be modified to
allow up to a 35% concentration for any one
A/R debtor in any one month during the term
of the Facility.
B. 100% of the invoice cost of equipment,
software and leaseholds.
Expenses related to sales tax, installation
and/or delivery will be excluded.
WARRANTIES &
COVENANTS: Borrower shall make customary representations,
warranties, and covenants, together with such other
representations, warranties, and covenants as the
Bank or its counsel may deem reasonably necessary or
desirable, including the following:
FINANCIAL COVENANTS:
Borrower will agree to maintain the following
financial covenants monthly when there is an
outstanding balance under Facility A or B (quarterly
otherwise):
1. Minimum Quick Ratio of 1.50 to 1;
2. Minimum Tangible Net Worth of $3,750,000;
3. Maximum Debt to Tangible Net Worth of 2.00
to 1;
4. Quarterly profitability required starting
Q496. Q296 and Q396 losses not to exceed
($4,250,000) and ($1,700,000), respectively;
annual profitability required beginning
FY97;
5. *MINIMUM LIQUIDITY coverage of 2x Facility B
commitment required until expiration of
drawdown; 2x loan outstanding under Facility
B required thereafter.
*MINIMUM LIQUIDITY applies to Facility B
only and is defined as unrestricted cash
(and equivalents) plus 50% of net accounts
receivable or net available under A/R line
of credit.
REPORTING
REQUIREMENTS: 1. Within 90 days of fiscal year-end,
CPA-audited annual financial statements;
2. Monthly company-prepared financial
statements, prepared in accordance with GMP,
and Covenant Compliance Certificate received
within fifteen (15) days of month end when
there is an outstanding balance* under
Facility A or B; quarterly, within 30 days
otherwise;
3. Monthly Borrowing Base Certificate, accounts
receivable agings and accounts payable
agings received within fifteen days (15) of
month end immediately prior to and while
there is an outstanding balance* under
Facility A;
<PAGE> 3
3D/fx Interactive, Inc.
Commitment Letter
Page -3-
4. Collateral audit required prior to initial
cash advance under Facility A and within 30
days following a non-cash secured L/C
issuance; audits performed semi-annually
thereafter so long as there is an
outstanding balance* under Facility A. Cost
of the examinations are at Borrower's
expense.
*Bank will permit letters of credit to be
issued in an amount not to exceed 25% of
gross A/R without considering such issuances
as outstandings under Facility A. Borrower
will be required to submit a Borrowing Base
Certificate and A/R aging prior to initial
letter of credit issuance secured by A/R.
OTHER REQUIREMENTS: 1. Primary banking relationship to be
maintained with Bank.
2. Copies of invoices prior to each advance on
the Term Loan.
4. Proof of insurance on all corporate assets
with Lenders' Loss Payable F Clause naming
Bank Loss Payee.
EXPENSES: Borrower shall pay all of the Bank's fees and charges
in connection with the Loans, including all
reasonable fees of Bank's counsel. Such costs payable
by Borrower are in addition to the Loan Fees
described above. In the event the Loan does not
close, the Loan Fees to Borrower shall be reduced by
the aggregate of all expenses and charges.
CONDITIONS
OF CLOSING: The following shall be satisfied prior to closing and
shall be conditions precedent to the Bank's
obligation to fund the Loans:
1. Compliance with all warranties and
covenants, including financial and reporting
requirements.
2. After due-diligence inquiry conducted by the
Bank there shall be no discovery of any
facts or circumstances which would
negatively affect, in the Bank's sole
discretion, collectability of the Loans
against Borrower.
If these basic terms and conditions are acceptable, please so indicate by
signing the enclosed copy of this letter and returning it with the Loan Fees to
the attention of the undersigned by Wednesday, July 10, 1996 or such later date
agreed upon by Bank in writing. The proposal will constitute your instruction to
the Bank to commence, at your expense, documentation which shall supersede this
letter. This letter is intended to set forth the proposed terms of the Loans
currently under discussion between us. Except for your obligation to pay the
Bank's expenses and charges described above, this letter and our other
communications and negotiations regarding the proposed Loans do not constitute
an agreement or an offer and do not create any legal rights benefiting, or
obligations binding on, either of us. It is intended that all legal rights and
obligations of the Bank and Borrower will be set forth in definitive loan
documents.
<PAGE> 4
3D/fx Interactive, Inc.
Commitment Letter
Page -4-
Gary, we are pleased to provide you with this commitment. We hope these loans
provide the foundation for a long and mutually beneficial relationship.
Sincerely,
SILICON VALLEY BANK
________________________________
Michael J. Rose, Vice President
________________________________
Sean Lynden, Vice President & Group Manager
AGREED TO AND ACCEPTED THIS _________ DAY OF ________, 1996
3DFX INTERACTIVE, INC.
