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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
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 OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
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)
L. GREGORY BALLARD
PRESIDENT AND
CHIEF EXECUTIVE 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)
------------------------
COPIES TO:
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ROBERT P. LATTA, ESQ. NORA L. GIBSON, 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
(650) 493-9300 (650) 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 this form is a post-effective amendment filed pursuant to Rule 462(d)
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
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value......................................... $64,967,813 $19,166
========================================================================================================================
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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.
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.
================================================================================
<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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
STATE.
SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998
LOGO
2,300,000 SHARES
COMMON STOCK
Of the 2,300,000 shares of Common Stock offered hereby 2,000,000 are being
sold by 3Dfx Interactive, Inc. ("3Dfx" or the "Company") and 300,000 are being
sold by the Selling Shareholders. See "Principal and Selling Shareholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. The Company's Common Stock is traded on the Nasdaq
National Market under the symbol "TDFX." On February 10, 1998, the last reported
sale price for the Common Stock, as reported on the Nasdaq National Market, was
$25.19 per share.
------------------------
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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------
Per Share..................... $ $ $ $
- ------------------------------------------------------------------------------------------------------
Total(2)...................... $ $ $ $
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(1) Before deducting expenses payable by the Company, estimated at $450,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 345,000 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 BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1998.
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES
THE DATE OF THIS PROSPECTUS IS , 1998
<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."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ STOCK MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
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Copyright (C) 1998 3Dfx Interactive, Inc. The 3Dfx Interactive logo and
Voodoo Graphics and Voodoo Rush are trademarks of 3Dfx Interactive, Inc. Images
courtesy of Shiny Entertainment, Interplay Productions, Eidos Interactive,
Activision, Ritual Entertainment, id Software, Origin Systems, and Electronic
Arts. Messiah images are trademarks of Shiny Entertainment. (C)1998 Shiny
Entertainment. Tank(TM) character from QUAKE II(TM) (C) 1998 Id Software, Inc.
All Rights Reserved. Distributed by Activision, Inc. under sublicense. Quake(R)
is a registered trademark of Id Software, Inc. Quake II(TM), the Id Software
name, the Quake II logo and the Id logo are trademarks of Id Software, Inc.
Activision(R) is a registered trademark of Activision, Inc. Activision(R) and
Interstate '76 are registered trademarks of Activision, Inc. Interstate '76
images are trademarks of Ritual Entertainment. SiN images are (C) 1998
Activision, Inc. Ritual and SiN are (C) 1998 Ritual Entertainment. TOMB RAIDER
II, LARA CROFT and her likeness are trademarks of Core Design (C) 1998 Core.
DEATHTRAP DUNGEON is a trademark of Eidos, PLC. (C) 1998 Eidos. FLIGHT UNLIMITED
II is a trademark of Looking Glass Studios. (C) 1998 Looking Glass Studios. All
Rights Reserved. Vampire image from Wing Commander Prophecy courtesy of ORIGIN
Systems. (C) 1998 ORIGIN Systems, Inc. ORIGIN is an Electronic Arts company.
Nuclear Strike images and Nuclear Strike are trademarks or registered trademarks
of Electronic Arts or its wholly-owned subsidiaries in the U.S. and/or other
countries. (C) 1998 Electronic Arts. All rights reserved. All other trademarks
and the trade names are the properties of their respective owners.
<PAGE> 5
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, THE SELLING SHAREHOLDERS 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.
------------------------
TABLE OF CONTENTS
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PAGE
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Summary............................................................................... 4
Risk Factors.......................................................................... 6
Use of Proceeds....................................................................... 20
Price Range of Common Stock........................................................... 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.............................................................................. 32
Management............................................................................ 49
Certain Transactions.................................................................. 59
Principal and Selling Shareholders.................................................... 61
Description of Capital Stock.......................................................... 64
Shares Eligible for Future Sale....................................................... 66
Underwriting.......................................................................... 68
Legal Matters......................................................................... 70
Experts............................................................................... 70
Additional Information................................................................ 70
Index to Financial Statements......................................................... F-1
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Glide, Voodoo Graphics, Voodoo2, 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.
------------------------
FORWARD LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. When used in this Prospectus, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, fluctuations in the Company's quarterly and
annual operating results, intense competition, the Company's dependence on the
PC and emerging 3D interactive electronic entertainment markets, the Company's
dependence on the retail distribution channel, acceptance of the Company's 3D/2D
solution for the PC market, the Company's ability to manage growth, the
Company's dependence on third party developers and publishers, rapid
technological change in the Company's markets, the Company's customer and
product concentration, continued acceptance and adoption of Glide, the Company's
proprietary, low-level 3D API, the Company's dependence on independent
manufacturers and other third parties, and the Company's dependence on achieving
acceptable semiconductor manufacturing yields, as well as those discussed in
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and elsewhere in this Prospectus.
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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."
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
interactive electronic entertainment platforms, specifically the personal
computer ("PC") and the coin-operated ("coin-op") arcade system. The Company's
strategy is to provide a 3D media processor solution comprised of hardware and
embedded software designed around a common architecture that will become the
standard graphics engine for the interactive electronic entertainment market. To
date, the Company's efforts have been largely focused on the multimedia add-in
card market. The Company believes that its high profile brand image in the
retail channel and its success in forging strong relationships with software
content developers, combined with the benefits of its technology, provide
powerful incentives for the leading PC 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
different 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 a
number of 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, 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 and Voodoo Rush, the Company's first products, 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, Elitetron and Orchid, among
others, have introduced consumer multimedia add-in cards incorporating the
Company's Voodoo Graphics 3D media processor for sale in the retail channel and
for incorporation into PCs manufactured primarily by systems integrators. In the
coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized
by Acclaim, Atari, Kaneko, Midway and Taito, among others. Voodoo Rush
incorporates a 3D/2D solution into a single personal computer interface ("PCI")
board. The Company has also developed Voodoo2, which is expected to be
commercially available in the first quarter of 1998. The Company's next product,
Banshee, 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 second quarter of 1998. All of the
Company's products are manufactured, tested and packaged by third-parties.
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THE OFFERING
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Common stock offered by the Company.......... 2,000,000 shares
Common stock offered by the Selling
Shareholders............................... 300,000 shares
Common stock outstanding after the
offering................................... 14,566,630 shares(1)
For capital expenditures and 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
Use of proceeds.............................. inventories. See "Use of Proceeds."
Nasdaq National Market symbol................ TDFX
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SUMMARY FINANCIAL DATA
(in thousands, except per share data)
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<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
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STATEMENT OF OPERATIONS DATA:
Revenues.................................................... $ -- $ 6,390 $ 44,069(2)
Loss from operations........................................ (5,106) (14,810) (2,344)
Net loss.................................................... (5,039) (14,751) (1,714)
Basic net loss per share(3)................................. $ (1.52) $ (0.15)
Diluted net loss per share(3)............................... $ (1.52) $ (0.15)
Shares used in basic net loss per share calculations(3)..... 9,681 11,699
Shares used in diluted net loss per share calculations(3)... 9,681 11,699
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<CAPTION>
DECEMBER 31, 1997
---------------------------
ACTUAL AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.................. $ 34,921 $ 82,332
Working capital.................................................... 37,456 84,867
Total assets....................................................... 61,917 109,328
Accumulated deficit................................................ (21,504) (21,504)
Total shareholders' equity......................................... 44,274 91,685
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(1) Based on shares outstanding as of December 31, 1997. Excludes (i) 2,505,984
shares of Common Stock issuable upon exercise of options outstanding as of
December 31, 1997, with a weighted average exercise price of $6.38 per
share, (ii) 93,636 shares of Common Stock issuable upon exercise of warrants
outstanding as of December 31, 1997, with a weighted average exercise price
of $5.97 per share, (iii) 881,308 shares of Common Stock reserved for future
issuance as of December 31, 1997 under the Company's stock plans, and (iv)
500,000 shares of Common Stock reserved for issuance subsequent to December
31, 1997 under the Company's stock plans. In addition, the Company intends
to seek shareholder approval at the 1998 Annual Meeting of Shareholders
currently scheduled for May 1998 for (i) a 1,700,000 share increase in the
number of shares reserved for issuance under the 1995 Stock Option Plan and
(ii) an increase in the number of shares available for purchase under the
1997 Employee Stock Purchase Plan on the date of each annual meeting of
shareholders commencing in 1999 of the lesser of 200,000 shares or 1% of the
outstanding capitalization of the Company. See "Management -- Stock Plans,"
"Description of Capital Stock" and Notes 5, 6 and 10 of Notes to Financial
Statements.
(2) Includes $1.8 million of development contract revenues recognized under the
Sega Agreement. No future revenues will be recognized under the Sega
Agreement. See "Risk Factors -- Pending Litigation."
(3) See Note 1 of Notes to Financial Statements for an explanation of shares
used in basic and diluted net loss per share calculations.
(4) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $25.19
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 otherwise indicated herein, all information in this Prospectus
assumes that the Underwriters' overallotment option is not exercised. See
"Underwriting."
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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. When used in this Prospectus, the words "anticipate,"
"believe," "estimate" and "expect" and similar expressions as they relate to the
Company or its management are intended to identify such forward-looking
statements. 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.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly and annual results of operations have in the past
varied significantly and are expected to vary significantly in the future as a
result of 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 the relative
volume of sales of the Company's various products; changes in the relative
volume of sales to the Company's various direct and indirect customers;
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; market acceptance of
the products of the Company's customers; an adverse effect on consumers'
attraction to the Company's acceleration technology in the retail channel; new
product announcements or product introductions by the Company's competitors; the
Company's ability to introduce on a timely basis new products in accordance with
OEM design requirements and design cycles; the ability of the Company's products
to perform favorably relative to competitive benchmarks; 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; expenditures in connection with enforcing
contractual and other rights, including the cost of litigation in connection
therewith; 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; 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 more of these factors could
result in the Company failing to achieve its expectations as to future revenues
and profitability. 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. 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. Finally, the Company's results of operations in any
given quarter may be below the expectations of public market analysts or
investors, in which case the market price of the Common Stock could be
materially adversely affected.
LIMITED OPERATING HISTORY
The Company has a limited operating history, has been engaged primarily in
research and product development and has incurred net losses in every quarter
except the quarter ended December 31, 1997. The Company was a development stage
company until its first commercial product shipments in the third quarter of
1996. The Company's limited operating history makes the assessment of future
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operating results difficult. The Company incurred net losses of approximately
$5.0 million, $14.8 million and $1.7 million in 1995, 1996 and 1997,
respectively, and had an accumulated deficit of $21.5 million at December 31,
1997. These net losses were attributable to the lack of substantial revenue and
continuing significant costs incurred in the research, development and testing
of the Company's products. Although the Company has experienced revenue growth
in recent periods, historical growth rates will not be sustained and are not
indicative of future operating results. In addition, approximately 4.1% of the
Company's revenues for 1997 were attributable to development contract revenues
recognized under the Technology Development and License Agreement dated as of
February 28, 1997 (the "Sega Agreement") between the Company and Sega
Enterprises, Ltd. ("Sega"). No future revenues will be recognized under the Sega
Agreement. See "-- Pending Litigation." There can be no assurance that
significant revenues or profitability will be sustained or increased on a
quarterly or annual basis in the future.
COMPETITION
The Company's strategy of targeting the interactive electronic
entertainment market across multiple platforms requires the Company to compete
against different companies in several market segments, all of which are
intensely competitive. The interactive electronic entertainment market is
comprised of interactive games played on PCs, coin-op arcade systems and home
game consoles as well as location based entertainment ("LBE"). 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 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
Microsystems, Inc. ("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 3Dlabs, Inc., Ltd. ("3Dlabs"), 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, 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 Corporation
("Intel") have announced plans to release 3D graphics chips in 1998 that promise
to provide low cost 3D functionality for PCs and workstations. The Company
believes that Intel will introduce a single chip 2D/3D graphics accelerator in
the near future. Intel has been very active in the graphics market, having
previously invested in 3Dlabs and having recently signed a development agreement
with 3Dlabs in late 1997 targeting the high end workstation market. In early
1998, Intel acquired Chips and Technologies, Inc. ("CHIPS") a leading graphics
semicondutor supplier. To the extent that Intel's initiatives in the graphics
sector are successful, it could materially adversely affect the Company's
financial position and results of operations. The Company has had a relationship
with Intel since November 1996, when, in conjunction with Intel's investment in
the Company, 3Dfx and Intel entered into an agreement to license an early
version of Glide, the Company's proprietary low level 3D API. Intel also has an
option to license future versions of Glide on terms no less favorable than
licenses of Glide to other third party
7
<PAGE> 10
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.
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 subsidiaries Atari Corporation ("Atari")
and Midway Games, Inc. ("Midway"). In the coin-op arcade 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 home game console segment is dominated by
three companies, Nintendo, Sega and Sony. As a result of the termination of the
Company's contract with Sega and the related litigation, the Company currently
does not participate in the home game console market.
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,
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 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 independent software vendors ("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.
DEPENDENCE ON EMERGING 3D INTERACTIVE ELECTRONIC ENTERTAINMENT MARKET
The market for 3D interactive electronic entertainment for use in PCs,
coin-op arcade systems and home game consoles 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, coin-op arcade systems and home game consoles. There can
be no
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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 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,
coin-op arcade systems and home game consoles.
DEPENDENCE ON THE PC MARKET
For 1996 and 1997, 82% and 93%, respectively, of the Company's revenues
were derived 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 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 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 have its products specified as standard 3D media processors for
new hardware components or subassemblies designed by PC manufacturers and OEMs
(a "design win"). The failure to achieve any such design win would result in the
loss of any potential sales volume that could be generated by such newly
designed hardware component or subassembly and would also competitively
advantage the 3D media processor manufacturer that achieves such design win,
either of 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.
In July 1997, the Company learned from Sega that Sega will not use the
Company's chipset for the next generation Sega home game console. As a result,
the Company currently has no arrangements for developing, marketing and selling
a product for the home game console market. There can be no assurance that the
Company will be able to find a strategic partner that will produce a home game
console incorporating a chipset developed by the Company. The failure to access
the home game console market may limit the Company's ability to diversify its
product offerings and may have the effect of increasing the Company's dependency
on the PC market. See "-- Pending Litigation."
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DEPENDENCE ON RETAIL DISTRIBUTION CHANNEL
The Company's products are distributed primarily in the retail distribution
channel through graphics board manufacturers which in turn sell to consumers.
Accordingly, the Company is dependent upon these graphics board manufacturers to
assist in promoting market acceptance of its products. The graphics board
manufacturers which purchase the Company's products are generally not committed
to make future purchases of the Company's products and therefore could
discontinue incorporating the Company's products into their graphics boards in
favor of a competitor's product, or for any other reason. Because the Company
sells a significant portion of its products to such graphics board
manufacturers, it is difficult to ascertain current demand for existing products
and anticipated demand for newly introduced products, regardless of any such
manufacturers' level of inventory for the Company's products. Such manufacturers
have in the past been subject to product allocation by the Company. As a result,
such manufacturers may overstate their needs for the Company's products in order
to ensure an adequate supply. In addition, such manufacturers could overestimate
consumer demand for their graphics boards. In either case, the Company's
business, financial condition and results of operations could be materially
adversely affected. Moreover, initial orders for a new product may be caused by
the interest of graphics board manufacturers in integrating the latest
accelerator product for potential future sale to consumers. As a result, initial
orders for a new product, such as Voodoo2, may not be indicative of long-term
consumer demand. In addition, the Company is dependent upon the continued
viability and financial stability of these graphics board manufacturers, some of
which are small organizations with limited capital. The Company believes that
its future growth and success will continue to depend in large part upon its
sales into the retail channel through graphics board manufacturers. Accordingly,
if a significant number of graphics board manufacturers were to experience
financial difficulties, or otherwise become unable or unwilling to promote, sell
or pay for the Company's products, the Company's business, financial condition
and results of operations could be materially adversely affected.
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 works with
Alliance Semiconductor Corporation ("Alliance") and Macronix International Co.,
Ltd ("Macronix") to offer the 3D/2D chipset branded as the Company's Voodoo Rush
product. Voodoo Rush functions 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. 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
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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 second 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/ 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.
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 December 31, 1997, the Company had
grown to 123 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 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 "-- Dependence on
Key Personnel," "Business -- Employees" and "Management."
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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."
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, coin-op arcade system and
home game console 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, coin-op arcade system and home game
console 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 the Company's subcontractors 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, coin-op arcade system and home
game console manufacturers and consumers of interactive electronic
entertainment, 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.
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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 a limited number of customers and the Company's sales are
highly concentrated. Revenues derived from sales to Diamond, Elitetron and
Orchid accounted for approximately 37%, 16% and 7%, respectively, of revenues
for 1997. Revenues derived from sales to Orchid, Diamond and Williams accounted
for approximately 44%, 33% and 11%, respectively, of revenues for 1996. All such
sales were made pursuant to purchase orders. Development contract revenues
recognized under the Sega Agreement represented approximately 4.1% of revenues
during 1997; no further revenues are expected under the Sega Agreement. The
Company expects that a small number of customers will continue to account for a
substantial portion of its revenues for the foreseeable future. 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, graphics
boards or coin-op arcade systems sold by a single customer or by a small number
of customers.
PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS
The Company's revenues are dependent on the markets for 3D media processors
for PCs and coin-op arcade systems 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 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 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
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.
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
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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.
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 wafers 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 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 packaged 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.
For example, cost of revenues in the three months ended December 31, 1997
includes a $700,000 charge for the write-off of Voodoo2 inventory which was not
salable as a result of a manufacturing defect.
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.
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. In particular, the Company's
Chief Financial Officer and Vice President, Administration, David Zacarias,
joined the Company in February 1998. 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
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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 continues to increase the volume of commercial production of
its products, 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, 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 " -- Limited Operating History," "-- 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 six patent applications pending in
16
<PAGE> 19
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.
In addition, in connection with the Company's litigation against Sega (see
"-- Pending Litigation"), the Company was granted a preliminary injunction
enjoining Sega from using or providing to any other person or entity access to
the Company's confidential information and trade secrets that were provided to
them in connection with the Sega Agreement. Sega has been ordered by the court
to return to the Company all of the Company's confidential documents and/or
information now possessed by Sega. To date, Sega has not returned such
proprietary information to the Company. There can be no assurance that Sega will
comply with the court order or that Sega has not used and will not use the
proprietary information to its competitive advantage.
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. While to date the Company
has not experienced an adverse impact associated with economic downturns in
Asia, there can be no assurance that the recent volatility in the Asian economy
will not adversely affect the Company's business, financial condition or results
of operations. 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 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
17
<PAGE> 20
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. 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."
PENDING LITIGATION
On July 22, 1997, Sega terminated the Sega Agreement. The Company filed a
lawsuit in California in the Superior Court for the County of Santa Clara on
August 29, 1997 and filed an amended complaint on October 8, 1997. The amended
complaint names as defendants, Sega and its U.S. subsidiary Sega of America,
Inc., NEC Corporation ("NEC"), and VideoLogic Group, Plc. ("VideoLogic") and
includes claims for breach of contract, interference with contract,
misrepresentation, unfair competition, and threatened misappropriation of trade
secrets. Discovery in the case is currently being conducted. Although NEC and
VideoLogic have responded to the Company's complaint, Sega has not yet responded
to the Company's complaint by way of answer or counterclaim. The Company expects
to incur significant legal expenses in connection with this litigation which
could have a material adverse effect on the Company's financial condition and
results of operations. In addition, pursuing this litigation is likely to result
in the diversion of management's attention from the day-to-day operations of the
business. There can be no assurance that the litigation will be resolved in the
Company's favor or that the litigation will be resolved quickly. Any prolonged
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. An adverse result could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Legal Proceedings."
POSSIBLE VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has in the past been and
could in the future be subject to significant fluctuations in response to
quarterly variations in the Company's results of operations, announcements
regarding the Company's product developments, announcements of technological
innovations or new products by the Company, its OEM customers or competitors,
changes in securities analysts' recommendations, or other events. The Company's
revenues and results of operations may be below the expectations of public
market securities analysts or investors, resulting in significant fluctuations
in the market price of the Company's Common Stock. It is likely that the
Company's future quarterly revenues or results of operations from time to time
will not meet the expectations of such analysts or investors, which could have
an adverse effect on the market price of the Company's Common Stock. Moreover,
stock markets have from time to time experienced extreme price and volume
fluctuations which have particularly affected the market prices for high
technology companies and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations, as well as
general economic, political and market conditions, may adversely affect the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of the Company's Common stock. In the past,
following periods of volatility in the market price of a company's stock,
securities class action litigation has occurred against the issuing company.
There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and
would at a minimum divert management's attention and resources, which could have
a material adverse effect on the
18
<PAGE> 21
Company's business, financial condition and results of operations. Any adverse
determination in such litigation could also subject the Company to significant
liabilities. See "Price Range of Common Stock."
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
30.8% of the Company's outstanding Common Stock following the completion of this
offering (30.8% if the Underwriters' over-allotment option is exercised). These
shareholders, if acting together, would be able to significantly influence 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 and Selling
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."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Company's Common Stock in the public
market after this offering could adversely affect the market price of the
Company's Common Stock. Of the 14,566,630 shares of Common Stock to be
outstanding upon completion of the offering, the 2,300,000 shares offered
hereby, the 3,450,000 shares sold in the Company's initial public offering and
5,252,061 additional shares will be freely tradeable without restriction. An
additional 87,510 shares will become eligible for sale beginning on June 30,
1998 under Rule 144. An additional 3,564,569 shares will be eligible for sale
beginning on the opening of market on the third trading day following the date
of public disclosure of the Company's financial results for the three months
ended March 31, 1998, upon expiration of certain lock-up agreements and subject
to the provisions of Rules 144(k), 144 and 701 under the Securities Act of 1933,
as amended (the "Act"). In October 1997, the Company filed a Registration
Statement on Form S-8 registering 3,499,768 shares subject to outstanding
options or reserved for future issuance under the Company's stock plans. The
holders of approximately 3,772,848 shares of Common Stock to be outstanding upon
the closing of this offering are entitled to certain rights to registration for
sale to the public beginning 180 days after the effective date of the offering.
See "Management -- Stock Plans," "Description of Capital Stock," and "Shares
Eligible for Future Sale."
19
<PAGE> 22
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby, are estimated to be $47,411,000
($55,667,023 if the Underwriters' over-allotment option is exercised in full) at
an assumed public offering price of $25.19 and after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company.
Although the Company currently has no specific plan for substantially all
of the net proceeds of the offering, the Company believes that the availability
of substantial financial resources is important to the Company's ability to
compete. The principal reasons for the offering are to improve the Company's
financial position and to provide the Company with additional financial
flexibility. The Company expects to use approximately $8.0 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 Company intends to use the remaining 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
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, or securing manufacturing capacity, although no such acquisitions or
projects 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. The
Company will not receive any proceeds from the sale of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been quoted on the Nasdaq National Market
under the symbol TDFX since the Company's initial public offering on June 25,
1997. Prior to such time there was no public market for the Common Stock of the
Company. The following table sets forth for the periods indicated the high and
low sale prices per share of the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL YEAR 1997
Second Quarter (from June 25, 1997).................... $14.75 $12.50
Third Quarter.......................................... $18.625 $ 8.875
Fourth Quarter......................................... $23.00 $13.75
FISCAL YEAR 1998
First Quarter (through February 10, 1998).............. $27.75 $20.75
</TABLE>
On February 10, 1998, the reported last sale price of the Common Stock on
the Nasdaq National Market was $25.19 per share. As of December 31, 1997, there
were approximately 248 shareholders of record of the Common Stock.
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> 23
CAPITALIZATION
The following table sets forth as of December 31, 1997 (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed public offering price of $25.19 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>
DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capitalized lease obligations, less current
portion(1)........................................... $ 546 $ 546
------- -------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized, none issued and outstanding........... -- --
Common Stock, no par value; 50,000,000 shares
authorized, 12,566,630 shares issued and
outstanding and 14,566,630 issued and outstanding
as adjusted(2).................................... 66,717 114,128
Warrants............................................. 242 242
Deferred compensation................................ (1,181) (1,181)
Accumulated deficit.................................. (21,504) (21,504)
------- -------
Total shareholders' equity........................ 44,274 91,685
------- -------
Total capitalization......................... $ 44,820 $ 92,231
======= =======
</TABLE>
- ---------------
(1) See Note 8 of Notes to Financial Statements.
(2) Excludes (i) 2,505,984 shares of Common Stock issuable upon exercise of
options outstanding as of December 31, 1997, with a weighted average
exercise price of $6.38 per share, (ii) 93,636 shares of Common Stock
issuable upon exercise of warrants outstanding as of December 31, 1997, with
a weighted average exercise price of $5.97 per share, (iii) 881,308 shares
of Common Stock reserved for future issuance as of December 31, 1997 under
the Company's stock plans and (iv) 500,000 shares of Common Stock reserved
for issuance subsequent to December 31, 1997 under the Company's stock
plans. In addition, the Company intends to seek shareholder approval at the
1998 Annual Meeting of Shareholders currently scheduled for May 1998 for (i)
a 1,700,000 share increase in the number of shares reserved for issuance
under the 1995 Stock Option Plan and (ii) an increase in the number of
shares available for purchase under the 1997 Employee Stock Purchase Plan on
the date of each annual meeting of shareholders commencing in 1999 of the
lesser of 200,000 shares or 1% of the outstanding capitalization of the
Company. See "Management -- Stock Plans," "Description of Capital Stock" and
Notes 5, 6 and 10 of Notes to Financial Statements.
21
<PAGE> 24
DILUTION
The net tangible book value of the Company as of December 31, 1997 was
approximately $44,274,000, or $3.52 per share of Common Stock. "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. After
giving effect to the receipt of the net proceeds from the sale of the 2,000,000
shares of Common Stock offered by the Company hereby (after deducting estimated
underwriting discounts and commissions and offering expenses payable by the
Company) at an assumed public offering price of $25.19 per share, the Company's
net tangible book value as of December 31, 1997 would have been $91,685,000, or
$6.29 per share of Common Stock. This represents an immediate increase in net
tangible book value of $2.77 per share to existing shareholders and an immediate
dilution of $18.90 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price.......................... $ 25.19
Net tangible book value as of
December 31, 1997................................. $ 3.52
Increase attributable to new investors............... 2.77
--------
Net tangible book value after offering................. 6.29
--------
Dilution to new investors.............................. $ 18.90
========
</TABLE>
The foregoing computations assume no exercise of stock options or warrants
after December 31, 1997. As of December 31, 1997, there were outstanding options
to purchase 2,505,984 shares of Common Stock, with a weighted average exercise
price of $6.38 per share, and outstanding warrants to purchase 93,636 shares of
Common Stock, with a weighted average exercise price of $5.97 per share. In
addition, as of December 31, 1997, 881,308 shares of Common Stock were reserved
for future issuance under the Company's stock plans and subsequent to December
31, 1997, 500,000 additional shares of Common Stock were reserved for issuance
under the Company's stock plans. In addition, the Company intends to seek
shareholder approval at the 1998 Annual Meeting of Shareholders currently
scheduled for May 1998 for (i) a 1,700,000 share increase in the number of
shares reserved for issuance under the 1995 Stock Option Plan and (ii) an
increase in the number of shares available for purchase under the 1997 Employee
Stock Purchase Plan on the date of each annual meeting of shareholders
commencing in 1999 of the lesser of 200,000 shares or 1% of the outstanding
capitalization of the Company. 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> 25
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, 1996 and 1997 and the balance sheet data as of December
31, 1996 and 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 balance sheet data as of December 31, 1995 are
derived from financial statements of the Company that have been audited by Price
Waterhouse LLP, independent accountants, and are not included elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................................... $ -- $ 6,390 $44,069(1)
Cost of revenues............................................. -- 5,123 22,611
------- -------- -------
Gross profit................................................. -- 1,267 21,458
------- -------- -------
Operating expenses:
Research and development(2)................................ 2,940 9,435 12,412
Selling, general and administrative(2)..................... 2,166 6,642 11,390
------- -------- -------
Total operating expenses........................... 5,106 16,077 23,802
------- -------- -------
Loss from operations......................................... (5,106) (14,810) (2,344)
Interest and other income, net............................... 67 59 630
------- -------- -------
Net loss..................................................... $(5,039) $(14,751) $(1,714)
======= ======== =======
Basic net loss per share(3).................................. $ (1.52) $ (0.15)
======== =======
Diluted net loss per share(3)................................ $ (1.52) $ (0.15)
======== =======
Shares used in basic net loss per share calculations(3)...... 9,681 11,699
Shares used in diluted net loss per share calculations(3).... 9,681 11,699
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments............ $ 865 $ 5,291 $34,921
Working capital (deficit).................................... (307) 6,637 37,456
Total assets................................................. 2,440 15,581 61,917
Capitalized lease obligations, less current portion(4)....... 544 632 546
Accumulated deficit.......................................... (5,039) (19,790) (21,504)
Total shareholders' equity................................... 552 9,621 44,274
</TABLE>
- ---------------
(1) Includes $1.8 million of development contract revenues recognized under the
Sega Agreement. No future revenues will be recognized under the Sega
Agreement. See "Risk Factors -- Pending Litigation."
(2) Research and development expenses include amortization of deferred
compensation of $22,000, $50,000 and $194,000 for 1995, 1996 and 1997,
respectively. Selling, general and administrative expenses include
amortization of deferred compensation of $34,000, $146,000 and $290,000 for
1995, 1996 and 1997, respectively. 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 basic and diluted net loss per share calculations.
(4) See Note 8 of Notes to Financial Statements.
23
<PAGE> 26
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. When used in this Prospectus,
the words "expects," "anticipates," "estimates," and similar expressions are
intended to identify forward looking statements. 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 has incurred net losses in every quarter
except the quarter ended December 31, 1997. The Company incurred net losses of
approximately $5.0 million, $14.8 million and $1.7 million in 1995, 1996 and
1997, respectively, and had an accumulated deficit of $21.5 million at December
31, 1997. These net losses were attributable to the lack of substantial revenue
and continuing significant costs incurred in the research, development and
testing of the Company's products. Although the Company has experienced revenue
growth in recent periods, historical growth rates will not be sustained and are
not indicative of future operating results. There can be no assurance that
significant revenues or profitability will be sustained or increased on a
quarterly or annual basis in the future.
The Company derives revenue from the sale of 3D media processors designed
for use in PCs, coin-op arcade and LBE 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 began
commercial shipments in April 1997. The Company has developed Voodoo2, which is
expected to be commercially available in the first quarter of 1998. 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. 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 Diamond, Elitetron and Orchid accounted for
approximately 37%, 16% and 7%, respectively, of revenues for 1997. Revenues
derived from sales to Orchid, Diamond and Williams accounted for approximately
44%, 33% and 11%, respectively of revenues for 1996. 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.
In February 1997, the Company and Sega entered into the Sega Agreement
pursuant to which the Company began developing a 3D media processor chipset for
Sega's next generation home game console. During 1997, the Company recognized
development contract revenues of $1.8 million under the Sega Agreement
representing 4.1% of total revenues during that period. In July 1997, Sega
terminated the Sega Agreement. In August 1997, the Company filed a lawsuit
against Sega, and filed an amended complaint in October 1997 naming as
additional defendants NEC and VideoLogic. The complaint alleges breach of
contract, interference with contract, misrepresentation, unfair competition, and
threatened misappropriation of trade secrets. Discovery in the case is currently
being conducted. Although NEC and VideoLogic have responded to the Company's
complaint, Sega has not yet responded to the Company's complaint by way of
answer or counterclaim. The Company expects to incur significant legal expenses
in connection with this litigation which could have a material adverse effect on
the Company's financial condition and results of operations. In addition,
pursuing this litigation is likely to result in the diversion of management's
attention from the day-to-day
24
<PAGE> 27
operations of the business. There can be no assurance that the litigation will
be resolved in the Company's favor or that the litigation will be resolved
quickly. Any prolonged litigation could have a material adverse effect on the
Company's business, financial condition and results of operations. An adverse
outcome of the litigation could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Pending Litigation."
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 wafers 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. 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. Such wafer and die purchases constitute a substantial
portion of cost of products revenues once products are sold. TSMC is responsible
for procurement of raw materials used in the production of the Company's
products. The Company believes that raw materials required are readily
available. The Company's products are packaged and tested by a third party
subcontractor, ASE. Such assembly and testing is conducted on a purchase order
basis rather than under a long-term agreement.
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 $484,000 (of
which $194,000 and $290,000 were recorded in research and development expenses
and selling, general and administrative expenses, respectively) and $196,000 (of
which $50,000 and $146,000 were recorded in research and development expenses
and selling, general and administrative expenses, respectively) in the years
ended December 31, 1997 and 1996, respectively, and will result in charges over
the next 10 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).
25
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data of the
Company expressed as a percentage of revenue for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1996 1997
------ ------
<S> <C> <C>
Revenues............................................... 100.0% 100.0%
Cost of revenues....................................... 80.2 51.3
----- -----
Gross profit......................................... 19.8 48.7
----- -----
Operating expenses:
Research and development............................. 147.7 28.2
Selling, general and administrative.................. 103.9 25.8
----- -----
Total operating expenses..................... 251.6 54.0
----- -----
Loss from operations................................... (231.8) (5.3)
Interest and other income, net......................... 0.9 1.4
----- -----
Net loss............................................... (230.9%) (3.9%)
===== =====
</TABLE>
Years Ended December 31, 1997 and 1996
Revenues. Revenues increased 589.7% from $6.4 million in 1996 to $44.1
million in 1997. Revenues in 1997 included $1.8 million of development contract
revenues earned under the Sega Agreement which was terminated by Sega in July
1997. No future revenues will be recognized under the Sega Agreement. Revenues
from product sales are recognized upon product shipment. Revenues in 1997 were
principally attributable to sales of the Company's Voodoo Graphics and Voodoo
Rush chipsets as a result of increased customer demand for and market acceptance
of these products. Substantially all of the revenues in the year ended December
31, 1996 were derived from sale of the Company's Voodoo Graphics chipset, which
began commercial shipments in September 1996 and, to a lesser extent, sale of
graphics subsystems.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of 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 revenues does not include expenses related to development contract
revenues. Cost of revenues increased 341.4% from $5.1 million in 1996 to $22.6
million in 1997. Gross profit as a percentage of revenues was 19.8% and 48.7% in
1996 and 1997, respectively. The increase in cost of revenues resulted from the
significant increase in revenues in 1997. 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.
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;
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 31.6%
from $9.4 million in 1996 to $12.4 million in 1997. The increase reflects an
increase in non-recurring engineering costs and engineering personnel costs
resulting from the commencement of manufacturing of prototypes of the Voodoo2
chipset and the Banshee chip. The Company expects to continue to make
substantial
26
<PAGE> 29
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 71.5% from $6.6 million
in 1996 to $11.4 million in 1997. The increase resulted from the addition of
personnel in sales, marketing, finance and administration as the Company
expanded operations, increased commission expenses associated with the
commencement of commercial sales and increased involvement in tradeshow and
advertising activities. 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, Net. Interest and other income, net increased
from net interest and other income of $59,000 in 1996 to net interest and other
income of $630,000 in 1997. The increase is related to increased earnings from
investments of higher cash balances resulting from the completion of the
Company's initial public offering in June 1997, partially offset by increased
interest expense on outstanding equipment line of credit and capital lease
balances.
Provision For Income Taxes. The Company recorded no provision for income
taxes in 1996 and 1997 as it incurred losses during such periods. At December
31, 1997, the Company had net operating loss carryforwards for federal and state
income tax purposes of approximately $18.5 million and $17.5 million,
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 completion of
the Company's initial public offering in June 1997 resulted in an annual
limitation of the Company's ability to utilize net operating losses incurred
prior to that date. The annual limitation is approximately $5.4 million.
Years Ended December 31, 1996 and 1995
Revenues. 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 Graphics
chipset, which began commercial shipments in September 1996 and, to a lesser
extent, sale of graphics subsystems. There were no development contract revenues
in 1996.
Gross Profit. Gross profit and cost of revenues were $1.3 million and $5.1
million, respectively, in 1996. Gross profit as a percentage of revenues was
19.8% in 1996. Cost of 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,
27
<PAGE> 30
(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, Net. Interest and other income, 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.
Quarterly Results of Operations
The following table sets forth unaudited quarterly results of operations
data for each quarter during the years ended December 31, 1996 and 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, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $ -- $ -- $ 1,887 $ 4,503 $ 5,247 $ 6,507 $ 10,018 $ 22,297
Cost of revenues.......... -- -- 1,719 3,404 2,582 3,278 5,352 11,399
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ -- -- 168 1,099 2,665 3,229 4,666 10,898
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and
development........... 1,659 2,864 2,626 2,286 1,953 2,397 3,201 4,861
Selling, general and
administrative........ 1,028 1,529 1,661 2,424 1,846 2,521 2,684 4,339
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses....... 2,687 4,393 4,287 4,710 3,799 4,918 5,885 9,200
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.............. (2,687) (4,393) (4,119) (3,611) (1,134) (1,689) (1,219) 1,698
Interest and other income
(expense), net.......... 35 3 8 13 (27) (64) 347 374
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......... $(2,652) $ (4,390) $ (4,111) $ (3,598) $(1,161) $ (1,753) $ (872) $ 2,072
======= ======= ======= ======= ======= ======= ======= =======
</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. Revenues were derived primarily from the sale of the
Voodoo Graphics and Voodoo Rush chipsets over the last six quarters. Revenues
increased significantly quarter to quarter in 1997 due primarily to increased
sales volumes resulting from increased customer demand for and market acceptance
of these products. During the three months ended March 31, 1997 and June 30,
1997, the Company recognized development contract revenues of $750,000 and
$1,067,000, respectively, under the Sega Agreement for the delivery of certain
engineering designs to Sega and revenues recognized under the percentage of
completion method of accounting based on costs incurred relative to total
contract costs. No future revenues will be recognized under the Sega Agreement.
See "Risk Factors -- Pending Litigation."
Cost of revenues in 1996 and 1997 reflects significant prototype and
manufacturing start-up expenses incurred in connection with the initial
commercial shipments of Voodoo Graphics and Voodoo Rush. The increase in cost of
revenues in the three months ended June 30, 1997, September 30,
28
<PAGE> 31
1997 and December 31, 1997 resulted from the increases in sales in each of the
respective periods. Cost of revenues in the three months ended December 31,
1997, includes a $700,000 charge for the write off of Voodoo2 inventory which
was not salable as a result of a manufacturing defect. Given the Company's
limited operating and product shipment history, the Company believes that
quarter to quarter comparisons of gross profit as a percentage of revenues are
not meaningful.
Research and development expenses fluctuated quarter to quarter in 1996 and
increased quarter to quarter in 1997. In 1996, research and development expenses
related to the manufacturing, development and marketing of Voodoo Graphics and
Voodoo Rush. In 1997, the increase in research and development expenses in each
quarter reflects an increase in headcount, non-recurring engineering costs
resulting from the commencement of manufacturing of the Voodoo Rush, Voodoo2
chipsets and the Banshee chip.
Selling, general and administrative expenses fluctuated quarter to quarter
in 1996 and 1997. The increase quarter to quarter in 1997 primarily relates to
increased finance and administrative staffing and related costs necessary to
support higher levels of operations, increased commission expenses associated
with the commencement of commercial sales and increased involvement in tradeshow
and advertising activities.
Interest and other income (expense), net fluctuated quarter to quarter in
1996 and 1997. The increase in interest and other in come in the three months
ended September 30, 1997 and December 31, 1997 is due to interest income earned
on the Company's investments as a result of higher cash balances from the
completion of the Company's initial public offering in June 1997, partially
offset by interest expense on outstanding balances under the equipment line of
credit and capital leases.
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 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 June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This Statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is required to be adopted for fiscal
years beginning after December 15, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is required to be adopted
for fiscal years beginning after December 15, 1998.
29
<PAGE> 32
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. While uncertainty exists
concerning the potential effects associated with such compliance, the Company
does not believe that year 2000 compliance will result in a material adverse
effect on its financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of equity securities yielding approximately $29.4 million and
most recently through an initial public offering in June 1997 yielding
approximately $34.3 million, net of underwriting fees and offering expenses. As
of December 31, 1997, the Company had approximately $5.0 million of equipment
line financing in place. As of December 31, 1997, the Company had approximately
$34.9 million in cash, cash equivalents and short-term investments.
Net cash used in operating activities in 1996 was due primarily to the net
loss of $14.8 million, and a $4.9 million and $1.5 million increase in inventory
and accounts receivable, respectively, associated with the generation of
revenues. These increases were partially offset by a $2.6 million increase in
accounts payable and accrued liabilities. Net cash used in operating activities
in 1997 was due primarily to the net loss of $1.7 million, a $12.2 million and
$2.3 million increase in accounts receivable and other assets, respectively,
offset by a $10.3 million and $1.6 million increase in accounts payable and
accrued liabilities and a $1.1 million decrease in inventory.
Net cash used in investing activities was approximately $2.2 million and
$10.7 million in 1996 and 1997, respectively, and was due, in each period, to
the purchase of property and equipment and the purchase of investments in 1997.
The Company does not have any significant capital spending or purchase
commitments other than normal purchase commitments and commitments under leases.
As of December 31, 1997, the Company had capital equipment of $10.3 million less
accumulated depreciation of $3.5 million to support its research and development
and administrative activities. The Company has financed approximately $2.8
million from capital lease obligations through December 31, 1997. The Company
has two equipment lines of credit, which provide for the purchase of up to $2.0
million and $3.0 million of property and equipment, respectively. Approximately
$3.0 million is available under these equipment lines of credit. Borrowings
under these lines are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 1.50% and 0.75% per annum, respectively
(8.75% and 8.00%, respectively, as of December 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 December 31, 1997. The lease lines of credit expire in August
1998 and December 2001, respectively. 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 $23.8 million
and $34.6 million in 1996 and 1997, respectively, due primarily to proceeds from
the issuance of preferred stock in 1996 and the initial public offering in July,
1997.
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 80% of eligible
accounts receivable plus 100% of cash and cash equivalents or $7.0 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 0.25% 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 December 31, 1997. The line of credit was renewed in
December 1997. At December 31, 1997, there were no borrowings outstanding under
this line of credit.
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<PAGE> 33
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, and available
borrowings under line of credit arrangements and other factors. The Company
believes that the net 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.
31
<PAGE> 34
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
interactive electronic entertainment platforms, specifically the PC and the
coin-op arcade system. The Company's strategy is to provide a 3D media processor
solution comprised of hardware and embedded software designed around a common
architecture that will become the standard graphics engine for the interactive
electronic entertainment market. To date, the Company's efforts have been
largely focused on the multimedia add-in card market. The Company believes that
its high profile brand image in the retail channel, and its success in forging
strong relationships with software content developers, combined with the
benefits of its technology, provide powerful incentives for the leading PC OEMs
and entertainment hardware manufacturers to utilize the 3Dfx solution.
Voodoo Graphics and Voodoo Rush, the Company's first products, 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, Elitetron and Orchid, among
others, have introduced consumer multimedia add-in cards incorporating the
Company's Voodoo Graphics 3D media processor for sale in the retail channel and
for incorporation into PCs manufactured primarily by systems integrators. In the
coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized
by Acclaim, Atari, Kaneko, Midway and Taito, among others. Voodoo Rush
incorporates a 3D/2D solution into a single PCI board. The Company has also
developed Voodoo2, which is expected to be commercially available in the first
quarter of 1998. The Company's next product, Banshee 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 second quarter of 1998. All of the Company's products are
manufactured, packaged and tested by third parties.
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 NHL 98, Quake II
and Tomb Raider II.
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 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 PC, the coin-op arcade system and the home game
console. Coin-op arcade games
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<PAGE> 35
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 relatively limited success in the PC
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
different 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.
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<PAGE> 36
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 and Voodoo Rush, the Company's first products, 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.
To promote the rapid adoption of its products, the Company's architecture
supports most industry standard APIs, including: Apple Computer Inc.'s Rave3D,
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 numerous platforms reduces the developer's time
to market from the arcade to the PC, 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 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.
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. Currently, over 90 such software
entertainment titles are commercially available. 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 600 content developers, game publishers and ISVs.
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<PAGE> 37
Pursue Branding Strategy. The Company continues to devote substantial
marketing resources towards establishing 3Dfx as a recognizable brand. 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 brand awareness. The Company has recently
announced that in March 1998, Dimension Publishing will introduce a quarterly
magazine dedicated exclusively to 3Dfx products. This magazine will include
software title and hardware release schedules, product reviews, gaming tips and
other information that will enhance the return on the consumer's investment in
3Dfx based products. The Company believes that the magazine will continue to
build the Company's brand image while concurrently increasing awareness in the
marketplace about 3Dfx products. 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 Multi-Platform Architecture. The Company's 3D technology embodies
a single hardware/software architecture that can be deployed in numerous
interactive electronic entertainment platforms. For PC applications, Diamond,
Elitetron, Guillemot, Hercules, Integraph and Orchid, among others, have
introduced consumer multimedia add-in cards incorporating the Company's 3D media
processors for sale in the retail channel and for incorporation into PCs by
systems integrators. In the coin-op arcade system market, Voodoo Graphics is
being utilized by Acclaim, Atari, Kaneko, Midway, and Taito, among others.
Leverage Success in Retail Distribution Channel into OEM Channel. Given its
high performance, multi-chip product offerings, the Company's efforts to date
have largely been focused on the multimedia add-in card market. With
introduction of its Banshee product, currently anticipated in the second quarter
of 1998, the Company will extend its focus to include the PC OEM market. The
Company believes that its success in branding both 3Dfx and its Voodoo products
at the consumer level through its efforts in the retail channel, as well as its
success in working with the software content community, provide an incentive for
PC OEMs to design 3Dfx products into their future product lines. The Company
believes that its brand equity will provide PC OEMs with a differentiating
feature that consumers will recognize. Additionally, utilizing 3Dfx products
will enable OEMs to offer their customers immediate access to a substantial
software title library, including a number of entertainment titles which will
function in 3D accelerated mode only when 3Dfx technology is present in the
system.
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 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.
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<PAGE> 38
PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
The Company's product strategy is to offer a 3D media processor solution
comprised of hardware and embedded software designed around a common
architecture that will become the standard graphics engine for the interactive
electronic entertainment market. 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 commenced commercial shipment in
April 1997. The Company has also developed Voodoo2, which is expected to be
commercially available in the first quarter of 1998. Voodoo Graphics, Voodoo
Rush and Voodoo2 are being targeted at price and performance points for the PC
and coin-op arcade markets. These products and 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.
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, among others, have
each introduced multimedia add-in boards for PCs 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, Atari,
Kaneko, Midway and Taito among others for coin-op arcade systems and game
applications.
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. Voodoo
Graphics generates up to 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 II-300
MHz MMX system.
Voodoo Rush. Voodoo Rush began sampling in November 1996 and commenced
commercial shipment in April 1997. 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 and Macronix 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 35 megapixels per second for bilinear filtered textures with LOD
MIP-mapping, Z-buffering, alpha-blending and fogging enabled. The triangle rate
is 800,000 triangles per second for filtered, LOD MIP-mapped, Z-buffered,
alpha-blended, fogged, textured triangles on a Pentium II-300 MHz MMX system.
Voodoo2. Voodoo2, introduced in November 1997, is the Company's next
generation 3D-only accelerator and provides a significant increase in
performance over the Company's first generation Voodoo Graphics product.
Commercial shipment of Voodoo2 is expected in the first quarter of 1998. There
can be no assurance that Voodoo2 will be commercially shipped or accepted by the
market. Voodoo2 is targeted at the same markets as the Company's first
generation Voodoo Graphics
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<PAGE> 39
accelerator. To date, several of the Company's existing customers including
Diamond, Guillemot Orchid and Quantum3D have announced products based on
Voodoo2. In addition, Creative Labs has announced the "3D Blaster Voodoo2" as an
addition to its graphics product line.
Voodoo2 will be offered to the consumer in a configuration previously
marketed by the Company for use in the arcade and simulation markets. Voodoo2 is
delivered as a 3-chip chipset that includes a pixel chip for controlling the
display memory and two texture units that process texture maps in parallel.