By: ________________________________
Vice President, Administration & CFO
Its: _______________________________
<PAGE> 1
EXHIBIT 10.13.1
January 10, 1997
L. Gregory Ballard
Dear Greg:
On behalf of the Board of Directors, I would like to express our
gratitude for your hard work and efforts in building a strong 3Dfx Interactive
Inc.
In appreciation of your efforts, the Board of Directors has approved a
special vesting provision with respect to your stock option grant in the event
of a change of control of the Company. For the purposes of this letter, the
term "change of control" shall mean (i) a sale of all or substantially all of
the Company's assets, or (ii) a consolidation or merger of the Company with or
into any other corporation or corporations (other than wholly-owned
subsidiaries of the Company), or engagement in a transaction or series of
related transactions, in which more than 50% of the voting power of the
Company is disposed.
In the event your employment is terminated for other than cause within
one year following the effective date of a change of control, in addition to
options already vested, the vesting of 25% of your options will be accelerated
and become fully vested or, in the event that less than 25% of your options
remain unvested, the vesting of all of your remaining options will be
accelerated and become fully vested. For the purposes of this letter,
termination other than for cause shall include "constructive" termination under
the following circumstances: (i) your base salary or rate of compensation is
reduced; (ii) your job authority and responsibility are significantly reduced;
and (iii) you are required to change the location of your job so that you will
be based at a location more than 50 miles from the then current location of
your job.
<PAGE> 2
L. Gregory Ballard
January 10, 1997
Page 2
If the foregoing confirms our agreement regarding these arrangements,
please confirm your acceptance by signing a copy of this letter in the space
indicated below.
Sincerely,
/s/ GORDON CAMPBELL
- ---------------------------
Gordon Campbell
Chairman of the Board
The foregoing is agreed and accepted:
Signature: /s/ L. GREGORY BALLARD
------------------------
Print Name: L. Gregory Ballard
-------------------------
Date: 1/14/97
-----------------------------
<PAGE> 1
EXHIBIT 10.13.2
August 26, 1996
Karl Chicca
Dear Karl:
On behalf of the Board of Directors, I would like to express our
gratitude for your hard work and efforts in building a strong 3Dfx Interactive,
Inc.
In appreciation of your efforts, the Board of Directors has approved a
special vesting provision with respect to your stock option grant in the event
of a change of control of the Company. For the purposes of this letter, the term
"change of control" shall mean (i) a sale of all or substantially all of its
assets, or (ii) a consolidation or merger with or into any other corporation or
corporations (other than wholly-owned subsidiaries of the Company), or
engagement in a transaction or series of related transactions, in which more
than 50% of the voting power of the Company is diagnosed.
In the event your employment is terminated for other than cause within
one year following the effective date of a change of control, the vesting of 25%
some of your options will be accelerated and become fully vested or, in the
event that less than 25% of your options remain unvested, the vesting of all of
your remaining options will be accelerated and become fully vested. For the
purposes of this letter, termination other than for cause shall include
"constructive" termination under the following circumstances: (i) your base
salary or rate of compensation is reduced; (ii) your job authority and
responsibility are significantly reduced; and (iii) you are required to change
the location of your job so that you will be based at a location more than 50
miles from the then current location of your job.
<PAGE> 2
Karl Chicca
August 26, 1996
Page 2
If the foregoing confirms our agreement regarding these arrangements,
please confirm your acceptance by signing a copy of this letter in the space
indicated below.
Sincerely,
/s/ GORDON CAMPBELL
- ---------------------------
Gordon Campbell
Chairman of the Board and President
The foregoing is agreed and accepted:
Signature: /s/ KARL CHICCA
------------------------
Print Name: KARL CHICCA
-------------------------
Date: 8-26-96
-----------------------------
<PAGE> 1
EXHIBIT 10.13.3
August 26, 1996
Scott Sellers
Dear Scott:
On behalf of the Board of Directors, I would like to express our
gratitude for your hard work and efforts in building a strong 3Dfx Interactive
Inc.
In appreciation of your efforts, the Board of Directors has approved a
special vesting provision with respect to your restricted stock in the event
of a change of control of the Company. For the purposes of this letter, the
term "change of control" shall mean (i) a sale of all or substantially all of
the Company's assets, or (ii) a consolidation or merger of the Company with or
into any other corporation or corporations (other than wholly-owned subsidiaries
of the Company), or engagement in a transaction or series of related
transactions, in which more than 50% of the voting power of the Company is
diagnosed.
In the event your employment is terminated for other than cause within
one year following the effective date of a change of control, in addition to
stock already released from the Company's repurchase option, 25% of your stock
will be released from the Company's repurchase option set forth in Section 3 of
your Restricted Stock Purchase Agreement or, in the event that less than 25% of
your stock remains subject to the Company's repurchase option, all of your
remaining stock will be released from the Company's repurchase option. For the
purposes of this letter, termination other than for cause shall include
"constructive" termination under the following circumstances: (i) your base
salary or rate of compensation is reduced; (ii) your job authority and
responsibility are significantly reduced; and (iii) you are required to change
the location of your job so that you will be based at a location more than 50
miles from the then current location of your job.