Voodoo2 maintains compatibility with Voodoo Graphics so virtually all existing
games for Voodoo Graphics that are currently on the retail shelf operate
unchanged with Voodoo2. In addition to the features supported by Voodoo
Graphics, Voodoo2 now has a more advanced triangle setup unit that increases
triangle throughput to 3,000,000 triangles per second measured on a Pentium
II-300 MHz MMX system. The second texture unit doubles the texturing performance
for games that include support for the second texture unit. Voodoo2 provides
performance of 90 Megapixels per second and 90 Megatexels per second; when the
second texture unit is activated, Voodoo2 provides up to 180 Megatexels per
second. Voodoo2 boards also incorporate a scan-line interleave connector that
allows two boards to operate in parallel thus doubling rendering capability. In
this configuration, Voodoo2 provides performance of 180 Megapixels per second
and 180 Megatexels per second; when the second texture unit is activated,
Voodoo2 provides up to 360 Megatexels per second.
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 markets. See "-- Strategy."
The Company expects to begin commercial shipment of Banshee during the second
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, Voodoo
Rush and Voodoo2. 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, multimedia board vendors, coin-op board
manufacturers and coin-op arcade system manufacturers. 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."
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
3DFX PRODUCTS AND PRODUCTS UNDER DEVELOPMENT
- --------------------------------------------------------------------------------------------------------
COMMERCIAL
PRODUCT AVAILABILITY TARGET MARKET KEY FEATURES(1)
- --------------------------------------------------------------------------------------------------------
Voodoo Graphics September 1996 PCs, coin-op arcade Add-on 3D solution; systems scalability;
systems 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 April 1997 PCs Single-board 3D/2D solution; consistent
sustained performance with all features
enabled; fill rate of 45 Mpixel/sec; fully
featured triangle rate of 800K/sec; texture
streaming; fully featured architecture; 3D
in a window
- --------------------------------------------------------------------------------------------------------
Voodoo2 Expected first PCs, coin-op arcade Add-on 3D solution; systems scalability;
quarter 1998 systems consistent sustained performance with all
features enabled; fully featured triangle
rate of up to 3.0 M/sec; texture streaming;
on-chip triangle set up; fully featured
architecture
- --------------------------------------------------------------------------------------------------------
Banshee Expected second PCs, coin-op arcade Single chip 3D/2D solution; large feature
quarter 1998 systems set; fully integrated architecture; high
sustained fill rate and triangle rate with
all features enabled; compatible 3D
architecture with Voodoo Graphics
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Fully featured" means textured, bilinear filtered with LOD MIP-mapping,
Z-buffered and fogged.
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<PAGE> 40
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 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
representative list of the companies that 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>
A-trend Technologye(1) Acclaim Entertainment Inc.(2)
Canopus Corporation Eolith Co., Ltd.(2)
Creative Labs(2) IGS Taiwan(2)
Deltron Precision, Inc.(1) Kaneko Ltd.(2)
Diamond Multimedia Systems, Inc. Konami Co. Ltd.
Elitetron Electronic Co., Ltd. RealVision Corporation(2)
Guillemot International Taito Corporation
Hercules Computer Technology, Inc. WMS Industries, Inc. (Williams)
Intergraph Corporation
Jazz Multimedia
Orchid Technology
Quantum3D, Inc.
Skywell Technology Corp.(1)
TechWorks, Inc.
</TABLE>
- ---------------
(1) Indirect customer that purchases products from the Company's board level
customers.
(2) Indicates design win only; such companies have not yet purchased commercial
quantities of the Company's products.
Because of the Company's limited operating history and early stage of
development, it has only a limited number of customers and its sales are highly
concentrated. Revenues derived from sales to Diamond, Elitetron and Orchid
accounted for approximately 37%, 16% and 7%, respectively, of revenues for 1997.
Revenues derived from sales to Orchid, Diamond and Williams accounted for
approximately 44%, 33% and 11%, respectively of revenues for 1996. 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.
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 10 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 11 sales representatives. 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 December 31, 1997, the
Company employed 30 individuals in its sales, marketing and customer support
organization.
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<PAGE> 41
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 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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<PAGE> 42
As of December 31, 1997, there were 86 game titles for the PC and 6 arcade
titles utilizing the Company's hardware that were commercially available. The PC
game titles utilize different APIs, including Glide, D3D and OpenGL, or some
combination thereof. The following table is a representative list of game titles
for use with platforms utilizing the Company's hardware that were commercially
available as of December 31, 1997:
<TABLE>
<CAPTION>
TITLE PUBLISHER DEVELOPER API PLATFORM
- ---------------------- ------------------------ ------------------------- ---------- ---------------
<S> <C> <C> <C> <C>
Andretti Racing Electronic Arts Electronic Arts Glide/D3D PC
Flight Unlimited 2 Eidos Interactive Looking Glass Technology Glide PC
Grand Theft Auto Gremlin DMA Design Glide PC
Heavy Gear Activision Activision Glide/D3D PC
Hexen II Activision Raven Software OpenGL PC
Interstate '76 Activision Activision Glide/D3D PC
Jedi Knight-Dark LucasArts LucasArts Glide/D3D PC
Forces II
Jet Fighter III Interplay Productions Mission Studios Glide PC
Longbow 2 Janes Combat Simulation Janes Combat Simulation Glide PC
Microsoft Flight Microsoft Microsoft D3D PC
Simulator '98
Myth: The Fallen Lords Bungie Bungie Glide PC
Need for Speed II SE Electronic Arts Electronic Arts Glide PC
NHL Hockey '98 Electronic Arts Sports Electronic Arts Glide PC
Quake II Activision id Software OpenGL PC
Shadows of the Empire LucasArts LucasArts D3D PC
Tanarus (on-line only) Sony Interactive Sony Interactive Glide PC
Test Drive 4 Accolade Pitbull Syndicate Glide PC
Tomb Raider II Eidos Interactive Core Designs D3D PC
Turok Acclaim Sculpted Software Glide PC
Virtua Squad Sega Sega D3D PC
Blitz Midway Atari Games Glide Coin-Op Arcade
San Francisco Rush Midway Atari Games Glide Coin-Op Arcade
</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 sometimes 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 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 brand
awareness. 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 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 has
recently announced that in March 1998 Dimension Publishing will introduce a
quarterly magazine dedicated exclusively to 3Dfx products. This magazine will
include software title and hardware release schedules, product
40
<PAGE> 43
reviews, gaming tips and other information that will enhance the return on the
consumer's investment in 3Dfx based products. The Company believes that this
magazine will continue to build the Company's brand image while concurrently
increasing awareness in the marketplace about 3Dfx products. 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.
TECHNOLOGY
3D Technology
The technology necessary to create interactive, realistic and visually
engaging 3D at high frame rates 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 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
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<PAGE> 44
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. 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, Voodoo Rush and the Company's
subsequent 3D media processors 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:
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 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.
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.
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<PAGE> 45
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 $12.4
million in 1995, 1996 and 1997, respectively.
MANUFACTURING
The Company has adopted a "fabless" manufacturing strategy for its
semiconductor products 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, packaging,
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. The Company's semiconductor and system products are
manufactured by third party suppliers. These suppliers are responsible for
procurement of raw materials used in the production of these products. The
Company believes that raw materials required are readily available. 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 wafers 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 early 1998, TSMC will move to a 0.35
micron ASIC, CMOS process technology in connection with production of Voodoo2.
After the wafer production process is completed, the semiconductor die is
shipped to ASE, which packages and tests the semiconductor die, tests the
finished product, and ships the finished product to the Company or its
customers. Both suppliers have their manufacturing operations located in 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.
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<PAGE> 46
Generally, the Company receives semiconductor products from its
subcontractors, performs incoming quality assurance, packages the products, and
ships them to its customers from its location in San Jose.
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 been in active contact with
other semiconductor fabrication foundries in an effort to further diversify its
supplier manufacturing base. The Company has held discussions with certain
potential suppliers and, in some cases, has reviewed the technology and
facilities of such suppliers. However, the Company has not yet selected a second
source of supply. The Company does have a domestic second source for assembly.
However, the capacity at this domestic second source for assembly is limited and
is therefore not appropriate for full production.
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),
cancellations or reschedulings of customer orders and shipments. See "Risk
Factor -- 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 multiple and requires the Company to compete against different companies
in several 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 3Dlabs, 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
44
<PAGE> 47
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.
Furthermore, a substantial number of companies including Intel have
announced plans to release 3D graphics chips in 1998 that promise to provide low
cost 3D functionality for PCs and workstations. The Company believes that Intel
will introduce a single chip 2D/3D graphics accelerator in the near future.
Intel has been very active in the graphics market, having previously invested in
3Dlabs and having recently signed a development agreement with 3Dlabs in late
1997 targeting the high end workstation market. In early 1998, Intel acquired
CHIPS. To the extent that Intel's initiatives in the graphics sector are
successful, it could materially adversely affect the Company's financial
position and results of operations. The Company has had a relationship with
Intel since November 1996, when, in conjunction with Intel's investment in the
Company, 3Dfx and Intel entered into an agreement to license an early version of
Glide, the Company's proprietary low level 3D API. 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.
Coin-op Arcade and Console Segments. The market for electronic arcade
entertainment is comprised of a small number of companies, including Acclaim,
Atari, 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. In
July 1997, Sega terminated its agreement with the Company to develop a new home
game console incorporating the Company's technology. As a result of the
termination of the Company's contract with Sega and the related litigation, the
Company currently does not participate in the home game console market.
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
performance, both in processing power and image quality, support of and
conformity to industry standard APIs and software expertise. In addition, the
Company believes that it competes favorably on price at certain product
performance levels. The Company faces a competitive disadvantage as a result of
its small size, particularly with respect to the development of a broad retail
distribution channel. 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, 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
45
<PAGE> 48
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 six 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.
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."
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<PAGE> 49
In addition, in connection with the Company's litigation against Sega, the
Company was granted a preliminary injunction enjoining Sega from using or
providing to any other person or entity access to the Company's confidential
information and trade secrets that were provided to them in connection with the
Sega Agreement. Sega has been ordered by the court to return to the Company all
of the Company's confidential documents and/or information now possessed by
Sega. To date, Sega has not returned such proprietary information to the
Company. There can be no assurance that Sega will comply with the court order or
that Sega has not used and will not use the proprietary information to its
competitive advantage.
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 December 31, 1997, the Company had 123 employees, 70 of whom were
engaged in engineering, and 53 of whom were engaged in marketing, sales,
operations and administrative positions. As of December 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."
FACILITIES
The Company leases approximately 77,805 square feet for its headquarters in
one building in San Jose, California pursuant to a lease that expires in 2007,
with an option to extend the lease for an additional five-year term. In
addition, beginning in August 1998 the Company will lease approximately 52,000
square feet in a building adjacent to its San Jose headquarters building
pursuant to a lease that expires in 2005, with an option to extend the lease for
an additional three-year term. 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
On July 22, 1997, Sega terminated the Sega Agreement. The Company filed a
lawsuit in California in the Superior Court for the County of Santa Clara on
August 29, 1997 and filed an amended complaint on October 8, 1997. The amended
complaint names as defendants Sega and its U.S. subsidiary, Sega of America,
Inc., NEC, and VideoLogic, and includes claims for breach of contract,
interference with contract, misrepresentation, unfair competition, and
threatened misappropriation of trade secrets. Discovery in the case is currently
being conducted. As of the date of this Prospectus,
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<PAGE> 50
although NEC and VideoLogic have answered the complaint, Sega has not responded
to the Company's complaint by way of answer or counterclaim. The Company expects
to incur significant legal expenses in connection with this litigation which
will have an adverse effect on the Company's financial condition and results of
operations. In addition, pursuing this litigation is likely to result in the
diversion of management's attention from the day-to-day operations of the
business. There can be no assurance that the litigation will be resolved in the
Company's favor or that the litigation will be resolved quickly. Any prolonged
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations. An adverse outcome of the
litigation could have a material adverse effect on the Company's business,
financial condition and results of operations.
From time to time, the Company may be involved in additional litigation
relating to claims arising out of its operations in the normal course of
business. As of the date of this Prospectus, the Company is not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have a
material adverse effect on the Company's business, financial condition or
results of operations.
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<PAGE> 51
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
Scott D. Sellers........ 29 Vice President, Research and Development and Director
Gary Tarolli............ 40 Vice President and Chief Scientist
Philip Carmack.......... 35 Vice President, Hardware Engineering
Karl Chicca............. 39 Vice President, Operations
Andy Keane.............. 35 Vice President, Marketing
Darlene R. Kindler...... 45 Vice President of Consumer Marketing/Third Party
Janet Leising........... 40 Vice President, Software Engineering
Jordan G. Watters....... 35 Vice President, Sales
David Zacarias.......... 48 Chief Financial Officer and Vice President, Administration
George J. Still, 39
Jr.(2)................ 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.
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
49
<PAGE> 52
that, Mr. Sellers was a Microprocessor Engineer at Pellucid, Inc., 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.
Philip Carmack has served as Vice President, Hardware Engineering of the
Company since June 1997 and Director of Hardware Engineering since December
1995. Prior to joining the Company, Mr. Carmack was the 3D Graphics Manager at
3DO Company, a 3D console graphics company, from August 1994 to November 1995.
He was Systems Engineering Group Manager at Kubota Graphics Corporation, a 3D
graphics systems company, from September 1991 to August 1994. Prior to that, Mr.
Carmack was the Chief Architect and Technical Lead at Loral/ROLM Mil-Spec
Computers, a defense company, from July 1989 to September 1991. Prior to joining
Loral/ROLM, he was a Systems Design Engineer A at Amdahl Corporation, Computer
Development Division for two years.
Mr. Carmack received a BS in electrical Engineering from Brigham Young
University and a MS in Electrical Engineering from Stanford University.
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.
Darlene R. Kindler has served as Vice President, Consumer Marketing/Third
Party since February 1998. From September 1996 to February 1998, Ms. Kindler was
the Company's Director of Publisher and Developer Relations. Prior to joining
the Company, Ms. Kindler served, from July 1996 to September 1996, as Vice
President of Consumer Division, and from April 1994 to July 1996, as Director of
Sales and Marketing for Data East, Inc., a licensee and publisher of Nintendo,
Sony Playstation and Sega games, as well as a manufacturer and distributor of
arcade games. From 1990 to April 1994, Ms. Kindler served as Director of Sales
and Marketing for IREM America Corp., a Japanese company specializing in arcade
games and Nintendo consumer products. Ms. Kindler was Manager of International
Marketing at Nintendo of America, Inc., a manufacturer of home console video
game machines, from 1984 to 1990. She holds a BS from Washington State
University.
Janet Leising has served as Vice President, Software Engineering of the
Company since June 1997 and as Director of Software Engineering since August
1995. Prior to joining the Company, Ms. Leising was the Director of Software
Engineering at Weitek Systems Inc., a multimedia semiconductor company, from
November 1993 to July 1995. She was PC Graphics Manager and the X/PEX Manager at
Kubota Graphics Computers Inc., a workstation company, from November 1991 to
November 1993. Prior to that, Ms. Leising was the Section Manager at Data
General, R.T.P., a workstation company,
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<PAGE> 53
from June 1988 to November 1991. Ms. Leising received a BS in Computer Science
from Utah State University.
Jordan G. Watters has served as Vice president, Sales of the Company since
January 1998. From May 1997 until January 1998, Mr. Watters was the Company's
Director of Worldwide Sales. Prior to joining the Company, Mr. Watters served,
from January 1996 to May 1997, as Vice President of Sales and Marketing and,
from April 1995 to January 1996, as Director of Sales at VideoLogic, Inc., a
manufacturer and distributor of PC multimedia products. From 1989 to April 1995,
Mr. Watters served in a variety of sales and managerial positions, most recently
as Business Unit Manager, at Conner Peripherals, Inc., a manufacturer of
computer storage products. Mr. Watters has BS degrees in Engineering and
Chemistry from California State University at Chico and a MS degree in
Engineering from Stanford University.
David Zacarias has served as Chief Financial Officer and Vice President,
Administration of the Company since February 1998. Prior to joining the Company,
Mr. Zacarias served as Chief Financial Officer, from February 1993 to January
1998 and as Chief Operating Officer from July 1995 to January 1998 of OPTi Inc.,
a fabless semiconductor company. Mr. Zacarias received his BS in Business and
MBA from the University of California at Berkeley. Mr. Zacarias is a Certified
Public Accountant.
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.
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.
The term of office for each director is one year. 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 and,
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<PAGE> 54
therefore, the term of office for each officer is indefinite. There are no
family relationships among any of the directors or executive officers of the
Company.
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. Pursuant to such automatic
grant mechanism, on June 25, 1997, Gordon A. Campbell received an option to
purchase 11,000 shares of the Company's Common Stock and each of George J.
Still, Jr., Anthony Sun, Philip M. Young and James Whims received an option to
purchase 6,000 shares of the Company's Common Stock at an exercise price of
$11.00 per share.
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."
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 years ended December 31, 1996 and 1997, for the Company's
Chief Executive Officer and the Company's next five most highly compensated
executive officers whose salary and bonus for 1997 fiscal year exceeded $100,000
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
---------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#)(1)
- ----------------------------------------- ------ -------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
L. Gregory Ballard(2).................... 1997 $210,167 $6,220 -- 18,750
President, Chief Executive Officer and 1996 11,538 -- -- 350,000
Director
Scott D. Sellers......................... 1997 149,079 5,000 -- 68,750
Vice President, Research and 1996 116,667 1,400 -- 25,000
Development and Director
Gary Tarolli............................. 1997 155,500 5,000 -- 68,750
Vice President and Chief Scientist 1996 130,000 1,400 -- 25,000
Philip Carmack........................... 1997 147,619 4,665 40,000
Vice President, Hardware Engineering 1996 140,000 -- -- 50,000
Karl Chicca(3)........................... 1997 147,171 5,000 -- 18,750
Vice President, Operations 1996 75,385 -- 110,003 75,000
David Bowman(4).......................... 1997 134,226 -- 84,000 18,750
Vice President, Sales 1996 96,923 -- -- 100,000
</TABLE>
- ---------------
(1) These shares are subject to exercise under stock options granted under the
Company's 1995 Employee Stock Plan.
(2) Mr. Ballard joined the Company in December 1996.
(3) Mr. Chicca joined the Company in June 1996. Other annual compensation amount
relates to relocation bonus.
(4) Other annual compensation amount relates to commissions paid. Mr. Bowman
resigned as a Vice President in December 1997.
52
<PAGE> 55
STOCK OPTION GRANTS
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1997.
All such options were awarded under the Company's 1995 Employee Stock Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF % OF TOTAL STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OPTIONS TERM(1)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) IN FISCAL 1997 SHARE(2)(3) DATE(4) 5%($) 10%($)
- ---------------------------- ---------- -------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard.......... 18,750 1% $ 12.00 3/31/07 $141,501 $ 358,592
Scott D. Sellers............ 18,750 1 12.00 3/31/07 141,501 358,592
50,000 4 15.75 10/27/07 495,255 1,255,072
Gary Tarolli................ 18,750 1 12.00 3/31/07 141,501 358,592
50,000 4 15.75 10/27/07 495,255 1,255,072
Philip Carmack.............. 40,000 3 12.00 3/31/07 301,869 764,996
Karl Chicca................. 18,750 1 12.00 3/31/07 141,501 358,592
David Bowman................ 18,750 1 12.00 3/31/07 141,501 358,592
</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.
53
<PAGE> 56
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, 1997. The following table sets forth certain
information regarding stock options held as of December 31, 1997 by the Named
Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1997(#)(1) DECEMBER 31, 1997($)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
L. Gregory Ballard.................... 86,650 281,250 $1,871,640 $ 5,866,875
Scott D. Sellers...................... 8,854 84,896 195,319 890,556
Gary Tarolli.......................... 8,854 84,896 195,319 890,556
Philip Carmack........................ 23,177 66,823 515,785 1,016,215
Karl Chicca........................... 4,687 65,625 103,395 1,230,938
David Bowman.......................... 16,667 77,083 367,674 1,483,701
</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 the last sale price of the Common Stock on December 31, 1997,
$22.50 per share, minus the exercise price.
STOCK PLANS
1995 Stock Option Plan. The Company's 1995 Employee Stock Plan (the "1995
Plan") was adopted by the Board of Directors in May 1995 and approved by the
shareholders in June 1995. A total of 2,675,000 shares of Common Stock has been
reserved for issuance under the 1995 Plan. In addition, the Board of Directors
has approved an increase of 1,700,000 shares to be reserved for issuance under
the 1995 Plan subject to the approval of the shareholders at the 1998 Annual
Meeting of Shareholders, currently scheduled for May 1998. 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
54
<PAGE> 57
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 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
150,000 shares (or 250,000 shares in the case of a new employee's initial
employment with the Company). The 1995 Plan will terminate in May 2005, unless
sooner terminated by the Board of Directors.
As of December 31, 1997, 452,958 shares of Common Stock, net of
repurchases, had been issued upon the exercise of options granted under the 1995
Plan, options to purchase 2,158,042 shares of Common Stock at a weighted average
exercise price of $5.09 per share were outstanding and 64,000 shares remained
available for future option grants under the 1995 Plan.
1997 Supplemental Stock Option Plan. The Company's 1997 Supplemental
Employee Stock Plan (the "1997 Supplemental Plan") was adopted by the Board of
Directors in October 1997 and amended in February 1998. As of December 31, 1997,
a total of 500,000 shares of Common Stock were reserved for issuance under the
1997 Supplemental Plan. In February 1998, an additional 500,000 were reserved
for issuance under the 1997 Supplemental Plan. The 1997 Plan, as amended,
provides for grants of nonstatutory stock options to employees or consultants of
the Company. The purpose of the 1997 Supplemental 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 1997 Supplemental 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 1997 Supplemental Plan is stated in
the option agreement. Options granted under the 1997 Supplemental 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. 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
55
<PAGE> 58
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 15 days, after which
such options shall terminate. The consideration for exercising any nonstatutory
stock option may consist of 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, reduction in amount of any
Company liability, or any combination of the foregoing methods of payment or
such other consideration or method of payment to the extent permitted under
applicable law. The 1997 Supplemental Plan will terminate in October 2007,
unless sooner terminated by the Board of Directors.
As of December 31, 1997, under the 1997 Supplemental Plan, options to
purchase 312,950 shares of Common Stock at a weighted average exercise price of
$14.75 per share were outstanding and 187,050 shares remained available for
future option grants under the 1997 Supplemental 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 550,000 shares of
Common Stock has been reserved for issuance under the Purchase Plan. The Board
of Directors has approved an amendment to the Purchase Plan that would provide
for an annual increase, commencing in 1999, in the number of shares reserved for
issuance under the Purchase Plan equal to the lesser of 200,000 or 1% of the
Company's outstanding capitalization. This amendment is subject to the approval
of the shareholders at the 1998 Annual Meeting of Shareholders. If such
amendment is approved, a maximum additional 1,600,000 shares would be reserved
under the Purchase Plan and therefore the maximum number of shares which could
be issued under the Purchase Plan over its term would be 2,150,000 shares. As of
December 31, 1997, 34,742 shares had been purchased 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 began on June 25, 1997 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, 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
56
<PAGE> 59
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 150,000
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 also provides for an initial
grant of options to purchase 12,500 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 5,000 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 10,000
shares. In addition to these grants, each director shall automatically be
granted an option to purchase 1,000 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 2,000 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). 12,500
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. 5,000 or 10,000
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. 1,000 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.
As of December 31, 1997, no shares of Common Stock had been issued upon the
exercise of options granted under the Director Plan, options to purchase 35,000
shares of Common Stock at a weighted average exercise price of $11.00 per share
were outstanding and 115,000 shares remain available for future option grants
under the Director Plan.
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
57
<PAGE> 60
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. Contributions 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.
58
<PAGE> 61
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT OF SECURITIES
Between January 12 and May 18, 1995, the Company sold an aggregate of
1,646,253 shares of its Common Stock at prices ranging from $.025 to $.10 per
share. Between March 13, 1995 and January 17, 1997 the Company sold the
following shares of its Preferred Stock in private placement transactions:
2,750,992 shares of Series A Preferred Stock at a price of $2.00 per share;
2,650,003 shares of Series B Preferred Stock at a price of $4.40 per share and
1,620,864 shares of Series C Preferred Stock at a price of $7.50 per share. In
addition, the Company issued warrants to purchase the following shares of
Preferred Stock: 43,750 shares of Series A Preferred Stock at an exercise price
of $2.00 per share; 115,919 shares of Series B Preferred Stock at an exercise
price of $4.40 per share and 35,000 shares of Series C Preferred Stock at an
exercise price of $7.50 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........................................ 300,000 -- -- --
Gary Tarolli............................................ 300,000 -- -- --
DIRECTORS
Gordon A. Campbell...................................... 90,875 44,808 231,532 --
ENTITIES AFFILIATED WITH DIRECTORS
Venture capital funds affiliated with U.S. Venture
Partners (Philip M. Young)........................... -- 975,000 340,900 133,334
Venture capital funds affiliated with Venrock Associates
(Anthony Sun)........................................ -- 975,000 340,900 133,334
Norwest Equity Partners V (George J. Still, Jr.)........ -- 795,500 133,334
Techfarm, Inc. (Gordon A. Campbell)..................... 462,500 -- -- --
OTHER 5% SHAREHOLDERS
Chase Capital Partners.................................. -- -- 738,637 133,334
Intel Corporation....................................... -- -- -- 666,667
</TABLE>
- ---------------
(1) The purchasers of these securities are entitled to registration rights. See
"Description of Capital Stock -- Registration Rights."
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 for such
management services during 1995, 1996 and 1997 of $45,000, $60,000, $60,000,
respectively.
The Company has an agreement with Quantum3D, a supplier of advanced
graphics subsystems based on the Company's technology, pursuant to which the
Company will supply graphic boards and components to Quantum3D. Gordon Campbell,
Chairman of the Board of Directors of the Company, is a Director, significant
investor in and shareholder of Quantum3D. Sales to Quantum3D during 1997 totaled
$949,000. As of December 31, 1997, the Company has an outstanding trade
receivable from Quantum3D of approximately $624,500.
59
<PAGE> 62
In connection with the termination of Gary Martin's employment with the
Company, the Company and Mr. Martin, who was Chief Financial Officer and Vice
President, Finance until January 31, 1998, entered into a Separation Agreement
pursuant to which Mr. Martin will (i) remain a temporary employee through August
1, 2000 and (ii) continue to receive medical insurance through December 31,
1998. In addition, all options granted to Mr. Martin pursuant to the Stock Plans
will continue to vest through August 1, 2000. As of January 1, 1998, Mr. Martin
held vested options to purchase 83,810 shares of Common Stock and unvested
option to purchase 57,240 shares of Common Stock. In the event of a Change of
Control, the Company will (i) waive its right to repurchase any unvested shares
of Common Stock owned by Mr. Martin and (ii) accelerate the vesting of all
unvested stock options granted to Mr. Martin pursuant to the Stock Plans. For
purposes of the separation agreement, a "Change of Control" occurs, subject to
certain conditions and exceptions, upon (i) the acquisition, directly or
indirectly, by any person (other than existing beneficial owners) of securities
of the Company representing 50% or more of the total voting power represented by
the Company's then outstanding voting securities; (ii) the merger or
consolidation of the Company with another corporation in which the voting
securities of the Company outstanding immediately prior to such merger or
consolidation ceased to represent at least 50% of the voting power represented
by the voting securities of the Company thereafter; or (iii) the liquidation of
the Company or the sale or disposition of all or substantially all of the
Company's assets.
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.
60
<PAGE> 63
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of February 6, 1998 and as adjusted
to reflect the sale of the 2,300,000 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, (iv) by all directors and executive officers of the
Company as a group and (v) the Selling Shareholders. 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 BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) SHARES OFFERING(1)
------------------- BEING -------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Entities affiliated with U.S. Venture
Partners(2)................................. 855,544 6.7% -- 855,544 5.8%
2180 Sand Hill Road, Suite 300
Menlo Park, CA 94025
Entities affiliated with Venrock
Associates(3)............................... 928,295 7.3 -- 928,295 6.3
755 Page Mill Road, A-230
Palo Alto, CA 94304
Norwest Equity Partners V(4).................. 344,590 2.7 -- 344,590 2.3
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301-1426
Entities affiliated with Chase Capital
Partners(5)................................. 871,971 6.9 200,000 671,971 4.6
380 Madison Avenue, 12th Flr.
New York, NY 10017
Entities affiliated with Techfarm, Inc.(6).... 878,715 6.9 -- 878,715 6.0
111 West Evelyn Avenue, #101
Sunnyvale, CA 94086
Intel Corporation............................. 666,667 5.3 -- 666,667 4.5
SC-4-210
2200 Mission College Blvd.
Santa Clara, CA 95052-8119
Anthony Sun(3)................................ 928,295 7.3 -- 928,295 6.3
Philip M. Young(2)............................ 855,544 6.7 -- 855,544 5.8
George J. Still, Jr.(4)....................... 344,590 2.7 -- 344,590 2.3
Gordon A. Campbell(6)......................... 878,715 6.9 -- 878,715 6.0
L. Gregory Ballard(7)......................... 119,167 1.0 5,000 114,167 *
James Whims(8)................................ 21,166 * -- 21,166 *
Scott D. Sellers(9)........................... 310,417 2.4 -- 310,417 2.1
Gary Tarolli(10).............................. 280,907 2.2 -- 280,907 1.9
Karl Chicca(11)............................... 57,813 * -- 57,813 *
Philip Carmack(12)............................ 27,649 * -- 27,649 *
David Bowman(13).............................. 27,501 * -- 27,501 *
All other selling shareholders as a group,
each of which owns less than 1% of the
outstanding Common Stock.................... 95,000
All executive officers and directors as a
group (15 persons)(14)...................... 3,917,571 30.8 5,000 3,912,571 30.8
</TABLE>
- ---------------
* Less than 1%.
(1) Applicable percentage ownership is based on 12,707,215 shares of Common
Stock outstanding as of February 6, 1998, and 14,707,215 shares of Common
Stock outstanding after completion of this offering, in each case together
with applicable options for such shareholder. Beneficial ownership
61
<PAGE> 64
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 February 6, 1998, are
deemed outstanding for the 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 89,170 shares held by Second Ventures, II, L.P., 43,477 shares
held by USVP Entrepreneur Partners II, L.P., 734,586 shares held by U.S.
Venture Partners IV, L.P., 1,809 shares held by Mr. Young and 4,500 shares
issuable upon exercise of stock options exercisable within 60 days of
February 6, 1998 held by Mr. Young. Mr. Young, a director of the Company,
is a general partner of each of these limited partnerships. Mr. Young
disclaims beneficial ownership of the shares held by the limited
partnerships except to the extent of his proportionate partnership interest
therein. In addition to Mr. Young, the general partners of each of Second
Ventures, II, L.P., USVP Entrepreneur Partners II, L.P. and U.S. Venture
Partners IV, L.P. are William K. Bowes, Jr., Irwin Federman, Steven M.
Krausz and Dale J. Vogel.
(3) Includes 600,584 shares held by Venrock Associates, L.P., 301,061 shares
held by Venrock Associates II, L.P., 22,150 shares held by the Anthony Sun
Family Trust as to which Mr. Sun claims beneficial ownership and 4,500
shares issuable upon exercise of stock options exercisable within 60 days
of February 6, 1998 held by Mr. Sun. Mr. Sun, a director of the Company, is
a general partner of each of these limited partnerships. Mr. Sun disclaims
beneficial ownership of the shares held by the limited partnerships except
to the extent of his proportionate partnership interest therein. In
addition to Mr. Sun, the general partners of each of Venrock Associates,
L.P. and Venrock Associates II, L.P. are Patrick F. Latterell, Peter O.
Crisp, Ted H. McCourtney, Anthony B. Evnin, Ph.D., Kimberley A.
Rummelsburg, David R. Hathaway, Ray A. Rothrock and Mark Bailey.
(4) Includes 328,834 shares held by Norwest Equity Partners V, L.P., 4,981
shares held by Mr. Still, 6,275 shares held by Still Family Partners as to
which Mr. Still claims beneficial ownership and 4,500 shares issuable upon
exercise of stock options exercisable within 60 days of February 6, 1998
held by Mr. Still. Mr. Still, a director of the Company, is a managing
general partner of Itasca Partners V, L.L.P., the general partner of
Norwest Equity Partners V, L.P. Mr. Still disclaims beneficial ownership of
the shares held by Norwest Equity Partners V, L.P. except to the extent of
his proportionate partnership interest therein. In addition to Mr. Still,
the managing general partners of Itasca Partners V, L.L.P. Norwest Equity
Partners V, L.P. are Daniel J. Haggerty and John E. Lindahl.
(5) Includes 133,334 shares held by Chase Venture Capital Associates, L.P.
("Chase") and 738,637 shares held by Chemical Venture Capital Associates,
L.P. ("Chemical"). The general partner of each of Chase and Chemical is
Chase Capital Partners, Inc.
(6) Includes 462,500 shares held by Techfarm, L.P., 65,000 shares held by
Techfarm II, L.P., 292,965 shares held by Gordon A. Campbell and 58,250
shares issuable upon exercise of stock options exercisable within 60 days
of February 6, 1998 held by Gordon A. Campbell. Mr. Campbell is President
of Techfarm Management, Inc. (dba Techfarm, Inc.), the general partner of
Techfarm, L.P. and Techfarm II, L.P. Techfarm, Inc., Techfarm, L.P. and
Techfarm II, L.P. disclaim beneficial ownership of the shares held by Mr.
Campbell, and Mr. Campbell disclaims beneficial ownership of the shares
held by Techfarm, L.P. and Techfarm, II, L.P.
(7) Includes 116,667 shares of Common Stock issuable upon exercise of stock
options exercisable within 60 days of February 6, 1998 held by Mr. Ballard.
(8) Includes 21,166 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Whims.
(9) Includes 10,417 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Sellers.
62
<PAGE> 65
(10) Includes 28,750 shares held by the Tarolli Grantor Retained Annuity Trust
as to which Mr. Tarolli claims voting and investment control and 10,417
shares issuable upon exercise of stock options exercisable within 60 days
of February 6, 1998 held by Mr. Tarolli.
(11) Includes 34,375 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Chicca.
(12) Includes 27,344 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Carmack.
(13) Includes 25,001 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by Mr. Bowman.
(14) Includes 374,168 shares issuable upon exercise of stock options exercisable
within 60 days of February 6, 1998 held by all executive officers and
directors as a group.
63
<PAGE> 66
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is 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 December 31, 1997, there were 12,566,630 shares of Common Stock
outstanding held of record by approximately 248 shareholders. As of December 31,
1997, options to purchase an aggregate of 2,505,984 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
The Company is 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
At December 31, 1997 there were outstanding warrants to purchase 43,750
shares, 19,886 shares, 5,000 shares and 25,000 shares of Common Stock at
exercise prices of $2.00, $4.40, $7.50 and $13.875 per share, respectively. Such
warrants contain "net exercise" provisions that enable the warrantholders to
exercise a portion of their warrant without paying the exercise price. To the
extent the warrantholders choose to "net exercise" their warrants, the Company
will not receive the proceeds from the exercise of such warrants. The warrant to
purchase 43,750 shares expires on March 31, 2002, the warrant to purchase 19,886
shares expires on January 1, 2003, the warrant to purchase 5,000 shares expires
on December 31, 2001 and the warrant to purchase 25,000 shares expires on
December 3, 2002.
REGISTRATION RIGHTS
The holders of approximately 3,772,848 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 180 days 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
64
<PAGE> 67
any of its securities under 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 BankBoston, N.A. Its telephone
number is (781) 575-3120.
65
<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, the Company will have 14,566,630 shares of
Common Stock outstanding, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 2,300,000 shares of Common Stock sold in the offering and the 3,450,000
shares sold in the Company's initial public offering will be freely transferable
without restriction under the Securities Act unless they are held by
"affiliates" of the Company as that term is used under the Securities Act and
the regulations promulgated thereunder. The remaining approximately 8,816,630
shares of Common Stock (the "Restricted Shares") held by officers, directors,
employees, consultants and other shareholders of the Company were sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act and are "restricted" securities within the meaning of Rule 144
under the Securities Act. Of this number, 5,252,061 shares are freely tradeable
without restriction. An additional 87,510 shares will become eligible for sale
beginning on June 30, 1998 under Rule 144. An additional 3,564,569 shares that
are subject to lock-up agreements (as described below under "Underwriting") will
become eligible for sale beginning on the open of market on the third trading
day following the date of public disclosure of the Company's financial results
for the three months ended March 31, 1998 upon expiration of such agreements and
subject to compliance with the provisions of Rules 144(k), 144 and 701.
In general, under Rule 144 as currently in effect, 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 146,000 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 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 (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, 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 one-year minimum holding period requirements.
In October 1997, the Company filed a Registration Statement on Form S-8
registering 3,499,768 shares of Common Stock subject to outstanding options or
reserved for future issuance under its stock plans. As of December 31, 1997,
options to purchase a total 2,505,992 shares were outstanding and 1,381,308
shares were reserved for future issuance under the Company's stock plans. Common
Stock issued upon exercise of outstanding vested options or issued pursuant to
the Purchase Plan, other than Common Stock issued to affiliates of the Company,
are available for immediate resale in the open market.
66
<PAGE> 69
No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial amount of
such shares by existing shareholders or by shareholders purchasing in the
offering could have a negative impact on the market price of the Common Stock.
67
<PAGE> 70
UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC 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>
BancAmerica Robertson Stephens..................................
NationsBanc Montgomery Securities LLC...........................
UBS Securities LLC..............................................
-------
Total................................................. 2,300,000
=======
</TABLE>
The Representatives have advised the Company and the Selling Shareholders
that they propose to offer the shares of Common Stock to the public at the
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 completion of the
Offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall affect the amount of
proceeds to be received by the Company and the Selling Shareholders 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 345,000
additional shares of Common Stock at the same price per share as the Company
will receive for the 2,000,000 shares that the Underwriters have agreed to
purchase from the Company. 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 2,300,000 shares offered hereby. If purchased, such
additional shares will be sold by the Underwriters on the same terms as those on
which the 2,300,000 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 shareholders of the Company
have agreed with the Representatives 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 until the open of market on the third trading day following the
date of public disclosure of the Company's financial results for the three
months ended March 31, 1998 (the "Lock-Up Period"), without the prior written
consent of BancAmerica Robertson Stephens. However, BancAmerica Robertson
Stephens may, in its sole
68
<PAGE> 71
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
3,564,569 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 BancAmerica Robertson Stephens issue, sell,
contract to sell or otherwise dispose of any shares of 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 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.
In connection with this offering, certain Underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in the Common Stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended, during the business day prior to
the pricing of the offering before the commencement of offers or sales of the
Common Stock. Passive market makers must comply with applicable volume and price
limitations and must be identified as such. In general, a passive market maker
must display its bid at a price not in excess of the highest independent bid of
such security; if all independent bids are lowered below the passive market
maker's bid, however, such bid must then be lowered when certain purchase limits
are exceeded.
69
<PAGE> 72
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, 1996 and 1997,
and for each of the three years in the period ended December 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.
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission also makes electronic filings publicly available on the
Internet within 24 hours of acceptance. The Commission's Internet address is
http://www.sec.gov. The Commission web site also contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the Commission. The Common Stock of the Company is quoted on
the Nasdaq National Market. Reports, proxy and information statements and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
70
<PAGE> 73
3DFX INTERACTIVE, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................................... F-2
Balance Sheets as of December 31, 1996 and 1997....................................... F-3
Statements of Operations for the years ended December 31, 1995, 1996 and 1997......... F-4
Statements of Shareholders' Equity for the years ended December 31, 1995, 1996 and
1997................................................................................ F-5
Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997......... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
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, 1996 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 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
January 27, 1998
F-2
<PAGE> 75
3DFX INTERACTIVE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................ $ 5,291 $ 28,937
Short-term investments............................................... -- 5,984
Accounts receivable less allowance for doubtful accounts of $78 and
$308.............................................................. 1,393 13,387
Inventory............................................................ 4,960 3,845
Other current assets................................................. 321 2,400
-------- --------
Total current assets......................................... 11,965 54,553
Property and equipment, net............................................ 3,482 6,816
Other assets........................................................... 134 548
-------- --------
$ 15,581 $ 61,917
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit....................................................... $ 1,076 $ 777
Accounts payable..................................................... 2,236 12,573
Accrued liabilities.................................................. 1,415 2,969
Current portion of capitalized lease obligations..................... 601 778
-------- --------
Total current liabilities.................................... 5,328 17,097
-------- --------
Capitalized lease obligations, less current portion.................... 632 546
-------- --------
Commitments (Note 8)
Shareholders' Equity:
Preferred Stock, no par value, 7,269,018 and 5,000,000 shares
authorized; 6,951,692 and none issued and outstanding............. 28,701 --
Common Stock, no par value, 25,033,000 and 50,000,000 shares
authorized; 1,890,013 and 12,566,630 shares issued and
outstanding....................................................... 1,626 66,717
Warrants............................................................. 353 242
Notes receivable..................................................... (19) --
Deferred compensation................................................ (1,250) (1,181)
Accumulated deficit.................................................. (19,790) (21,504)
-------- --------
Total shareholders' equity................................... 9,621 44,274
-------- --------
$ 15,581 $ 61,917
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 76
3DFX INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... -- $ 6,390 $ 44,069
Cost of revenues............................................ -- 5,123 22,611
------- -------- --------
Gross profit................................................ -- 1,267 21,458
------- -------- --------
Operating expenses:
Research and development.................................. 2,940 9,435 12,412
Selling, general and administrative....................... 2,166 6,642 11,390
------- -------- --------
Total operating expenses.......................... 5,106 16,077 23,802
------- -------- --------
Loss from operations........................................ (5,106) (14,810) (2,344)
Interest and other income, net.............................. 67 59 630
------- -------- --------
Net loss.................................................... $(5,039) $(14,751) $ (1,714)
======= ======== ========
Net loss per share
Basic..................................................... $ (1.52) $ (0.15)
======== ========
Diluted................................................... $ (1.52) $ (0.15)
======== ========
Shares used in net loss per share calculations (Note 1)
Basic..................................................... 9,681 11,699
-------- --------
Diluted................................................... 9,681 11,699
-------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 77
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
$0.025 per
share............. -- $ -- 1,364,000 $ 34 $ -- $(19) $ -- $ -- $ 15
Issuance of Common
Stock to founders,
investors and
employees at
$0.075 per
share............. -- -- 73,000 6 -- (6) -- -- --
Issuance of Common
Stock to founders,
investors and
employees at $0.10
per share......... -- -- 209,250 21 -- (21) -- -- --
Issuance of Series A
Convertible
Preferred Stock in
March 1995 at
$2.00 per share,
net of issuance
cost.............. 2,750,992 5,474 -- -- -- -- -- -- 5,474
Common Stock options
exercised......... -- -- 125,000 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.......... 2,750,992 5,474 1,771,250 310 -- (25) (168) (5,039) 552
Issuance of Series B
Convertible
Preferred Stock in
March 1996 at
$4.40 per share,
net of issuance
cost.............. 2,650,003 11,634 -- -- -- -- -- -- 11,634
Issuance of Series C
Convertible
Preferred Stock in
November 1996 at
$7.50 per share,
net of issuance
cost.............. 1,550,697 11,593 -- -- -- -- -- -- 11,593
Common Stock options
exercised......... -- -- 185,209 42 -- -- -- -- 42
Forgiveness of notes
receivable from
shareholders...... -- -- -- -- -- 6 -- -- 6
Repurchased Common
Stock............. -- -- (66,446) (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.......... 6,951,692 28,701 1,890,013 1,626 353 (19) (1,250) (19,790) 9,621
Issuance of Series C
Convertible
Preferred Stock in
January 1997 at
$7.50 per share,
net of Issuance
cost.............. 70,167 521 -- -- -- -- -- -- 521
Conversion of
Preferred Stock to
Common Stock...... (7,021,859) (29,222) 7,021,859 29,222 -- -- -- -- --
Issuance of common
stock in
connection with
initial public
offering, less
issuance costs.... -- -- 3,450,000 34,336 -- -- -- -- 34,336
Issuance of common
stock under stock
option and
purchase plans.... -- -- 214,757 413 -- -- -- -- 413
Common Stock
repurchased....... -- -- (104,246) (9) -- -- -- -- (9)
Exercise of warrants
to purchase Common
Stock............. -- -- 94,247 714 (329) -- -- -- 385
Issuance of warrant
to purchase Common
Stock............. -- -- -- -- 218 -- -- -- 218
Repayment of notes
receivable from
shareholders...... -- -- -- -- -- 19 -- -- 19
Deferred
compensation...... -- -- -- 415 -- -- (415) -- --
Amortization of
deferred
compensation...... -- -- -- -- -- -- 484 -- 484
Net loss............ -- -- -- -- -- -- -- (1,714) (1,714)
---------- ------- ---------- ------- ---- ---- ------ ------- ------
Balance at December
31, 1997.......... -- $ -- 12,566,630 $66,717 $ 242 $ -- $ (1,181) $ (21,504) $ 44,274
========== ======= ========== ======= ==== ==== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 78
3DFX INTERACTIVE INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (5,039) $ (14,751) $ (1,714)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.......................................... 227 1,017 2,238
Warrant valuation..................................... -- 353 --
Stock compensation.................................... 56 196 484
Increase in allowance for doubtful accounts........... -- 78 230
Changes in assets and liabilities:
Accounts receivable................................ -- (1,471) (12,224)
Inventory.......................................... (37) (4,923) 1,115
Other assets....................................... (169) (286) (2,275)
Accounts payable................................... 471 1,765 10,337
Accrued liabilities................................ 564 851 1,554
--------- ---------
Net cash used in operating activities............ (3,927) (17,171) (255)
--------- ---------
Cash flows from investing activities:
Purchases of short-term investments, net................... -- -- (5,984)
Purchases of property and equipment........................ (589) (2,210) (4,730)
--------- ---------
Net cash used in investing activities................... (589) (2,210) (10,714)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock,
net..................................................... 5,474.... 23,227 521
Proceeds from initial public offering, net................. -- -- 34,336
Proceeds from issuance of Common Stock, net................ 61 44 423
Proceeds from exercise of warrants......................... -- -- 385
Principal payments of capitalized lease obligations, net... (154) (540) (751)
Proceeds (payments) on drawdown
on line of credit, net.................................. -- 1,076 (299)
--------- ---------
Net cash provided by financing activities............... 5,381 23,807 34,615
--------- ---------
Net increase in cash and cash equivalents.................... 865 4,426 23,646
--------- ---------
Cash and cash equivalents at beginning of period............. -- 865 5,291
--------- ---------
Cash and cash equivalents at end of period................... $ 865 $ 5,291 $ 28,937
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest................... $ 45 $ 96 $ 263
Acquisition of property and equipment under
capitalized lease obligations........................... 1,007 920 842
</TABLE>
The accompanying notes are an integral part of these financial statments.
F-6
<PAGE> 79
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the single business
segment of the design, development and marketing of 3D media processors
specifically designed for interactive electronic entertainment applications in
the PC, coin-op arcade and home game console markets. The Company did not incur
any expenses from the period of inception (August 24, 1994) through December 31,
1994.
In June 1997, the Company completed its initial public offering and issued
3,000,000 shares of its Common Stock to the public at a price of $11.00 per
share. The Company received cash of approximately $30,400,000, net of
underwriting discounts and commissions. Upon the closing of initial public
offering, all outstanding shares of the Company's then outstanding Convertible
Preferred Stock were automatically converted into shares of Common Stock. On
July 25, 1997, the Company's underwriter exercised an option to purchase an
additional 450,000 shares of Common Stock at a price of $11.00 per share to
cover over-allotments. The Company received cash of approximately $3,900,000,
net of underwriting discounts and commissions.
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 generally 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.
Cash equivalents and investments
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 December 31, 1997, approximately $3,137,000 and $24,218,000, respectively,
of money market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.
Investments in debt securities are classified as "available for sale" and
have maturities greater than three months from the date of acquisition.
Investments classified as "available for sale" are reported at fair value with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of shareholders' equity. Unrealized gains and losses were not material
during the year ended December 31, 1997.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and accounts receivable.
F-7
<PAGE> 80
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3Dfx invests primarily in money market accounts, commercial paper
instruments and term notes. Cash equivalents and short-term investments 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. Two customers
account for 29% and 26% of accounts receivable at December 31, 1997.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1997
---- ----
<S> <C> <C>
Customers comprising 10% or more of the Company's revenues for
the periods indicated:
A ....................................................... 44% 7%
B ....................................................... 33% 37%
C ....................................................... 11% 2%
D ....................................................... -- 16%
</TABLE>
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.
Research and software development costs
Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. 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).