<PAGE> 2
Scott Sellers
August 26, 1996
Page 2
If the foregoing confirms our agreement regarding these arrangements,
please confirm your acceptance by signing a copy of this letter in the space
indicated below.
Sincerely,
/s/ GORDON CAMPBELL
- ---------------------------
Gordon Campbell
Chairman of the Board
The foregoing is agreed and accepted:
Signature: /s/ SCOTT SELLERS
------------------------
Print Name: Scott Sellers
-------------------------
Date: 8/30/96
-----------------------------
<PAGE> 1
EXHIBIT 10.13.4
August 26, 1997
Gary Tarolli
Dear Gary:
On behalf of the Board of Directors, I would like to express our
gratitude for your hard work and efforts in building a strong 3Dfx Interactive,
Inc.
In appreciation of your efforts, the Board of Directors has approved a
special vesting provision with respect to your restricted stock in the event
of a change of control of the Company. For the purposes of this letter, the
term "change of control" shall mean (i) a sale of all or substantially all of
the Company's assets, or (ii) a consolidation or merger of the Company with or
into any other corporation or corporations (other than wholly-owned subsidiaries
of the Company), or engagement in a transaction or series of related
transactions, in which more than 50% of the voting power of the Company is
diagnosed.
In the event your employment is terminated for other than cause within
one year following the effective date of a change of control, in addition to
stock already released from the Company's repurchase option, 25% of your stock
will be released from the Company's repurchase option set forth in Section 3 of
your Restricted Stock Purchase Agreement or, in the event that less than 25% of
your stock remains subject to the Company's repurchase option, all of your
remaining stock will be released from the Company's repurchase option. For the
purposes of this letter, termination other than for cause shall include
"constructive" termination under the following circumstances: (i) your base
salary or rate of compensation is reduced; (ii) your job authority and
responsibility are significantly reduced; and (iii) you are required to change
the location of your job so that you will be based at a location more than 50
miles from the then current location of your job.
<PAGE> 2
Gary Tarolli
August 26, 1997
Page 2
If the foregoing confirms our agreement regarding these arrangements,
please confirm your acceptance by signing a copy of this letter in the space
indicated below.
Sincerely,
/s/ GORDON CAMPBELL
- ---------------------------
Gordon Campbell
Chairman of the Board
The foregoing is agreed and accepted:
Signature: /s/ GARY TAROLLI
------------------------
Print Name: Gary Tarolli
-------------------------
Date: 8-28-96
-----------------------------
<PAGE> 1
Exhibit 11.1
3Dfx Interactive, Inc.
Calculation of Pro Forma Net Loss Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------------
<S> <C> <C>
Net loss $(14,751) $(1,161)
-------- -------
Weighted average common shares outstanding 3,774 3,851
Weighted average common equivalent shares
related to convertible preferred stock
(using the if-converted method) 13,161 14,044
Common equivalent shares relating to
stock options and warrants issued (using
the treasury stock method) subsequent
to April 15, 1996 2,726 2,726
-------- -------
Shares used in pro forma net loss per
share calculation 19,661 20,621
Net loss per share $ (0.75) $ (0.06)
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 11, 1997, relating
to the financial statements of 3Dfx Interactive, Inc., which appears in such
Prospectus. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected Financial
Data."
PRICE WATERHOUSE LLP
San Jose, California
April 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1995 JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 MAR-31-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 865 5,291 4,141
<SECURITIES> 0 0 0
<RECEIVABLES> 0 1,471 4,113
<ALLOWANCES> 0 78 128
<INVENTORY> 37 4,960 2,999
<CURRENT-ASSETS> 135 321 896
<PP&E> 1,596 4,726 5,060
<DEPRECIATION> 227 1,244 1,629
<TOTAL-ASSETS> 2,440 15,581 15,586
<CURRENT-LIABILITIES> 1,344 5,328 5,972
<BONDS> 0 0 0
0 0 0
5,474 28,701 29,222
<COMMON> 310 1,626 2,078
<OTHER-SE> (5,039) (19,790) (20,951)
<TOTAL-LIABILITY-AND-EQUITY> 2,440 15,581 15,586
<SALES> 0 6,390 4,497
<TOTAL-REVENUES> 0 6,390 5,247
<CGS> 0 5,123 2,582
<TOTAL-COSTS> 0 5,123 2,582
<OTHER-EXPENSES> 5,106 16,077 3,799
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 45 141 63
<INCOME-PRETAX> (5,039) (14,751) (1,161)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (5,106) (14,810) (1,134)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (5,039) (14,751) (1,161)
<EPS-PRIMARY> 0 (.75) (.06)
<EPS-DILUTED> 0 (1.56) (.12)
</TABLE>