F-8
<PAGE> 81
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Earnings (loss) per share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted earnings (loss)
per share is computed using the weighted average number of common and
potentially dilutive common shares during the periods, except those that are
antidilutive. Pursuant to the requirements of the Securities and Exchange
Commission, common stock issued for nominal consideration is reflected in a
manner similar to a stock split in the calculation of basic and diluted earnings
(loss) per share. SFAS 128 requires a reconciliation of the numerators and
denominators of the basic and diluted per share computations as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER,
31
----------------------
1996 1997
-------- -------
<S> <C> <C>
Net loss available to common shareholders
(numerator)......................................... $(14,751) $(1,714)
-------- -------
Weighted average common shares outstanding............ 8,467 10,767
Effect of common stock equivalents issued for the one
year period up to the IPO date...................... 1,214 932
-------- -------
Weighted average shares outstanding (denominator for
both computations).................................. 9,681 11,699
======== =======
Basic loss per share.................................. $ (1.52) $ (0.15)
======== =======
Diluted loss per share................................ $ (1.52) $ (0.15)
======== =======
</TABLE>
During the years ended December 31, 1996 and 1997, options to purchase
approximately 459,000 and 1,148,372 shares, respectively, were outstanding but
are not included in the computation because they are antidilutive.
Basic and diluted loss per share data has not been presented for the year
ended December 31, 1995 since such amounts are not deemed meaningful.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income." This Statement establishes standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is required to be adopted for fiscal
years beginning after December 15, 1998.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is required to be adopted
for fiscal years beginning after December 15, 1998.
F-9
<PAGE> 82
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Inventory:
Raw material........................................... $ 424 $ 531
Work-in-progress....................................... 231 2,246
Finished goods......................................... 4,305 1,068
------- -------
$4,960.. $ 3,845
------- -------
Property and equipment:
Computer equipment..................................... $ 3,122 $ 6,179
Purchased computer software............................ 1,047 3,011
Furniture and equipment................................ 557 1,108
------- -------
4,726 10,298
Less: Accumulated depreciation and amortization........ (1,244) (3,482)
------- -------
$ 3,482 $ 6,816
======= =======
</TABLE>
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $1,927,000 and $2,769,000 with related
accumulated amortization of $602,000 and $1,514,000 at December 31, 1996 and
1997, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ ------
<S> <C> <C>
Accrued liabilities:
Accrued salaries, wages and benefits..................... $ 354 $1,014
Accrued prototype costs.................................. 143 1,070
Other accrued liabilities................................ 918 885
------ ------
$1,415 $2,969
====== ======
</TABLE>
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 80% of eligible accounts
receivable plus 100% of cash and cash equivalents or $7,000,000. Borrowings
under the line are secured by all of the Company's owned assets and bear
interest at the bank's prime rate plus 0.25% per annum (8.75%) as of December
31, 1997. The agreement requires that the Company maintain certain financial
ratios and levels of tangible net worth, profitability and liquidity. As of
December 31, 1997, the Company was in compliance with its covenants. The line of
credit expires in December 1998. At December 31, 1997, there were no borrowings
outstanding under this line of credit.
The Company has two lease lines of credit with a bank, which provides for
the purchase of up to $5,000,000 of property and equipment. Borrowings under
these lines are secured by all of the Company's owned assets and bear interest
at the bank's prime rate plus 1.50% and 0.75% per annum, respectively. The
agreement requires that the Company maintain certain financial ratios and levels
of tangible net worth, profitability and liquidity. As of December 31, 1997, the
Company was in compliance with its covenants. The equipment lines of credit
expire in August 1998 and December 2001, respectively. At December 31, 1997,
approximately $777,000 was outstanding under these equipment lines of credit.
F-10
<PAGE> 83
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- DEVELOPMENT CONTRACT:
In February 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 based upon a cumulative
volume of units sold by Sega which include the Company's product. The Company
recognized development contract revenues of $1,817,00 in the year ended December
31, 1997, representing a non-refundable amount due for the delivery of certain
engineering designs and revenue recognized under the percentage of completion
method of accounting. The Company has no further obligations to Sega with regard
to the $1,817,000 of development contract revenue recognized. The Company has an
outstanding receivable for $267,000 related to the Sega agreement which in light
of the litigation noted below, is classified as a long-term asset. The Company
did not earn any royalty revenue in the year ended December 31, 1997. Costs
incurred during the period relating to this contract are included in research
and development expense.
In July 1997, Sega terminated the development and license agreement with
the Company. In August 1997, the Company filed a lawsuit against Sega alleging
breach of contract, interference with the contract, misrepresentation, unfair
competition and threatened misappropriation of trade secrets. Discovery in the
case is presently under way. There can be no assurance that this litigation will
be resolved in the Company's favor. The resolution of this matter could have a
material adverse impact on the Company's financial position, results of
operations and liquidity. No future revenues will be recognized under the Sega
agreement.
NOTE 5 -- SHAREHOLDERS' EQUITY:
Common stock
The Company has issued 1,646,250 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 years ended December 31, 1996 and 1997,
49,571 and 83,855 shares, respectively, of Common Stock were repurchased.
In addition, during the three year period ended December 31, 1997, certain
employees exercised options to purchase 306,292 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 years ended December 31, 1996 and 1997, 16,875 and 20,391
shares, respectively, of Common Stock were repurchased.
As of December 31, 1996 and 1997, approximately 835,130 and 306,292 shares,
respectively, of Common Stock were subject to these repurchase rights.
Convertible preferred stock
At December 31, 1996, the aggregate authorized number of preferred shares
was 7,269,018, of which 2,794,742, 2,818,412 and 1,655,864 were 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 was
converted into one Share of Common Stock upon the completion of the underwritten
initial public offering (IPO) of Common Stock in June 1997. The holders of
Series A, B and C Convertible Preferred Stock had voting rights equal to Common
Stock on an if-converted basis.
F-11
<PAGE> 84
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Warrants
In March 1995, the Company issued a warrant to a vendor to purchase 43,750
shares of Series A Convertible Preferred Stock at $2.00 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. Upon completion of the Company's IPO, this
warrant was exchanged for a warrant to purchase Common Stock. The Company has
reserved 43,750 shares of Common 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 19,886 shares of
Series B Convertible Preferred Stock at an exercise price of $4.40. The warrant
expires on January 1, 2003. The warrant was deemed by management to have a
nominal value at the date of grant. Upon completion of the Company' IPO, this
warrant was exchanged for a warrant to purchase Common Stock. The Company has
reserved 19,886 shares of Common 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 8,523 shares of
Series B Convertible Preferred Stock at $4.40 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. In December 1997, the financial institution exercised the
warrant for 6,737 shares of Common Stock in a cashless exercise.
In February 1996, the Company entered into an agreement to issue warrants
to TSMC to purchase 140,000 shares of Series B Convertible Preferred Stock at an
exercise price of $4.40 per share. The purchase right of 50,000 warrants is
exercisable, in whole or in part, at any time on or before December 31, 2001;
however, would have expired, if not previously exercised, immediately upon the
closing of the underwritten initial public offering in June 1997. The purchase
right of 90,000 warrants became exercisable at the rate of 10 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 37,510 shares
of Series B Convertible Preferred Stock in conjunction with wafer purchases in
1996. These warrants would have expired on December 31, 2001. The warrant was
deemed to have a value of approximately $211,000 and was recognized as a cost of
revenues and research and development expense during 1996. In conjunction with
the Company's IPO in June 1997, TSMC exercised its warrant to purchase 87,510
shares of Series B Convertible Preferred Stock. The aggregate proceeds to the
Company were approximately 385,000. The Series B Convertible Preferred Stock
converted into Common Stock upon completion of the Company's IPO on June 25,
1997 included the shares issued in exchange for this warrant. No further warrant
rights exist with respect to this agreement.
In 1996, the Company issued to a university and consultants warrants to
purchase 5,000 and 30,000 shares, respectively, of Series C Convertible
Preferred Stock at an exercise price of $7.50 per share. These warrants were
deemed to have a 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 warrant for 30,000 shares of Common
Stock expired upon the closing of the Company's IPO as it was not exercised. The
warrant for 5,000 shares expires on December 31, 2001. Upon completion of the
Company's IPO, the warrant for 5,000 shares was exchanged for a warrant to
purchase Common Stock. The Company has reserved 5,000 shares of Common Stock for
the exercise of this warrant.
On December 3, 1997, the Company issued a warrant to purchase 25,000 shares
of Common Stock at a exercise price of $13.875 per share in conjunction with
developing a relationship with another company. The warrant is fully exercisable
and expires December 3, 2002. The Company valued the warrant under the
"Black-Scholes" formula at approximately $218,000. The warrant value will be
F-12
<PAGE> 85
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
amortized over a one-year period as a cost of revenue. The Company has reserved
25,000 shares of Common Stock for the exercise of this warrant.
As of December 31, 1997, the Company had reserved 93,636 shares of Common
Stock for the exercise of warrants.
NOTE 6 -- STOCK OPTION PLANS:
The 1995 Plan
In May 1995, the Company adopted a Stock Plan, (the 1995 Plan) which
provides for granting of incentive and nonqualified stock options to employees,
consultants and directors of the Company. Under the 1995 Plan, 2,675,000 shares
of Common Stock have been reserved for issuance at December 31, 1997.
Options granted under the 1995 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 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 1995 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.
The 1997 Plan
In October 1997, the Company adopted the 1997 Supplementary Stock Plan (the
1997 Plan), which provides for granting of nonqualified stock options to
employees (excluding officers, consultants and directors) of the Company. Under
the 1997 Plan, 500,000 shares of Common Stock have been reserved for issuance at
December 31, 1997.
Options granted under the 1997 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1997 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.
Directors' Option Plan
In March 1997, the Company adopted a 1997 Directors' Option Plan. Under
this plan options to purchase 150,000 shares of Common Stock may be granted. The
plan provides that options may be granted at a price not less than fair value of
a share at the date of grant. The Director's Option Plan provides for an initial
option grant to purchase 12,500 shares of Common Stock to each new nonemployee
director of the Company at the date he or she becomes a director. Each
nonemployee director and Chairman of the Board of Directors will annually be
granted an option to purchase 5,000 and 10,000 shares of Common Stock,
respectively, beginning with the 1998 annual meeting of shareholders. If a
director serves on either the Audit Committee or Compensation Committee, he or
she will annually be granted an option to purchase 1,000 shares of Common Stock,
respectively, beginning with the 1997 annual meeting of shareholders. Options
granted under the Director' Plan are generally for ten years and are granted at
the fair market value of the stock on the date of grant. The initial 12,500
option grant vests at a rate of 1/48 per month following the date of grant. The
annual option grant of 5,000, 10,000 or 1,000 vests at a rate of 1/12 per month
following the date of grant.
F-13
<PAGE> 86
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of activity under the 1995 Plan, the 1997 Plan
and the Directors' Option Plan during the years ended December 31, 1995, 1996
and 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)........... 853,750 --
Granted................................................ (640,750) 640,750 $ 0.20
Exercised.............................................. -- (125,000) $ 0.20
Canceled............................................... 2,500 (2,500) $ 0.20
---------- ---------
Balance at December 31, 1995............................. 215,500 513,250 $ 0.20
Additional shares authorized............................. 1,196,250 -- $ --
Granted................................................ (1,369,138) 1,369,138 $ 0.58
Exercised.............................................. -- (185,209) $ 0.23
Canceled............................................... 158,670 (158,670) $ 0.41
Repurchased............................................ 16,875 -- $ 0.20
---------- ---------
Balance at December 31, 1996............................. 218,157 1,538,509 $ 0.54
Additional shares authorized............................. 1,274,992 -- $ --
Granted................................................ (1,306,244) 1,306,244 $12.15
Exercised.............................................. -- (180,015) $ 0.49
Canceled............................................... 158,754 (158,754) $ 3.86
Repurchased............................................ 20,391 -- $ 0.08
---------- ---------
Balance at December 31, 1997............................. 366,050 2,505,984 $ 6.38
========== =========
</TABLE>
At December 31, 1996 and December 31, 1997, 186,172 and 471,937,
respectively, Common Stock options were vested.
Prior to the Company completing its IPO, the Company granted options for
the purchase of 2,460,307 shares of Common Stock to employees at exercise prices
ranging from $0.20 to $12.00 per share. Management calculated deferred
compensation of approximately $1,900,000 related to options granted prior to the
completion of the Company's IPO. Such deferred compensation will be amortized
over the vesting period relating to these options, of which $56,000, $196,000
and $484,000 has been amortized during the years ended December 31, 1995, 1996
and 1997, respectively.
Information relating to stock options outstanding under the 1995 Plan, the
1997 Plan and the Directors' Plan at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
WEIGHTED
AVERAGE WEIGHTED
REMAINING AVERAGE
NUMBER CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES: OUTSTANDING LIFE PRICE
---------------------------------------- ----------- ------------ --------
<S> <C> <C> <C>
$0.20 - $0.30........................... 265,797 7.6 years $ 0.21
$0.44 - $0.75........................... 591,825 8.6 years $ 0.48
$0.90................................... 442,796 8.9 years $ 0.90
$2.00 - $12.00.......................... 741,616 9.3 years $ 11.07
$13.88 - $17.06......................... 463,950 9.9 years $ 15.18
2,505,984 8.99 years $ 6.38
</TABLE>
F-14
<PAGE> 87
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS VESTED
-------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
RANGE OF EXERCISE PRICES: VESTED PRICE
------------------------------------------------------- --------- --------
<S> <C> <C>
$0.20 - $0.30.......................................... 139,708 $ 0.21
$0.44 - $0.75.......................................... 207,496 $ 0.47
$0.90.................................................. 107,233 $ 0.90
$2.00 - $12.00......................................... 17,500 $ 11.00
$13.88 - $17.06........................................ -- $ --
471,937 $ 0.88
</TABLE>
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 550,000 shares have been reserved
for issuance under this plan. As of December 31, 1997, 34,742 shares have been
purchased under the Employee Stock Purchase Plan.
Certain Pro Forma Disclosures
The Company accounts for its employee stock option plans and employee stock
purchase plan 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 options plans, employee stock purchase plans and
shares issued to founders which are subject to repurchase.
For the years ended December 31, 1995 and 1996, the value of each option on
the date of grant was determined utilizing the minimum value method as the
Company was non-public.
For the year ended December 31, 1997, the fair value of each option on the
date of grant was determined utilizing the Black-Scholes model.
To determine the value of each option on the date of grant the following
assumptions were used for the years ended December 31, 1995 and 1996: dividend
yield of 0.0%; a risk-free interest rate of 6%; a weighted average expected
option term of four years. The following assumptions were used for the stock
option plan and stock purchase plan, respectively, for the year ended December
31, 1997: dividend yield of 0.0% for both the stock option and stock purchase
plans; volatility of 70% for both the stock option plan and the stock purchase
plans; risk-free interest rates of 5.7% and 5.4%, respectively; a weighted
average expected term of 4 and 0.5 years, respectively. The weighted average
fair value of stock options granted in the years ended December 31, 1995, 1996
and 1997, was $0.18, $0.60 and $12.15, respectively.
Had the Company recorded compensation costs based on the estimated grant
date fair value, as defined by FAS 123, for awards granted under its stock
option plan, the Company's net loss and net loss per share would have been:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Pro forma net loss................... $(5,045) $(14,801) $(3,705)
Pro forma basic loss per share....... $ -- $ (1.53) $ (0.32)
Pro forma diluted loss per share..... $ -- $ (1.53) $ (0.32)
</TABLE>
F-15
<PAGE> 88
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The pro forma effect on net loss and loss per share for 1995, 1996 and 1997
is not representative of the pro forma effect on net income (loss) in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1995.
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.
NOTE 7 -- INCOME TAXES:
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1995, 1996 and 1997 as the Company incurred net
operating losses.
Deferred tax assets related to the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
------- -------
<S> <C> <C>
Net operating losses..................................... $ 7,278 $ 7,358
Expenses not currently deductible........................ 357 644
Tax credit carryforwards................................. 134 821
------- -------
7,769 8,823
Less: valuation allowance................................ (7,769) (8,823)
------- -------
$ -- $ --
======= =======
</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, 1997, the Company had net operating loss carry-forwards for
federal and state income tax purposes of approximately $18,500,000 and
$17,500,000, respectively, which expire beginning in 2010 and 2000,
respectively. At December 31, 1997, the Company had research and development
credit carry-forwards for federal and state income tax purposes of approximately
$491,000 and $330,000, respectively.
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 completion of the Company's IPO resulted in an
annual limitation of the Company's ability to utilize net operating losses
incurred prior to that date. The annual limitation is approximately $5,400,000.
NOTE 8 -- COMMITMENTS:
The Company leases under noncancelable operating leases for certain of its
facilities and equipment in addition to equipment capital leases. Rent expense
on the operating leases for the years
F-16
<PAGE> 89
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ended December 31, 1995, 1996 and 1997 was approximately $192,000, $305,000 and
$568,000, respectively.
Future minimum lease payments under the operating and capitalized leases
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
1998.................................................. $ 848 $ 841
1999.................................................. 908 451
2000.................................................. 934 174
2001.................................................. 996 --
2002.................................................. 1,027 --
Thereafter............................................ 5,011 --
------ ------
Total minimum lease payments.......................... $ 9,724 $ 1,466
======
Less: amount representing interest.................... (142)
------
Present value of minimum lease payments............... 1,324
Less: current portion................................. (778)
------
Noncurrent portion of capitalized lease obligations... $ 546
======
</TABLE>
Purchase Commitments
The Company's manufacturing relationship with Taiwan Semiconductor
Manufacturing Corporation ("TSMC") allows the Company to cancel all outstanding
purchase orders, but requires the repayment of all expenses incurred to date. As
of December 31, 1997, TSMC had incurred approximately $3,200,000 of
manufacturing expenses on the Company's outstanding purchase orders. The Company
does not expect to cancel any of its outstanding purchase orders.
NOTE 9 -- RELATED PARTY TRANSACTIONS:
Since April 1995, a consulting company has been providing management
services to the Company for which the Company pays a monthly fee of $5,000 for
consulting services. The Chairman and a director of the Board of Directors of
the Company are also officers of the consulting company. Total payments for such
management services during 1995, 1996 and 1997 were $45,000, $60,000 and
$60,000, respectively.
During 1997, a member of the Board of Directors provided consulting
services to the Company. Total payments for such consulting services in 1997 was
$45,000.
In April 1997, an officer of the Company resigned and subsequently founded
Quantum3D, Inc., a supplier of advanced graphic subsystems based on 3Dfx
technology. Sales to Quantum3D, Inc. during 1997 totaled $949,000. As of
December 31, 1997, the Company has an outstanding trade receivable from
Quantum3D, Inc. of approximately $624,500.
NOTE 10 -- SUBSEQUENT EVENT:
In February 1998, the Company's Board of Directors approved an increase of
1,700,000 shares of Common Stock, 500,000 shares of Common Stock and an annual
increase, commencing in 1999, in the number of Common Stock shares equal to the
lesser of 200,000 or 1% of the Company's outstanding capitalization to be
reserved for issuance under the 1995 Plan, 1997 Plan and Employee Stock Purchase
Plan, respectively. These increases to the 1995 Plan and the Employee Stock
Purchase Plan are contingent upon shareholder approval.
F-17
<PAGE> 90
LOGO
<PAGE> 91
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, the NASD filing fee and the Nasdaq Stock
Market Listing Fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
-----------
<S> <C>
SEC Registration Fee..................................... $ 19,166
NASD Filing Fee.......................................... 6,977
The Nasdaq Stock Market Listing Fee...................... 17,500
Blue Sky Qualification Fees and Expenses................. 10,000
Printing and Engraving Expenses.......................... 125,000
Legal Fees and Expenses.................................. 175,000
Accounting Fees and Expenses............................. 60,000
Transfer Agent and Registrar Fees........................ 2,500
Miscellaneous............................................ 33,857
--------
Total.................................................. $ 450,000
========
</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> 92
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 January 31, 1995, the Registrant has issued and sold (without payment
of any selling commission to any person) the following unregistered securities
(as adjusted to reflect the one-for-two reverse stock split effected in May
1995).
1. From March 3, 1995 to May 18, 1995, the Registrant issued and sold
282,250 shares of Common Stock to employees at $.07 to $.10 price per
share.
2. From May 1995 to March 31, 1997, the Registrant issued and sold 394,217
shares of Common Stock to employees and consultants at prices ranging
from $.02 to $.90 per share, upon exercise of stock options and stock
purchase rights, pursuant to the Registrant's 1995 Employee Stock Plan.
3. On March 13, 1995, the Registrant issued and sold 2,750,992 shares of
Series A Preferred Stock to a total of 43 accredited investors for an
aggregate purchase price of $5,501,979.
4. On March 31, 1995, the Registrant issued a warrant to purchase an
aggregate of 43,750 shares of Series A Preferred Stock to one investor
with an exercise price of $2.00 per share.
5. From November 2, 1995 to December 31, 1996, the Registrant issued
warrants to purchase an aggregate of 168,409 shares of Series B
Preferred Stock to a total of three investors with an exercise price of
$4.40 per share.
6. From February 14, 1996 to February 28, 1996, the Registrant issued and
sold 2,650,003 shares of Series B Preferred Stock to a total of 33
investors for an aggregate purchase price of $11,660,000.
7. From September 12, 1996 to January 17, 1997, the Registrant issued and
sold 1,620,864 shares of Series C Preferred Stock to a total of 39
investors for an aggregate purchase price of $12,156,443.
8. From June 1, 1996 to September 1996, the Registrant issued warrants to
purchase an aggregate of 35,000 shares of Series C Preferred Stock to
one university and two consultants with an exercise price of $7.50 per
share.
9. In December 1997, the Registrant issued a warrant to purchase an
aggregate of 25,000 shares of Common Stock to a customer with an
exercise price of $13.875 per share.
The sales and issuances of securities in the transactions described in
paragraphs (1) through (2) above were deemed to be exempt from registration
under the Securities Act by virtue of Rule 701 promulgated thereunder in that
they were offered and sold either pursuant to written compensatory benefit plans
or pursuant to a written contract relating to compensation, as provided by Rule
701.
The sales and issuances of securities in the transactions described in
paragraphs (3) through (8) above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) or Regulation D promulgated
thereunder. The purchasers in each case represented their intention to acquire
the securities for investment only and not with a view to the distribution
thereof. Appropriate legends are affixed to the stock certificates issued in
such transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. All recipients either received adequate
II-2
<PAGE> 93
information about the Registrant or had access, through employment or other
relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1* Restated Articles of Incorporation of the Registrant.
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.
10.7.1 Warrant to purchase shares of Common Stock issued to Creative Labs, Inc.
10.7.2* Warrant to purchase shares of Series B Preferred Stock issued to MMC/GATX
Partnership No. 1.
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.
10.12.1 Loan and Security Agreement dated August 19, 1996 by and between the Registrant
and Silicon Valley Bank.
10.12.2 Loan Modification Agreement dated as of August 18, 1997 by and between the
Registrant and Silicon Valley Bank.
10.12.3 Second Amendment and Limited Waiver to Loan and Security Agreement dated as of
December 9, 1997 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>
II-3
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------
<C> <S>
10.14**+ Software License and Co-Marketing Agreement made as of June, 1997 by and
between Electronic Arts, Inc.
10.15** Master Equipment Lease dated July 1, 1997 by and between the Registrant and
Pentech Financial Services, Inc.
10.16 Lease Agreement dated as of January 6, 1998 by and between the Registrant and
GEOMAX.
10.17 Separation Agreement dated as of October 12, 1997 by and between the Registrant
and Gary P. Martin.
10.18*** 1997 Supplemental Employee Stock Option Plan and Form of Stock Option Agreement
thereunder.
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-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-25365) which was declared
effective on June 25, 1997.
** Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the three months ended June 30, 1997.
*** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-39109) which was declared
effective October 30, 1997.
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
(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
II-4
<PAGE> 95
Rule 0430A 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-5
<PAGE> 96
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 11th day of February, 1998.
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 David
Zacarias and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, with full power of each to act alone, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule 462(b)
increasing the number of securities for which registration is sought), and file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, with full power of each to act alone, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully for all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully 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 February 11, 1998
- --------------------------------------------- Executive Officer (Principal
L. Gregory Ballard Executive Officer)
/s/ DAVID ZACARIAS Vice President, February 11, 1998
- --------------------------------------------- Administration and Chief
David Zacarias Financial Officer (Principal
Financial and Accounting
Officer)
/s/ GORDON A. CAMPBELL Chairman of the Board of February 11, 1998
- --------------------------------------------- Directors
Gordon A. Campbell
/s/ ANTHONY SUN Director February 11, 1998
- ---------------------------------------------
Anthony Sun
</TABLE>
II-6
<PAGE> 97
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- ------------------
<C> <S> <C>
/s/ PHILIP M. YOUNG Director February 11, 1998
- ---------------------------------------------
Philip M. Young
/s/ SCOTT D. SELLERS Director February 11, 1998
- ---------------------------------------------
Scott D. Sellers
/s/ JAMES WHIMS Director February 11, 1998
- ---------------------------------------------
James Whims
/s/ GEORGE J. STILL, JR. Director February 11, 1998
- ---------------------------------------------
George J. Still, Jr.
</TABLE>
II-7
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- ----------- ------------------------------------------------------------------ -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1* Restated Articles of Incorporation of the Registrant.
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.
10.7.1 Warrant to purchase shares of Common Stock issued to Creative
Labs, Inc.
10.7.2* Warrant to purchase shares of Series B Preferred Stock issued to
MMC/GATX Partnership No. 1.
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.
10.12.1 Loan and Security Agreement dated August 19, 1996 by and between
the Registrant and Silicon Valley Bank.
10.12.2 Loan Modification Agreement dated as of August 18, 1997 by and
between the Registrant and Silicon Valley Bank.
10.12.3 Second Amendment and Limited Waiver to Loan and Security Agreement
dated as of December 9, 1997 by and between the Registrant and
Silicon Valley Bank.
10.13.1* Change of Control Letter Agreement between the Registrant and L.
Gregory Ballard.
</TABLE>
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- ----------- ------------------------------------------------------------------ -------------
<C> <S> <C>
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.
10.14**+ Software License and Co-Marketing Agreement made as of June, 1997
by and between Electronic Arts, Inc.
10.15** Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.16 Lease Agreement dated as of January 6, 1998 by and between the
Registrant and GEOMAX.
10.17 Separation Agreement dated as of October 12, 1997 by and between
the Registrant and Gary P. Martin.
10.18*** 1997 Supplemental Employee Stock Option Plan and Form of Stock
Option Agreement thereunder.
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-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 333-25365) which was declared
effective on June 25, 1997.
** Incorporated by reference to exhibits filed with the Registrant's Quarterly
Report on Form 10-Q for the three months ended June 30, 1997.
*** Incorporated by reference to exhibits filed with the Registrant's
Registration Statement on Form S-8 (No. 333-39109) which was declared
effective October 30, 1997.
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
<PAGE> 1
Exhibit 1.1
2,300,000 SHARES(1)
3DFX INTERACTIVE, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_______________, 1998
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES LLC
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company LLC
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
3Dfx Interactive, Inc., a California corporation (the "Company"), and
certain shareholders of the Company named in Schedule B hereto (hereafter called
the "Selling Shareholders") address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "Underwriters") and hereby confirms its agreement with the several
Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
2,000,000 shares of its authorized and unissued Common Stock, no par value, to
the several Underwriters. The Selling Shareholders, acting severally and not
jointly, propose to sell an aggregate of 300,000 shares of the Company's
authorized and outstanding Common Stock, no par value, to the several
Underwriters. The 2,000,000 shares of Common Stock, no par value, of the Company
to be sold by the Company are hereinafter called the "Company Shares" and the
300,000 shares of Common Stock, no par value, to be sold by the Selling
Shareholders are hereinafter called the "Selling Shareholder Shares." The
Company Shares and the Selling Shareholder Shares are hereinafter collectively
referred to as the "Firm Shares." The Company also proposes to grant to the
Underwriters an option to purchase up to 345,000 additional shares of the
Company's Common Stock, no par value (the "Option Shares"), as provided in
Section 7 hereof. As used in this Agreement, the term "Shares" shall include the
Firm Shares and the Option Shares. All shares of Common Stock, no par value, of
the Company to be outstanding after giving effect to the sales contemplated
hereby, including the Shares, are hereinafter referred to as "Common Stock."
2. Representations, Warranties and Agreements of the Company and the
Selling Shareholders.
- --------
(1) Plus an option to purchase up to 345,000 additional shares from the
Company to cover over-allotments, if any.
<PAGE> 2
I. The Company represents and warrants to and agrees with each
Underwriter and each Selling Shareholder that:
(a) A registration statement on Form S-1 (File No.
333-__________) with respect to the Shares, including a prospectus subject to
completion, has been prepared by the Company in conformity with the requirements
of the Securities Act of 1933, as amended (the "Act"), and the applicable rules
and regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
pursuant to Rule 462(b) of the Rules and Regulations as may have been required
prior to the date hereof have been similarly prepared and filed with the
Commission; and the Company will file such additional amendments to such
registration statement, such amended prospectuses subject to completion and such
abbreviated registration statements as may hereafter be required. Copies of such
registration statement and amendments, of each related prospectus subject to
completion (the "Preliminary Prospectuses"), and of any abbreviated registration
statement pursuant to Rule 462(b) of the Rules and Regulations have been
delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b) of the Rules and Regulations
relating thereto after the effective date of such registration statement, shall
also mean (from and after the effectiveness of such amendment or the filing of
such abbreviated registration statement) such registration statement as so
amended, together with any such abbreviated registration statement. The term
"Prospectus" as used in this Agreement shall mean the prospectus relating to the
Shares as included in such Registration Statement at the time it becomes
effective (including, if the Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information
deemed to be a part of the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and Regulations); provided,
however, that if in reliance on Rule 434 of the Rules and Regulations and with
the consent of BancAmerica Robertson Stephens, on behalf of the several
Underwriters, the Company shall have provided to the Underwriters a term sheet
pursuant to Rule 434(b) or (c), as applicable, prior to the time that a
confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
term "Prospectus" shall mean the "prospectus subject to completion" (as defined
in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters
by the Company and circulated by the Underwriters to all prospective purchasers
of the Shares (including the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 434(d) of the Rules
and Regulations). Notwithstanding the foregoing, if any revised prospectus shall
be provided to the Underwriters by the Company for use in connection with the
offering of the Shares that
-2-
<PAGE> 3
differs from the prospectus referred to in the immediately preceding sentence
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. If in reliance on Rule 434
of the Rules and Regulations and with the consent of BancAmerica Robertson
Stephens, on behalf of the several Underwriters, the Company shall have provided
to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable,
prior to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be
materially different from the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
California with full power and authority (corporate and other) to own, lease and
operate its properties and conduct its business as described in the Prospectus;
the Company is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects (as set forth in the Registration
Statement and Prospectus) of the Company; no proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke,
limit or curtail, such power and authority or qualification; the Company is in
possession of and operating in compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect; the Company is not in violation of
its charter or bylaws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any material
bond, debenture, note or other evidence of indebtedness, or in any material
lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company is a party or by
which it or its properties may be bound; and the Company is not in material
violation of any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its properties of which it
has knowledge. The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than 3Dfx Interactive
International, a corporation formed under the laws of Grand Cayman, B.W.I.,
which
-3-
<PAGE> 4
was formed in ________, 1998, does not own, lease or operate any property and
has not conducted any business since inception.
(d) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable in
accordance with its terms, except as rights to indemnification hereunder may be
limited by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the consummation of
the transactions herein contemplated will not result in a material breach or
violation of any of the terms and provisions of, or constitute a default under,
(i) any material bond, debenture, note or other evidence of indebtedness, or
under any material lease, contract, indenture, mortgage, deed of trust, loan
agreement, joint venture or other agreement or instrument to which the Company
is a party or by which it or its properties may be bound, (ii) the charter or
bylaws of the Company, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or over its
properties of which the Company has knowledge. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or over its properties is required for the execution and delivery of
this Agreement and the consummation by the Company of the transactions herein
contemplated, except such as may be required under the Act or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or under state or other
securities or Blue Sky laws, all of which requirements have been satisfied, or
will have been satisfied prior to the Closing Date (as hereinafter defined) in
all material respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company or any of its officers or any of its properties, assets or rights before
any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or over its officers or properties or
otherwise which (i) might result in any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business prospects
(as set forth in the Registration Statement and Prospectus) of the Company or
might materially and adversely affect its properties, assets or rights, (ii)
might prevent consummation of the transactions contemplated hereby or (iii) is
required to be disclosed in the Registration Statement or Prospectus and is not
so disclosed; and there are no agreements, contracts, leases or documents of the
Company of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement by the Act or the Rules and Regulations which have not
been accurately described in all material respects in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company,
including the Selling Shareholder Shares, have been duly authorized and validly
issued and are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities, and the authorized and outstanding capital stock of the Company is
as set forth in the Prospectus under the caption "Capitalization" as of the date
stated therein and conforms in all material respects to the statements relating
thereto contained in the Registration Statement and the Prospectus (and such
statements correctly state in all material respects the substance of the
instruments defining the capitalization of the Company); the Company Shares and
the Option Shares have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and delivered by the
Company against payment therefor in accordance with the terms of this Agreement,
will be duly and validly issued and fully paid and nonassessable, and will be
sold free and clear of any pledge, lien, security interest, encumbrance, claim
or equitable interest; and no preemptive right,
-4-
<PAGE> 5
co-sale right, registration right, right of first refusal or other similar right
of shareholders exists with respect to any of the Company Shares or Option
Shares or the issuance and sale thereof other than those that have been
expressly waived prior to the date hereof and those that will automatically
expire upon and will not apply to the consummation of the transactions
contemplated on the Closing Date. No further approval or authorization of any
shareholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act or the Exchange Act, or under state or other securities or Blue Sky laws.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, the Company does not have outstanding any options to purchase, or
any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) Price Waterhouse LLP, which has examined the financial
statements of the Company, together with the related notes, as of December 31,
1996 and 1997, and for each of the years in the three years ended December 31,
1995, 1996 and 1997 filed with the Commission as a part of the Registration
Statement, which are included in the Prospectus, are independent accountants
within the meaning of the Act and the Rules and Regulations; the audited
financial statements of the Company, together with the related notes, and the
unaudited financial information, forming part of the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the respective dates and for the respective periods to which
they apply; and all audited financial statements of the Company, together with
the related notes, and the unaudited financial information, filed with the
Commission as part of the Registration Statement, have been prepared in
accordance with or derived from financial statements prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein. The selected and
summary financial and statistical data included in the Registration Statement
present fairly the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements are required to be included in the Registration Statement.
No financial statement schedules are required to be included in the Registration
Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (i) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects (as set forth in the
Registration Statement and Prospectus) of the Company, (ii) any transaction that
is material to the Company, except transactions entered into in the ordinary
course of business, (iii) any obligation, direct or contingent, that is material
to the Company, incurred by the Company, except obligations incurred in the
ordinary course of business, (iv) any change in the capital stock or outstanding
indebtedness of the Company that is material to the Company, (v) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or (vi) any loss or damage (whether or not insured) to the property of
the Company which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects (as set forth in the Registration
Statement and Prospectus) of the Company.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) the Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations, business or
business prospects (as set forth in the Registration Statement and Prospectus)
of the Company, (ii) the agreements to which the Company is a party described in
the
-5-
<PAGE> 6
Registration Statement and Prospectus are valid agreements, enforceable by the
Company, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles and, to the best of the Company's knowledge, the other contracting
party or parties thereto are not in material breach or material default under
any of such agreements, and (iii) the Company has valid and enforceable leases
for all properties described in the Registration Statement and Prospectus as
leased by it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Except as set forth in the Registration Statement and Prospectus,
the Company owns or leases all such properties as are necessary to its
operations as described in the Prospectus.
(j) The Company has timely filed all necessary federal,
state and foreign income and franchise tax returns and has paid all taxes shown
thereon as due, and there is no tax deficiency that has been or, to the best of
the Company's knowledge, might be asserted against the Company that might have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects (as described in the Registration
Statement and Prospectus) of the Company; and all tax liabilities are adequately
provided for on the books of the Company.
(k) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for its business and consistent with insurance coverage
maintained by similar companies in similar businesses, including, but not
limited to, insurance covering real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against, all of which insurance is in full force and
effect; the Company has not been refused any insurance coverage sought or
applied for; and the Company does have not any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not materially and adversely
affect the condition (financial or otherwise), earnings, operations, business or
business prospects (as described in the Registration Statement and Prospectus)
of the Company.
(l) To the best of Company's knowledge, no labor disturbance
by the employees of the Company exists or is imminent; and the Company is not
aware of any existing or imminent labor disturbance by the employees of any of
its principal suppliers, subassemblers, value added resellers, subcontractors,
original equipment manufacturers, authorized dealers or international
distributors that might be expected to result in a material adverse change in
the condition (financial or otherwise), earnings, operations, business or
business prospects (as described in the Registration Statement and Prospectus)
of the Company. No collective bargaining agreement exists with any of the
Company's employees and, to the best of the Company's knowledge, no such
agreement is imminent.
(m) The Company owns or possesses adequate rights to use all
patents, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names and copyrights which are necessary to conduct its businesses
in all material respects as described in the Registration Statement and
Prospectus; no patents, patent rights, trade secrets, trademarks, service marks,
trade names or copyrights have expired or terminated except such as would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects (as described in the
Registration Statement and Prospectus) of the Company; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent, patent
rights, inventions, trade secrets, know-how, trademarks, service marks, trade
names or copyrights other than the ongoing litigation with Sega Enterprises,
Ltd., NEC Corporation and VideoLogic Group, plc. (as described in the
Registration Statement and Prospectus); and the Company has not received any
notice of, and has no knowledge of, any infringement of or conflict with
asserted rights of others with respect to any patent, patent rights, inventions,
trade secrets, know-how,
-6-
<PAGE> 7
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects (as described in the
Registration Statement and Prospectus) of the Company.
(n) The Common Stock is registered pursuant to Section 12(g)
of the Exchange Act and is listed on The Nasdaq National Market, and the Company
has taken no action designed to, or likely to have the effect of, terminating
the registration of the Common Stock under the Exchange Act or delisting the
Common Stock from The Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of Securities
Dealers, Inc. ("NASD") is contemplating terminating such registration or
listing.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(q) The Company has not at any time during the last five (5)
years (i) made any unlawful contribution to any candidate for foreign office or
failed to disclose fully any contribution in violation of law, or (ii) made any
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(s) Each officer and director of the Company, each Selling
Shareholder and each beneficial owner of shares representing at least five
percent (5%) of the Company's outstanding Common Stock has agreed in writing
that such person will not, until the open of the market on the third trading day
following the date of public disclosure of the Company's financial results for
the fiscal year ending March 31, 1998 (the "Lock-up Period"), offer to sell,
contract to sell, or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to (collectively, a "Disposition") 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
(collectively, "Securities") now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (x) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (y) as
a distribution to limited partners or shareholders of such person, provided that
the distributees thereof agree in writing to be bound by the terms of this
restriction, or (z) with the prior written consent of BancAmerica Robertson
Stephens. The foregoing restriction is expressly agreed to preclude the holder
of the Securities from engaging in any hedging or other transaction which is
designed to or reasonably expected to lead to or result in a Disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than such holder. Such prohibited hedging or other
transactions would include, without limitation, any short sale (whether or not
against the box) or any purchase, sale or
-7-
<PAGE> 8
grant of any right (including, without limitation, any put or call option) with
respect to any Securities or with respect to any security (other than a
broad-based market basket or index) that includes, relates to or derives any
significant part of its value from Securities. The foregoing restriction shall
not apply to any Disposition of Securities during the Lock-up Period to the
Underwriter pursuant to this Agreement. Furthermore, such person has also agreed
and consented to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by such person except
in compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its officers, directors and
shareholders have agreed to such or similar restrictions (the "Lock-up
Agreements") presently in effect or effected hereby. The Company hereby
represents and warrants that it will not release any of its officers, directors
or other shareholders from any Lock-up Agreements currently existing or
hereafter effected without the prior written consent of BancAmerica Robertson
Stephens.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to its knowledge, the Company has not
conducted any activities that would require it to make future material capital
expenditures to comply with Environmental Laws and (iv) no property which is
owned, leased or occupied by the Company has been designated as a Superfund site
pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. ss. 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
(u) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them
that are required to be disclosed in the Registration Statement and Prospectus
that are not so disclosed.
(w) The Company has complied with all provisions of Section
517.075, Florida Statutes relating to doing business with the Government of Cuba
or with any person or affiliate located in Cuba.
II. Each Selling Shareholder, severally and not jointly,
represents and warrants to and agrees with each Underwriter and the Company
that:
(a) Such Selling Shareholder now has and on the Closing
Date[, and on any later date on which Option Shares are purchased,] will have
valid marketable title to the Shares to be sold by such Selling Shareholder,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest other than pursuant to this Agreement; and upon delivery of
such Shares hereunder and payment of the purchase price as herein contemplated,
each of the Underwriters will obtain valid marketable title to the Shares
purchased by it from such Selling Shareholder, free and clear of any pledge,
lien, security interest
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pertaining to such Selling Shareholder or such Selling Shareholder's property,
encumbrance, claim or equitable interest, including any liability for estate or
inheritance taxes, or any liability to or claims of any creditor, devisee,
legatee or beneficiary of such Selling Shareholder.
(b) Such Selling Shareholder has duly authorized (if
applicable), executed and delivered, in the form heretofore furnished to the
Representatives, an irrevocable Power of Attorney (the "Power of Attorney")
appointing ___________ and ___________ as attorneys-in-fact (collectively, the
"Attorneys" and individually, an "Attorney") and a Letter of Transmittal and
Custody Agreement (the "Custody Agreement") with ______________________________,
as custodian (the "Custodian"); each of the Power of Attorney and the Custody
Agreement constitutes a valid and binding agreement on the part of such Selling
Shareholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; and each of such Selling
Shareholder's Attorneys, acting alone, is authorized to execute and deliver this
Agreement and the certificate referred to in Section 6(h) hereof on behalf of
such Selling Shareholder, to determine the purchase price to be paid by the
several Underwriters to such Selling Shareholder as provided in Section 3
hereof, to authorize the delivery of the Selling Shareholder Shares under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, to accept payment therefor, and otherwise to act on behalf of such
Selling Shareholder in connection with this Agreement.
(c) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Shareholder of the Power
of Attorney and the Custody Agreement, the execution and delivery by or on
behalf of such Selling Shareholder of this Agreement and the sale and delivery
of the Selling Shareholder Shares under this Agreement (other than, at the time
of the execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such consents, approvals,
authorizations or orders as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Shareholder, if other than a natural person, has been duly organized and is
validly existing in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Shareholder has full legal right, power and authority to enter into and perform
its obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Shareholder under this Agreement.
(d) Such Selling Shareholder will not, during the Lock-up
Period, effect the Disposition of any Securities now owned or hereafter acquired
directly by such Selling Shareholder or with respect to which such Selling
Shareholder has or hereafter acquires the power of disposition, otherwise than
(i) as a bona fide gift or gifts, provided the donee or donees thereof agree in
writing to be bound by this restriction, (ii) as a distribution to partners or
shareholders of such Selling Shareholder, provided that the distributees thereof
agree in writing to be bound by the terms of this restriction, or (iii) with the
prior written consent of BancAmerica Robertson Stephens. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
Selling Shareholder. Such prohibited hedging or other transactions would
include, without limitation, any short sale (whether or not against the box) or
any purchase, sale or grant of any right (including, without limitation, any put
or call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. The foregoing
restrictions shall not apply to any Disposition of Securities during the Lock-up
Period to the Underwriters pursuant to this Agreement. Such Selling Shareholder
also agrees and consents to the entry of stop transfer instructions with
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<PAGE> 10
the Company's transfer agent against the transfer of the securities held by such
Selling Shareholder except in compliance with this restriction.
(e) Certificates in negotiable form for all Shares to be
sold by such Selling Shareholder under this Agreement, together with a stock
power or powers duly endorsed in blank by such Selling Shareholder, have been
placed in custody with the Custodian for the purpose of effecting delivery
hereunder.
(f) This Agreement has been duly authorized by each Selling
Shareholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Shareholder and is a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by applicable law
and except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles; and the
performance of this Agreement and the consummation of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of or constitute a default under any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture, mortgage,
deed of trust, loan agreement, joint venture or other agreement or instrument to
which such Selling Shareholder is a party or by which such Selling Shareholder,
or any Selling Shareholder Shares hereunder, may be bound or, to the best of
such Selling Shareholders' knowledge, result in any violation of any law,
order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over such Selling Shareholder or over the properties of such
Selling Shareholder, or, if such Selling Shareholder is other than a natural
person, result in any violation of any provisions of the charter, bylaws or
other organizational documents of such Selling Shareholder.
(g) Such Selling Shareholder has not taken and will not
take, directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Common Stock to facilitate the sale or resale of the Shares.
(h) Such Selling Shareholder has not distributed and will
not distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(i) All information furnished by or on behalf of such
Selling Shareholder relating to such Selling Shareholder and the Selling
Shareholder Shares that is contained in the representations and warranties of
such Selling Shareholder in such Selling Shareholder's Power of Attorney or set
forth in the Registration Statement or the Prospectus is, and at the time the
Registration Statement became or becomes, as the case may be, effective and at
all times subsequent thereto up to and on the Closing Date was or will be, true,
correct and complete, and does not, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) will not, contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make such information not
misleading.
(j) Such Selling Shareholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part to be
complied with or satisfied pursuant to this Agreement on or prior to the Closing
Date, and will advise one of its Attorneys and BancAmerica Robertson Stephens
prior to the Closing Date if any statement to be made on behalf of such Selling
Shareholder in the certificate contemplated by Section 6(h) would be inaccurate
if made as of the Closing Date.
(k) Such Selling Shareholder does not have, or has waived
prior to the date hereof, any preemptive right, co-sale right or right of first
refusal or other similar right to purchase any of the Shares
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<PAGE> 11
that are to be sold by the Company or any of the other Selling Shareholders to
the Underwriters pursuant to this Agreement; such Selling Shareholder does not
have, or has waived prior to the date hereof, any registration right or other
similar right to participate in the offering made by the Prospectus, other than
such rights of participation as have been satisfied by the participation of such
Selling Shareholder in the transactions to which this Agreement relates in
accordance with the terms of this Agreement; and such Selling Shareholder does
not own any warrants, options or similar rights to acquire, and does not have
any right or arrangement to acquire, any capital stock, rights, warrants,
options or other securities from the Company, other than those described in the
Registration Statement and the Prospectus.
(l) Such Selling Shareholder is not aware (without having
conducted any investigation or inquiry) that any of the representations and
warranties of the Company set forth in Section 2.I. above is untrue or
inaccurate in any material respect.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Shareholders
agree, severally and not jointly, to sell to the Underwriters, and each
Underwriter agrees, severally and not jointly, to purchase from the Company and
the Selling Shareholders, respectively, at a purchase price of $______ per
share, the respective number of Company Shares and Selling Shareholder Shares
set forth opposite the names of the Company and the Selling Shareholders in
Schedule B hereto. The obligation of each Underwriter to the Company and to each
Selling Shareholder shall be to purchase from the Company or such Selling
Shareholder that number of Company Shares or Selling Shareholder Shares, as the
case may be, which (as nearly as practicable, as determined by you) is in the
same proportion to the number of Company Shares or Selling Shareholder Shares,
as the case may be, set forth opposite the name of the Company or such Selling
Shareholder in Schedule B hereto as the number of Firm Shares which is set forth
opposite the name of such Underwriter in Schedule A hereto (subject to
adjustment as provided in Section 10) is the total number of Firm Shares to be
purchased by all Underwriters under this Agreement.
The certificates in negotiable form for the Selling Shareholder
Shares have been placed in custody (for delivery under this Agreement) under the
Custody Agreement. Each Selling Shareholder agrees that the certificates for the
Selling Shareholder Shares of such Selling Shareholder so held in custody are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Shareholder for such custody, including the Power of
Attorney is to that extent irrevocable and that the obligations of such Selling
Shareholder hereunder shall not be terminated by the act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of such
Selling Shareholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Shareholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Shareholder Shares hereunder, the
Selling Shareholder Shares to be sold by such Selling Shareholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 3 shall be made against
receipts of wire transfer reference numbers issued by the Federal Reserve System
evidencing payment of the purchase price therefor by the several Underwriters by
wire transfer of immediately available funds to an account specified in writing
by the Company with regard to the Shares being purchased from the Company and to
an account specified in writing by the Custodian with regard to the Shares being
purchased from such Selling Shareholders, at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304 (or at such
other place as may be agreed upon among the Representatives and the Company and
the Attorneys), at 7:00 A.M., San Francisco time (a) on the third (3rd) full
business day following the first day that Shares are traded, (b) if this
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<PAGE> 12
Agreement is executed and delivered after 1:30 P.M., San Francisco time, the
fourth (4th) full business day following the day that this Agreement is executed
and delivered or (c) at such other time and date not later than seven (7) full
business days following the first day that Shares are traded as the
Representatives and the Company and the Attorneys may determine (or at such time
and date to which payment and delivery shall have been postponed pursuant to
Section 10 hereof), such time and date of payment and delivery being herein
called the "Closing Date;" provided, however, that if the Company has not made
available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose wire transfer funds shall not have been received by you prior to the
Closing Date for the Firm Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares at an initial public offering
price of $__________ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
The information set forth in the last paragraph on the front cover
page (insofar as such information relates to the Underwriters), under the
paragraph on page 2, concerning stabilization and over-allotment by the
Underwriters, and under the first (including the table), second, seventh and
eighth paragraphs under the caption "Underwriting" in any Preliminary Prospectus
and in the final form of Prospectus filed pursuant to Rule 424(b) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in any Preliminary Prospectus, the Prospectus or the Registration Statement, and
you, on behalf of the respective Underwriters, represent and warrant to the
Company and the Selling Shareholders that the statements made therein do not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
4. Further Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed,
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with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the
Rules and Regulations or as part of a post-effective amendment to such
Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the reasonable opinion of counsel
for the several Underwriters ("Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the Underwriters;
it will promptly prepare and file with the Commission, and promptly notify you
of the filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare as promptly as practicable upon request, but at the expense of such
Underwriter, such amendment or amendments to the Registration Statement and such
prospectus or prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act; and it will file no amendment or
supplement to the Registration Statement or Prospectus which shall not
previously have been submitted to you a reasonable time prior to the proposed
filing thereof or to which you shall reasonably object in writing, subject,
however, to compliance with the Act and the Rules and Regulations and the
provisions of this Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may reasonably designate and to continue such qualifications in effect for
so long as may be required for purposes of the distribution of the Shares,
except that the Company shall not be required in connection therewith or as a
condition thereof to qualify as a foreign corporation or to execute a general
consent to service of process in any jurisdiction in which it is not otherwise
required to be so qualified or to so execute a general consent to service of
process. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later than the first (1st) full business day
following the first day that Shares are traded, copies of the Registration
Statement (three of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance
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<PAGE> 14
with Section 10(a)(3) of the Act, all in such quantities as you may from time to
time reasonably request. Notwithstanding the foregoing, if BancAmerica Robertson
Stephens, on behalf of the several Underwriters, shall agree to the utilization
of Rule 434 of the Rules and Regulations, the Company shall provide to you
copies of a Preliminary Prospectus updated in all respects through the date
specified by you in such quantities as you may from time to time reasonably
request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof,
the Company will furnish to its shareholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of operations for each of the first three quarters of the fiscal year,
and will furnish to you and the other several Underwriters hereunder, upon
request (i) concurrently with furnishing such report to its shareholders,
statements of operations of the Company for each of the first three (3) quarters
in the form furnished to the Company's shareholders, (ii) concurrently with
furnishing to its shareholders, a balance sheet of the Company as of the end of
such fiscal year, together with statements of operations, of shareholders'
equity, and of cash flows of the Company for such fiscal year, accompanied by a
copy of the certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to shareholders, (iv) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the National Association of Securities
Dealers, Inc. ("NASD"), (v) every material press release and every material news
item or article in respect of the Company or its affairs which was generally
released to shareholders or prepared by the Company or any of its subsidiaries,
and (vi) any additional information of a public nature concerning the Company or
its subsidiaries, or its business which you may reasonably request. During such
five (5) year period, if the Company shall have active subsidiaries, the
foregoing financial statements shall be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any significant
subsidiary which is not so consolidated.
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(j) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company or any Selling Shareholder to perform any agreement on their respective
parts to be performed hereunder or to fulfill any condition of the Underwriters'
obligations hereunder (other than for noncompliance with paragraph (e) of
Section 6 hereof), or if the Company shall terminate this Agreement pursuant to
Section 11(a) hereof, or if the Underwriters shall terminate this Agreement
pursuant to Section 11(b)(i), the Company will reimburse the several
Underwriters for all out-of-pocket expenses (including fees and disbursements of
Underwriters' Counsel) incurred by the Underwriters in investigating or
preparing to market or marketing the Shares.
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<PAGE> 15
(k) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
reasonable opinion the market price of the Common Stock has been or is likely to
be materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not, without
the prior written consent of BancAmerica Robertson Stephens, effect the
Disposition of, directly or indirectly, any Securities other than (i) the sale
of the Firm Shares and the Option Shares; (ii) the Company's issuance of options
or Common Stock under the Company's presently authorized 1995 Employee Stock
Plan, the 1997 Employee Stock Purchase Plan, the 1997 Supplemental Stock Option
Plan and the Director Option Plan, all as described in the Registration
Statement collectively (the "Option Plans"); (iii) Common Stock upon exercise of
any warrants of the Company outstanding as set forth in the Registration
Statement and Prospectus; (iv) securities pursuant to equipment or lease
financing activities entered into in the ordinary course of the Company's
business; or (v) securities to a strategic partner of the Company in conjunction
with an agreement involving a service, technical, manufacturing and/or marketing
collaboration (provided, however, that the strategic partner agree execute a
Lock-Up Agreement for any remaining Lock-Up Period).
(m) During a period of ninety (90) days from the effective
date of the Registration Statement, the Company will not file a registration
statement registering shares under the Option Plans.
5. Expenses.
(a) The Company and the Selling Shareholder agrees with
each Underwriter that:
(i) The Company and the Selling Shareholder will pay
and bear all costs and expenses in connection with the preparation, printing and
filing of the Registration Statement (including financial statements, schedules
and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or
supplements thereto; the printing of this Agreement, the Agreement Among
Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and
any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance and
delivery of the Shares hereunder to the several Underwriters, including transfer
taxes, if any, the cost of all certificates representing the Shares and transfer
agents' and registrars' fees; the fees and disbursements of counsel for the
Company; all fees and other charges of the Company's independent certified
public accountants; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus and the Prospectus, and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying the Shares under the laws
of such jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Shareholder in connection with the performance of their
obligations hereunder. Any additional expenses incurred as a result of the sale
of the Shares by the Selling Shareholders will be borne collectively by the
Company and the Selling Shareholders. The provisions of this Section 5(a)(i) are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Selling Shareholders and the Company hereby agree to pay, but shall
not affect any agreement which the Selling Shareholders and the Company may
make, or may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Shareholders hereunder to the several Underwriters.
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<PAGE> 16
(ii) In addition to its other obligations under Section
8(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(iii) In addition to their other obligations under
Section 8(b) hereof, each Selling Shareholder agrees that, as an interim measure
during the pendency of any claim, action, investigation, inquiry or other
proceeding described in Section 8(b) hereof relating to such Selling
Shareholder, it will reimburse the Underwriters on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of such Selling Shareholder's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriters shall promptly return such payment to the Selling
Shareholders together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section
8(c) hereof, the Underwriters severally and not jointly agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding described in Section 8(c) hereof, they will reimburse the
Company and each Selling Shareholder on a monthly basis for all reasonable legal
or other expenses incurred in connection with investigating or defending any
such claim, action, investigation, inquiry or other proceeding, notwithstanding
the absence of a judicial determination as to the propriety and enforceability
of the Underwriters' obligation to reimburse the Company and each such Selling
Shareholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Shareholder shall promptly return
such payment to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company and each such Selling Shareholder
within thirty (30) days of a request for reimbursement shall bear interest at
the Prime Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested
reimbursement payments, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the reimbursing parties, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand for arbitration or a written notice of
intention to arbitrate, therein electing the arbitration tribunal. In the event
the party demanding arbitration does not make such designation of an arbitration
tribunal in such demand or notice, then the party responding to said demand or
notice is authorized
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<PAGE> 17
to do so. Any such arbitration will be limited to the operation of the interim
reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses
which is created by the provisions of Section 8(e) hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Selling Shareholders
herein, to the performance by the Company and the Selling Shareholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., San Francisco time, on the date following the date of
this Agreement, or such later date as shall be consented to in writing by you;
and no stop order suspending the effectiveness thereof shall have been issued
and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company, any Selling Shareholder or any Underwriter, threatened
by the Commission, and any request of the Commission for additional information
(to be included in the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date, or any later date on which Option
Shares are to be purchased, as the case may be, there shall not have been any
change in the condition (financial or otherwise), earnings, operations, business
or business prospects (as described in the Registration Statement and
Prospectus) of the Company from that set forth in the Registration Statement or
Prospectus, which, in your reasonable judgment, is material and adverse and that
makes it, in your reasonable judgment, impracticable or inadvisable to proceed
with the public offering of the Shares as contemplated by the Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, the
following opinion of counsel for the Company and the Selling Shareholders, dated
the Closing Date or such later date on which Option Shares are to be purchased
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the State of California;
(ii) The Company has the corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectus;
(iii) The Company is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction, if
any, in which the ownership or leasing of its properties or the
conduct of its business requires such qualification, except where
the failure to be so qualified or be in good standing would not have
a material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company. To such counsel's
knowledge, the
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<PAGE> 18
Company does not own or control, directly or indirectly, any
corporation, association or other entity other than 3Dfx
Interactive, a corporation formed under the laws of Grand Cayman,
B.W.I., which was formed in _________, 1998, does not own, lease or
operate any property and has not conducted any business since
inception;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization" as of the dates stated therein, the issued
and outstanding shares of capital stock of the Company (including
the Selling Shareholder Shares) have been duly and validly issued
and are fully paid and nonassessable, and, to such counsel's
knowledge, will not have been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of
first refusal or other similar right of shareholders;
(v) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will
be duly and validly issued and fully paid and nonassessable, and, to
such counsel's knowledge, will not have been issued in violation of
or subject to any preemptive right, co-sale right, registration
right, right of first refusal or other similar right of
shareholders;
(vi) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company and has been
duly executed and delivered by the Company and, assuming due
authorization, execution and delivery by you, is a valid and binding
agreement of the Company, enforceable in accordance with its terms,
except insofar as indemnification provisions may be limited by
applicable law and except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(viii) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or
are pending or threatened under the Act;
(ix) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial
statements (including supporting schedules) and financial data
derived therefrom as to which such counsel need express no opinion),
as of the effective date of the Registration Statement, complied as
to form in all material respects with the requirements of the Act
and the applicable Rules and Regulations;
(x) The information in the Prospectus under the
caption "Description of Capital Stock," to the extent that it
constitutes matters of law or legal conclusions, has been reviewed
by such counsel and is a fair summary of such matters and
conclusions; and the forms of certificates evidencing the Common
Stock and filed as exhibits to the Registration Statement comply
with the law of the State of California;
(xi) The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of
Federal statutes and the General Corporation Law of
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<PAGE> 19
the State of California are accurate summaries thereof and fairly
present the information required to be presented by the Act and the
applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which are not described or referred to
therein or filed as required;
(xiii) The performance of this Agreement and the
consummation of the transactions herein contemplated (other than
performance of the Company's indemnification obligations hereunder,
concerning which no opinion need be expressed) will not (a) result
in any violation of the Company's charter or bylaws or (b) to such
counsel's knowledge, result in a material breach or violation of any
of the terms and provisions of, or constitute a material default
under, any material bond, debenture, note or other evidence of
indebtedness, or under any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument known to such counsel to which the Company
is a party or by which its properties are bound, or any applicable
statute, rule or regulation known to such counsel or, to such
counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over
the Company or over any of its property or operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or
body having jurisdiction over the Company, or over any of its
properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Act or such as may be
required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the Shares by
the Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company
of a character required to be disclosed in the Registration
Statement or the Prospectus by the Act or the Rules and Regulations,
other than those described therein;
(xvi) To such counsel's knowledge, the Company is not
presently (a) in material violation of its charter or bylaws, or (b)
in material breach of any applicable statute, rule or regulation
known to such counsel or, to such counsel's knowledge, any order,
writ or decree of any court or governmental agency or body having
jurisdiction over the Company or over any of its properties or
operations;
(xvii) To such counsel's knowledge, except as set forth
in the Registration Statement and Prospectus, no holders of Common
Stock or other securities of the Company have registration rights
with respect to securities of the Company and, except as set forth
in the Registration Statement and Prospectus, all holders of
securities of the Company having rights known to such counsel to
registration of such shares of Common Stock or other securities,
because of the filing of the Registration Statement by the Company
have, with respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the
Registration Statement or have included securities in the
Registration Statement pursuant to the exercise of and in full
satisfaction of such rights;
(xviii) Each Selling Shareholder which is not a natural
person has full right, power and authority to enter into and to
perform its obligations under the Power of Attorney and
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<PAGE> 20
Custody Agreement to be executed and delivered by it in connection
with the transactions contemplated herein; the Power of Attorney and
Custody Agreement of each Selling Shareholder that is not a natural
person has been duly authorized by such Selling Shareholder; the
Power of Attorney and Custody Agreement of each Selling Shareholder
has been duly executed and delivered by or on behalf of such Selling
Shareholder; and the Power of Attorney and Custody Agreement of each
Selling Shareholder constitutes the valid and binding agreement of
such Selling Shareholder, enforceable in accordance with its terms,
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(xix) Each of the Selling Shareholders has full right,
power and authority to enter into and to perform its obligations
under this Agreement and to sell, transfer, assign and deliver the
Shares to be sold by such Selling Shareholder hereunder;
(xx) This Agreement has been duly authorized by each
Selling Shareholder that is not a natural person and has been duly
executed and delivered by or on behalf of each Selling Shareholder;
and
(xxi) Upon the delivery of and payment for the Shares as
contemplated in this Agreement, each of the Underwriters will
receive valid marketable title to the Shares purchased by it from
such Selling Shareholder, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest. In
rendering such opinion, such counsel may assume that the
Underwriters are without notice of any defect in the title of the
Shares being purchased from the Selling Shareholders.
In addition, such counsel shall state that such counsel has
participated in conferences with certain officers and other representatives of
the Company, including its independent certified public accountants, and with
you and your counsel, at which the contents of the Registration Statement and
Prospectus and related matters were discussed, and although they have not
verified the accuracy, completeness or fairness of such information, nothing has
come to the attention of such counsel which leads them to believe that, at the
time the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which Option
Shares are to be purchased, the Registration Statement and any amendment or
supplement thereto (other than the financial statements including supporting
schedules and other financial and statistical information derived therefrom, as
to which such counsel need express no comment) contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or at the
Closing Date or any later date on which the Option Shares are to be purchased,
as the case may be, the Registration Statement, Prospectus and any amendment or
supplement thereto (except as aforesaid) contained any untrue statement of a
material fact or omitted to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the State of
California upon opinions of local counsel, and as to questions of fact upon
representations or certificates of officers of the Company, the Selling
Shareholders or officers of the Selling Shareholders (when the Selling
Shareholder is not a natural person) and of government officials, in which case
their opinion is to state that they are so relying and that they have no
knowledge of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
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<PAGE> 21
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, an
opinion of Brobeck, Phleger & Harrison LLP, in form and substance satisfactory
to you, with respect to the sufficiency of all such corporate proceedings and
other legal matters relating to this Agreement and the transactions contemplated
hereby as you may reasonably require, and the Company shall have furnished to
such counsel such documents as they may have requested for the purpose of
enabling them to pass upon such matters.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Price Waterhouse LLP addressed to the Company and the Underwriters,
dated the Closing Date or such later date on which Option Shares are to be
purchased, as the case may be, confirming that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations and based upon the procedures
described in such letter delivered to you concurrently with the execution of
this Agreement (herein called the "Original Letter"), but carried out to a date
not more than five (5) business days prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations, business or business prospects (as described in the
Registration Statement and Prospectus) of the Company from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from shall be addressed to or for the use of
the Underwriters in form and substance satisfactory to the Underwriters and
shall (i) represent, to the extent true, that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the applicable published Rules and Regulations, (ii) set forth their opinion
with respect to their examination of the balance sheet of the Company as of
December 31, 1996 and 1997, and related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 1995, 1996 and 1997 and
(iii) address other matters agreed upon by Price Waterhouse LLP and you. In
addition, you shall have received from Price Waterhouse LLP a letter addressed
to the Company and made available to you for the use of the Underwriters stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as of December 31, 1995, 1996 and 1997 did
not disclose any weaknesses in internal controls that they considered to be
material weaknesses.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date or any later
date on which Option Shares are to be purchased, as the case may be;
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<PAGE> 22
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and, to the best of the
Company's knowledge, no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material
information required to be included therein by the Act and the Rules
and Regulations and in all material respects conformed to the
requirements of the Act and the Rules and Regulations, the
Registration Statement, and any amendments or supplements thereto,
did not and does not include any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus and any amendments or supplements thereto, did not and
does not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not
misleading, and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in
an amended or supplemented Prospectus which has not been so set
forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations, business or business
prospects (as described in the Registration Statement and
Prospectus) of the Company, (b) any transaction that is material to
the Company, except transactions entered into in the ordinary course
of business, (c) any obligation, direct or contingent, that is
material to the Company, incurred by the Company, except obligations
incurred in the ordinary course of business, (d) any change in the
capital stock or outstanding indebtedness of the Company that is
material to the Company, (e) any dividend or distribution of any
kind declared, paid or made on the capital stock of the Company, or
(f) any loss or damage (whether or not insured) to the property of
the Company or any of its which has been sustained or will have been
sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business
prospects (as described in the Registration Statement and
Prospectus) of the Company.
(h) You shall be satisfied that, and you shall have received a
certificate, dated the Closing Date from the Attorneys for each Selling
Shareholder to the effect that, as of the Closing Date, they have not been
informed that:
(i) The representations and warranties made by such
Selling Shareholder herein are not true or correct in any material
respect on the Closing Date; or
(ii) Such Selling Shareholder has not complied with any
obligation or satisfied any condition which is required to be
performed or satisfied on the part of such Selling Shareholder at or
prior to the Closing Date.
(i) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each Selling
Shareholder and each beneficial owner of shares representing at least five
percent (5%) of the Company's outstanding Common Stock in writing prior to the
date hereof that such person will not, during the Lock-up Period, effect the
Disposition of any Securities now owned or hereafter acquired directly by such
person or with respect to which such person has or hereafter acquires the power
of disposition, otherwise than (i) as a bona fide gift or gifts, provided the
donee or donees thereof agree in writing to be bound by this restriction, (ii)
as a distribution to limited partners or shareholders of such person, provided
that the distributees thereof agree in writing to be bound by the terms of this
restriction, or (iii) with
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<PAGE> 23
the prior written consent of BancAmerica Robertson Stephens. The foregoing
restriction is expressly agreed to preclude the holder of the Securities from
engaging in any hedging or other transaction which is designed to or reasonably
expected to lead to or result in a Disposition of Securities during the Lock-up
Period, even if such Securities would be disposed of by someone other than the
such holder. Such prohibited hedging or other transactions would including,
without limitation, any short sale (whether or not against the box) or any
purchase, sale or grant of any right (including, without limitation, any put or
call option) with respect to any Securities or with respect to any security
(other than a broad-based market basket or index) that includes, relates to or
derives any significant part of its value from Securities. The foregoing shall
not apply to any Disposition of Securities during the Lock-up Period to the
Underwriters pursuant to this Agreement. Furthermore, such person will have also
agreed and consented to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of the Securities held by such
person except in compliance with this restriction.
(j) The Company and the Selling Shareholders shall have
furnished to you such further certificates and documents as you shall reasonably
request (including certificates of officers of the Company, the Selling
Shareholders or officers of the Selling Shareholders (when the Selling
Shareholder is not a natural person) as to the accuracy of the representations
and warranties of the Company and the Selling Shareholders herein, as to the
performance by the Company and the Selling Shareholders of their respective
obligations hereunder and as to the other conditions concurrent and precedent to
the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company and the Selling Shareholders
will furnish you with such number of conformed copies of such opinions,
certificates, letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution and sale of the
Firm Shares only, a nontransferable option to purchase up to an aggregate of
345,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against receipt of a wire transfer
reference number issued by the Federal Reserve System evidencing payment of the
purchase price therefor by the several Underwriters by wire transfer of
immediately available funds, to an account specified in writing by the Company
with regard to the Shares being purchased from the Company. In the event of any
breach of the foregoing, the Company shall reimburse the Underwriters for the
interest lost and any other expenses borne by them by reason of such breach.
Such delivery and payment shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, or at such
other place as may be agreed upon among the Representatives and the Company (i)
on the Closing Date, if written notice of the exercise of such option is
received by the Company at least two (2) full business days prior to the Closing
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<PAGE> 24
Date, or (ii) on a date which shall not be later than the third (3rd) full
business day following the date the Company receives written notice of the
exercise of such option, if such notice is received by the Company less than two
(2) full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose wire transfer funds shall not have been received by you prior to the date
of payment and delivery for the Option Shares to be purchased by such
Underwriter or Underwriters. Any such payment by you shall not relieve any such
Underwriter or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 6 hereof, and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may reasonably request in order to evidence the accuracy and completeness of
any of the representations, warranties or statements, the performance of any of
the covenants or agreements of the Company or the compliance with any of the
conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject (including without
limitation, in its capacity as an Underwriter or as a "qualified independent
underwriter" within the meaning of Schedule E of the Bylaws of NASD), under the
Act, the Exchange Act, or otherwise, specifically including, but not limited to,
losses, claims, damages or liabilities (or actions in respect thereof) arising
out of or based upon (i) any breach of any representation, warranty, agreement
or covenant of the Company herein contained, (ii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, or any amendment or supplement thereto, or the 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 (iii) any untrue
statement or alleged untrue statement of any material fact contained in any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and agrees to
reimburse each Underwriter for any legal or other expenses reasonably incurred
by it in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
amendment or supplement thereto, in reliance
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<PAGE> 25
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter, directly or through you,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement provided in this Section 8(a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of material fact or
omission or alleged omission to state therein a material fact purchased Shares,
if a copy of the Prospectus in which such untrue statement or alleged untrue
statement or omission or alleged omission was corrected had not been sent or
given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Selling Shareholder, severally and not jointly,
agrees to indemnify and hold harmless each Underwriter against any losses,
claims, damages or liabilities, joint or several, to which such Underwriter may
become subject (including, without limitation, in its capacity as an Underwriter
or as a "qualified independent underwriter" within the meaning of Schedule E or
the Bylaws of the NASD) under the Act, the Exchange Act or otherwise,
specifically including, but not limited to, losses, claims, damages or
liabilities (or actions in respect thereof) arising out of or based upon (i) any
breach of any representation, warranty, agreement or covenant of such Selling
Shareholder herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the 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 (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 8(b) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to the
Company or such Underwriter by such Selling Shareholder, directly or through
such Selling Shareholder's representatives, specifically for use in the
preparation thereof, and agrees to reimburse each Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement provided in this Section 8(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, damages, liabilities or actions
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected had not been sent
or given to such person within the time required by the Act and the Rules and
Regulations, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each person, if
any, who controls any Underwriter within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which such
Selling Shareholder may otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Shareholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Shareholder may become subject under the Act, the Exchange Act,
or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect
-25-
<PAGE> 26
thereof) arising out of or based upon (i) any breach of any representation,
warranty, agreement or covenant of such Underwriter herein contained, (ii) any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement or any amendment or supplement thereto, or the
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
(iii) any untrue statement or alleged untrue statement of any material fact
contained in any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, in the case of
subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished to the Company by such Underwriter, directly or through
you, specifically for use in the preparation thereof, and agrees to reimburse
the Company and each such Selling Shareholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Shareholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(c) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company, each Selling Shareholder and each person, if any, who controls the
Company or any Selling Shareholder within the meaning of the Act or the Exchange
Act. This indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such
-26-
<PAGE> 27
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on all claims that are the subject
matter of such proceeding.
(e) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 8 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that, except as set forth
in Section 8( ) hereof, the Underwriters severally and not jointly are
responsible pro rata for the portion represented by the percentage that the
underwriting discount bears to the initial public offering price, and the
Company and the Selling Shareholders are responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
amount in excess of the amount by which the underwriting discount applicable to
the Shares purchased by such Underwriter exceeds of the amount of damages which
such Underwriter has otherwise required to pay and (ii) no person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. The contribution agreement in this Section 8(e)
shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriters, the Company or
any Selling Shareholder within the meaning of the Act or the Exchange Act and
each officer of the Company who signed the Registration Statement and each
director of the Company.
(f) The liability of each Selling Shareholder under the
representations, warranties and agreements contained herein and under the
indemnity agreements contained in the provisions of this Section 8 shall be
limited to an amount equal to the initial public offering price of the Selling
Shareholder Shares sold by such Selling Shareholder to the Underwriters minus
the amount of the underwriting discount paid thereon to the Underwriters by such
Selling Shareholder. The Company and such Selling Shareholders may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(g) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 8, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 8
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, the Selling Shareholders and the Underwriters herein or in certificates
delivered pursuant hereto, and the indemnity and contribution agreements
contained in Section 8 hereof shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any Underwriter
or any person controlling any Underwriter within the meaning of the Act or the
Exchange Act, or by or on behalf of the Company or any Selling Shareholder or
any of their officers, directors or controlling persons within the meaning of
the Act or the Exchange Act, and shall survive the delivery of the Shares to the
several Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm
-27-
<PAGE> 28
Shares, the remaining Underwriters shall be obligated, severally in proportion
to their respective commitments hereunder, to take up and pay for the Firm
Shares of such defaulting Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 10, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement, supplements to the Prospectus
or other such documents which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining Underwriters
and substituted underwriter or underwriters shall be taken as the basis of their
underwriting obligation. If the remaining Underwriters shall not take up and pay
for all such Firm Shares so agreed to be purchased by the defaulting Underwriter
or Underwriters or substitute another underwriter or underwriters as aforesaid
and the Company shall not find or shall not elect to seek another underwriter or
underwriters for such Firm Shares as aforesaid, then this Agreement shall
terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 10, neither the Company or any Selling
Shareholder shall be liable to any Underwriter (except as provided in Sections 5
and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under this Agreement, to
purchase the number of Firm Shares agreed by such Underwriter to be purchased
hereunder, which Underwriter shall remain liable to the Company, the Selling
Shareholder and the other Underwriters for damages, if any, resulting from such
default) be liable to the Company or any Selling Shareholder (except to the
extent provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 10.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(j), 5 and 8 hereof.
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<PAGE> 29
(b) You, as Representatives of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company or any Selling Shareholder shall have failed, refused or been
unable to perform any agreement on its part to be performed, or because any
other condition of the Underwriters' obligations hereunder required to be
fulfilled is not fulfilled, including, without limitation, any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects (as described in the Registration Statement and Prospectus) of the
Company from that set forth in the Registration Statement or Prospectus, which,
in your reasonable judgment, is material and adverse, or (ii) if additional
material governmental restrictions, not in force and effect on the date hereof,
shall have been imposed upon trading in securities generally or minimum or
maximum prices shall have been generally established on the New York Stock
Exchange or on the American Stock Exchange or in the over the counter market by
the NASD, or trading in securities generally shall have been suspended on either
such exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iii) if the Company shall have sustained a loss by strike,
fire, flood, earthquake, accident or other calamity of such character as to
interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel with a copy to Brobeck, Phleger & Harrison
LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303,
Attention: Thomas A. Bevilacqua, Esq.; if sent to the Company, such notice shall
be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to the Company c/o 3Dfx Interactive, Inc., 4435 Fortan
Drive, San Jose, California 95134, telecopier number (408) 262-8874, Attention:
L. Gregory Ballard, Chief Executive Officer with a copy to Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304, Attention:
Robert P. Latta, Esq.; if sent to one or more of the Selling Shareholders, such
notice shall be sent mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to [NAME OF ATTORNEY-IN-FACT FOR SELLING
SHAREHOLDERS], as Attorney-in-Fact for the Selling Shareholders, at [ADDRESS OF
ATTORNEY-IN-FACT], telecopier number (___) ________].
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several Underwriters and the Company and the Selling Shareholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or entity, other than the parties hereto and their respective
executors, administrators, successors and assigns, and the controlling persons
within the meaning of the Act or the Exchange Act, officers and
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<PAGE> 30
directors referred to in Section 8 hereof, any legal or equitable right, remedy
or claim in respect of this Agreement or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of the parties hereto and their
respective executors, administrators, successors and assigns and said
controlling persons and said officers and directors, and for the benefit of no
other person or entity. No purchaser of any of the Shares from any Underwriter
shall be construed a successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling Shareholders under
this Agreement, you shall act on behalf of each of the several Underwriters, and
the Company or the Selling Shareholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
BancAmerica Robertson Stephens on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
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<PAGE> 31
If the foregoing correctly sets forth the understanding among the
Company, the Selling Shareholders and the several Underwriters, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Shareholders
and the several Underwriters.
Very truly yours,
3DFX INTERACTIVE, INC.
By /s/ L. Gregory Ballard
----------------------------------------
L. Gregory Ballard
President and Chief Executive Officer
SELLING SHAREHOLDERS
By
----------------------------------------
Attorney-in-Fact for the Selling
Shareholders named in Schedule B hereto
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
NATIONSBANC MONTGOMERY SECURITIES LLC
UBS SECURITIES LLC
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By BANCAMERICA ROBERTSON STEPHENS
By [ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C.]
By /s/ Kenneth R. Fitzsimmons
----------------------------------------
Authorized Signatory
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<PAGE> 32
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
To Be
Underwriters Purchased
------------ -----------
<S> <C>
BancAmerica Robertson Stephens.............................
NationsBanc Montgomery Securities LLC......................
UBS Securities LLC.........................................
Total.................................................
===========
</TABLE>
<PAGE> 33
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Firm Company
Shares To
Company Be Sold
---------------------- ------------
<S> <C>
3Dfx Interactive, Inc.
------------
Total.................................................. ============
</TABLE>
<TABLE>
<CAPTION>
Number of
Selling
Shareholder
Shares
Name of Selling Shareholder To Be Sold
--------------------------- -----------
<S> <C>
-----------
Total.................................................. ===========
</TABLE>
<PAGE> 1
EXHIBIT 5.1
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
February 11, 1998
3Dfx Interactive, Inc.
4435 Fortran Drive
San Jose, CA 95134
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 to be filed by
you with the Securities and Exchange Commission on February 11, 1998 (as such
may be further amended or supplemented, the "Registration Statement"), in
connection with the registration under the Securities Act of 1933, as amended,
of up to 2,645,000 shares (including an over-allotment option granted to the
Underwriters to purchase 345,000 shares) of your Common Stock, no par value per
share (the "Shares"). Of the Shares, 2,345,000 shares (including all shares
subject to the above-referenced over-allotment option) are authorized but
heretofore unissued, and 300,000 shares are or will be issued and outstanding
and held by the Selling Shareholders referred to in the Registration Statement.
We understand that the Shares are to be sold to the Underwriters for resale to
the public as described in the Registration Statement. As your legal counsel, we
have examined the proceedings taken, and are familiar with the proceedings
proposed to be taken, by you in connection with the issuance and sale of the
Shares.
It is our opinion that the Shares, when issued and sold in the manner
described in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendments thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<PAGE> 1
EXHIBIT 10.7.1
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER 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 PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: 3Dfx Interactive, Inc., a California corporation
Number of Shares: 25,000
Class of Stock: Common
Warrant Price: $13.875
Issue Date: December 3, 1997
Expiration Date: December 3, 2002
For value received, 3Dfx Interactive, Inc. (the "Company"), a
California corporation, hereby grants to Creative Labs, Inc. (the "Holder"), a
California Corporation, and the Holder is entitled, upon the terms and subject
to the conditions hereinafter set forth, to subscribe for and purchase from the
Company, 25,000 fully paid and nonassessable shares of the common stock (the
"Shares") of the Company at the exercise price per share (the "Warrant Price")
set forth in Article 1 below and as adjusted pursuant to Article 2, subject to
the provisions and upon the terms and conditions set forth in this Warrant.
ARTICLE 1. EXERCISE.
1.1 Exercise Price. The exercise price per Share of common
stock (the "Exercise Price") to be delivered by the Company upon exercise hereof
shall be, on or prior to December 3, 2002, $13.875.
1.2 Method of Exercise. Holder may exercise this Warrant by
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.3, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.3 Conversion Right. In lieu of exercising this Warrant as
specified in Section 1.2, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant Section 1.4.
1.4 Fair Market Value. If the Shares are traded in a public
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's common stock into which the Shares
are convertible) reported for the business day immediately before
-1-
<PAGE> 2
Holder delivers its Notice of Exercise to the Company. If the Shares are not
traded in a public market, the Board of Directors of the Company shall determine
fair market value in its reasonable good faith judgment. The foregoing
notwithstanding, if Holder advises the Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder shall promptly
agree upon a reputable investment banking firm to undertake such valuation. If
the valuation of such investment banking firm is more than 110 percent of that
determined by the Board of Directors, then all fees and expenses of such
investment banking firm shall be paid by the Company. In all other
circumstances, such fees and expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after
Holder exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, or surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the
Company.
1.7.1. "Acquisition." For the purpose of this Warrant,
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2. Assumption of Warrant. If upon the closing of any
Acquisition the successor entity assumes the obligations of this Warrant, then
this Warrant shall be exercisable for the same securities, cash, and property as
would be payable for the Shares issuable upon exercise of the unexercised
portion of this Warrant as if such Shares were outstanding on the record date
for the Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.7.3. Nonassumption. If upon the closing of any
Acquisition the successor entity does not assume the obligations of this Warrant
and Holder has not otherwise exercised this Warrant in full, then the
unexercised portion of this Warrant shall be deemed to have been automatically
converted pursuant to Section 1.3 and thereafter Holder shall participate in the
acquisition on the same terms as other holders of the same class of securities
of the Company.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
2.1 Stock Dividends, Splits, Etc. If the Company declares or
pays a dividend on its common stock (or the Shares if the Shares are securities
other than common stock) payable in common
-2-
<PAGE> 3
stock, or other securities, subdivides the outstanding common stock into a
greater amount of common stock, or, if the Shares are securities other than
common stock, subdivides the Shares in a transaction that increases the amount
of common stock into which the Shares are convertible, then upon exercise of
this Warrant, for each Share acquired, Holder shall receive, without cost to
Holder, the total number and kind of securities to which Holder would have been
entitled had Holder owned the Shares of record as of the date the dividend or
subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding
Shares are combined or consolidated, by reclassification or otherwise, into a
lesser number of shares, the Warrant Price shall be proportionately increased.
2.4 No Impairment. The Company shall not, by amendment of its
Articles of Incorporation or through a 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 of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment. If the Company
takes any action affecting the Shares or its common stock other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.5 Fractional Shares. No fractional Shares shall be issuable
upon exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder the amount computed by
multiplying the factional interest by the fair market value of a full Share.
-3-
<PAGE> 4
2.6 Certificate as to Adjustments. Upon each adjustment of the
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
3.1 Representations and Warranties. The Company hereby
represents and warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page
of this Warrant is not greater than the fair market value of the Shares as of
the date of this Warrant.
(b) All Shares which may be issued upon the exercise of
the purchase right represented by this Warrant, and all securities, if any,
issuable upon conversion of the Shares, shall, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable, and free of any liens
and encumbrances except for restrictions on transfer provided for herein or
under applicable federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any
time (a) to declare any dividend or distribution upon its common stock, whether
in cash, property, stock, or other securities and whether or not a regular cash
dividend; (b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (c) to effect any reclassification or recapitalization of common
stock; (d) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; or (e) offer holders of registration rights the
opportunity to participate in an underwritten public offering of the company's
securities for cash, then, in connection with each such event, the Company shall
give Holder (1) at least 20 days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this
Warrant and/or any of the Shares, the Company shall deliver to the Holder (a)
promptly after mailing, copies of all notices or other written communications to
the shareholders of the Company, (b) within ninety (90) days after the end of
each fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) within forty-five (45) days after the end of each of the first three
quarters of each fiscal year, the Company's quarterly, unaudited financial
statements.
-4-
<PAGE> 5
ARTICLE 4. MISCELLANEOUS.
4.1 Term; Notice of Expiration. This Warrant is exercisable, in
whole or in part, at any time and from time to time on or before the Expiration
Date set forth above.
4.2 Legends. This Warrant and the Shares (and the securities
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
THIS SECURITY HAS 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 PURSUANT TO
RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Transfer; Compliance with Securities Laws. This Warrant may
not be transferred or assigned in whole or in part and any attempted transfer in
violation of this provision shall be void and of no effect; provided, however,
that this Warrant may be transferred or assigned to any affiliate of the Holder
that owns at least an 80% interest in the Holder or to any affiliate of the
Holder of which the Holder owns at least an 80% interest. The Shares issuable
upon exercise of this Warrant may not be transferred or assigned in whole or in
part without compliance with applicable federal and state securities laws by the
transferor and the transferee (including, without limitation, the delivery of
investment representation letters and legal opinions reasonably satisfactory to
the Company, as reasonably requested by the Company). The Company shall not
require Holder to provide an opinion of counsel if the transfer is to an
affiliate of Holder or if there is no material question as to the availability
of current information as referenced in Rule 144(c), Holder represents that it
has complied with Rule 144(d) and (e) in reasonable detail, the selling broker
represents that it has complied with Rule 144(f), and the Company is provided
with a copy of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section
4.3, Holder may transfer the Shares issuable upon exercise of this Warrant (or
the securities issuable, directly or indirectly, upon conversion of the Shares,
if any) by giving the Company notice of the portion of the Warrant being
transferred setting forth the name, address and taxpayer identification number
of the transferee and surrendering this Warrant to the Company for reissuance to
the transferee(s) (and Holder if applicable). Unless the Company is filing
financial information with the SEC pursuant to the Securities Exchange Act of
1934, the Company shall have the right to refuse to transfer any portion of this
Warrant to any person who directly competes with the Company.
4.5 Notices. All notices and other communications from the
Company to the Holder, or vice versa, shall be deemed delivered and effective
when given personally or mailed by first-class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company or
the Holder, as the case may be, in writing by the Company or such holder from
time to time.
-5-
<PAGE> 6
4.6 Waiver. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
4.7 Attorneys Fees. In the event of any dispute between the
parties concerning the terms and provisions of this Warrant, the party
prevailing in such dispute shall be entitled to collect from the other party all
costs incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and
construed in accordance with the laws of the State of California, without giving
effect to its principles regarding conflicts of law.
"COMPANY"
3Dfx Interactive, Inc.
By /s/ L. GREGORY BALLARD
-----------------------------------------
Name L. Gregory Ballard
----------------------------------------
(Print)
Title: President and Chief Executive Officer
"HOLDER"
Creative Labs, Inc.
By
-----------------------------------------
Name
----------------------------------------
(Print)
Title:
--------------------------------------
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<PAGE> 7
APPENDIX 1
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase shares of the Common Stock
of 3Dfx Interactive, Inc. pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised with
respect to _____________________ of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
------------------------------------
(Name)
------------------------------------
------------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
-----------------------------------------
(Signature)
- --------------------
(Date)
<PAGE> 1
EXHIBIT 10.12.1
3DFX INTERACTIVE, INC.
LOAN AND SECURITY AGREEMENT
DATED AS OF AUGUST 19, 1996
<PAGE> 2
AGREEMENT
This Loan and Security Agreement ("Agreement") is made and entered into
as of August 19, 1996, by and between Silicon Valley Bank ("Bank") and 3DFX
INTERACTIVE, INC. ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
SECTION 1 DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following definitions:
"ACCOUNTS" means all presently existing and hereafter arising accounts,
contract rights, and all other forms of obligations owing to Borrower arising
out of the sale or lease of goods (including, without limitation, the licensing
of software and other technology) or the rendering of services by Borrower,
whether or not earned by performance, and any and all credit insurance,
guaranties, and other security therefor, as well as all merchandise returned to
or reclaimed by Borrower and Borrower's Books relating to any of the foregoing.
"ADVANCE" or "ADVANCES" means an Advance under the Committed Revolving
Line or the Committed Equipment Line.
"AFFILIATE" means, with respect to any Person, any Person that owns or
controls directly or indirectly such Person, any Person that controls or is
controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"BANK EXPENSES" means all reasonable costs or expenses (including
reasonable attorneys' fees and expenses) incurred in connection with the
preparation, negotiation, administration, and enforcement of the Loan Documents;
and Bank's reasonable attorneys' fees and expenses incurred in amending,
enforcing or defending the Loan Documents, whether or not suit is brought.
"BORROWER'S BOOKS" means all of Borrower's books and records including
ledgers; records concerning Borrower's assets or liabilities, the Collateral,
business operations or financial condition; and all computer programs, or tape
files, and the equipment containing such information.
"BORROWING BASE" has the meaning set forth in Section 2.1 hereof.
"BUSINESS DAY" means any day that is not a Saturday, Sunday, or other
day on which banks in the State of California are authorized or required to
close.
"CASH OR CASH EQUIVALENTS" means cash on hand or cash held in a
certificate of deposit, money market account, or checking account with Bank.
"CLOSING DATE" means the date of this Agreement.
"CODE" means the California Uniform Commercial Code.
1.
<PAGE> 3
"COLLATERAL" means the property described on EXHIBIT A attached hereto.
"COMMITTED REVOLVING LINE" means Four Million Dollars ($4,000,000).
"COMMITTED EQUIPMENT LINE" means Two Million Dollars ($2,000,000).
"CONTINGENT OBLIGATION" means, as applied to any Person, any direct or
indirect liability, contingent or otherwise, of that Person with respect to (i)
any indebtedness, lease, dividend, letter of credit or other obligation of
another, including, without limitation, any such obligation directly or
indirectly guaranteed, endorsed, co-made or discounted or sold with recourse by
that Person, or in respect of which that Person is otherwise directly or
indirectly liable; (ii) any obligations with respect to undrawn letters of
credit issued for the account of that Person; and (iii) all obligations arising
under any interest rate, currency or commodity swap agreement, interest rate cap
agreement, interest rate collar agreement, or other agreement or arrangement
designated to protect a person against fluctuation in interest rates, currency
exchange rates or commodity prices; provided, however, that the term "Contingent
Obligation" shall not include endorsements for collection or deposit in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determined amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof as determined by such Person in good faith; provided, however, that such
amount shall not in any event exceed the maximum amount of the obligations under
the guarantee or other support arrangement.
"CURRENT ASSETS" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current assets on the
consolidated balance sheet of Borrower and its Subsidiaries as at such date.
"CURRENT LIABILITIES" means, as of any applicable date, all amounts that
should, in accordance with GAAP, be included as current liabilities on the
consolidated balance sheet of Borrower and its Subsidiaries, as at such date,
plus, to the extent not already included therein, all outstanding Advances made
under this Agreement, including all Indebtedness that is payable upon demand or
within one year from the date of determination thereof unless such Indebtedness
is renewable or extendable at the option of Borrower or any Subsidiary to a date
more than one year from the date of determination, but excluding Subordinated
Debt.
"DAILY BALANCE" means the amount of the Obligations owed at the end of a
given day.
"ELIGIBLE ACCOUNTS" means those Accounts that arise in the ordinary course
of Borrower's business that comply with all of Borrower's representations and
warranties to Bank set forth in SECTION 5.4; provided, that standards of
eligibility may be fixed and revised from time to time by Bank in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. Unless otherwise agreed to by Bank, Eligible Accounts
shall not include the following:
(A) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(B) Accounts with respect to an account debtor, fifty percent
(50%) of whose Accounts the account debtor has failed to pay within ninety (90)
days of invoice date;
(C) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
(D) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(E) Accounts with respect to which the account debtor is an
Affiliate (other than by virtue of being directly or indirectly under common
ownership or control with Borrower) of Borrower;
2.
<PAGE> 4
(F) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts, and Accounts arising from products shipped to or services
provided to branches or offices located in the United States of any account
debtor that does not have its principal place of business in the United States;
(G) Accounts with respect to which the account debtor is a
federal, state, or local governmental entity or any department, agency, or
instrumentality thereof.
(H) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(I) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations
exceed the aforementioned percentage, provided however, (i) a thirty-five
percent (35%) concentration limit is allowed for any single account debtor
during any one month, or (ii) as otherwise approved in writing by Bank;
(J) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(K) Accounts the collection of which Bank reasonably
determines to be doubtful.
"ELIGIBLE FOREIGN ACCOUNTS" means Accounts with respect to which the
account debtor does not have its principal place of business in the United
States and that are: (1) covered by credit insurance in form and amount, and by
an insurer satisfactory to Bank less the amount of any deductible(s) which may
be or become owing thereon: or (2) supported by one or more letters of credit in
favor of Bank as beneficiary, in an amount and of a tenor, and issued by a
financial institution, acceptable to Bank; or (3) that Bank approves on a
case-by-case basis.
"EQUIPMENT" means all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"EQUIPMENT MATURITY DATE" means August 18, 1998.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"GAAP" means generally accepted accounting principles as in effect from
time to time.
"INDEBTEDNESS" means (a) all indebtedness for borrowed money or the
deferred purchase price of property or services, including without limitation
reimbursement and other obligations with respect to surety bonds and letters of
credit, (b) all obligations evidenced by notes, bonds, debentures or similar
instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or against any
person or entity under any provision of the United States Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency law, including assignments
for the benefit of creditors, formal or informal moratoria, compositions,
extension generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" means all present and future inventory in which Borrower
has any interest, including merchandise, raw materials, parts, supplies, packing
and shipping materials, work in process and finished products intended for sale
or lease or to be furnished under a contract of service, of every kind and
description now or at any time hereafter owned by or in the custody or
possession, actual or constructive, of Borrower, including such
3.
<PAGE> 5
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"INVESTMENT" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"LIEN" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"LOAN DOCUMENTS" means, collectively, this Agreement, any note or notes
executed by Borrower, and any other agreement entered into between Borrower and
Bank in connection with this Agreement, all as amended or extended from time to
time.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business operations or condition (financial or otherwise) of Borrower and its
Subsidiaries taken as a whole or (ii) the ability of Borrower to repay the
Obligations or otherwise perform its obligations under the Loan Documents.
"NEGOTIABLE COLLATERAL" means all of Borrower's present and future letters
of credit of which it is a beneficiary, notes, drafts, instruments, securities,
documents of title, and chattel paper, and Borrower's Books relating to any of
the foregoing.
"OBLIGATIONS" means all debt, principal, interest, Bank Expenses and
other amounts owed to Bank by Borrower pursuant to this Agreement or any other
agreement, whether absolute or contingent, due or to become due, now existing or
hereafter arising, including any interest that accrues after the commencement of
an Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
"OUTSTANDING BALANCE" means any outstandings under the Committed
Equipment Line or the Committed Revolving Line; provided however, that any
issued letters of credit which do not exceed 25% of gross Accounts Receivable
are not considered outstanding under the Committed Revolving Line.
"PAYMENT DATE" means the eighteenth (18th) calendar day of each month.
"PERIODIC PAYMENTS" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"PERMITTED INDEBTEDNESS" means:
(A) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(B) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(C) Subordinated Debt;
(D) Indebtedness to trade creditors incurred in the ordinary
course of business; and
(E) Indebtedness with respect to capital lease obligations and
Indebtedness secured by Permitted Liens.
4.
<PAGE> 6
"PERMITTED INVESTMENT" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"PERMITTED LIENS" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens securing capital lease obligations on assets subject
to such capital leases; and
(e) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (d) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase.
"PERSON" means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"PRIME RATE" means the variable rate of interest, per annum, most recently
announced by Bank, as its "prime rate," whether or not such announced rate is
the lowest rate available from Bank.
"QUICK ASSETS" means, at any date as of which the amount thereof shall be
determined, the consolidated cash, cash-equivalents, accounts receivable and
investments, with maturities not to exceed 90 days, of Borrower determined in
accordance with GAAP.
"RESPONSIBLE OFFICER" means each of the Chief Executive Officer, the Chief
Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" means August 18, 1997.
"SCHEDULE" means the schedule of exceptions attached hereto.
"SUBORDINATED DEBT" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to Bank
(and identified as being such by Borrower and Bank).
5.
<PAGE> 7
"SUBSIDIARY" means any corporation or partnership in which (i) any
general partnership interest or (ii) more than 50% of the stock of which by the
terms thereof ordinary voting power to elect the Board of Directors, managers or
trustees of the entity shall, at the time as of which any determination is being
made, be owned by Borrower, either directly or through an Affiliate.
"TANGIBLE NET NORTH" means at any date as of which the amount thereof
shall be determined, the consolidated total assets of Borrower and its
Subsidiaries minus, without duplication, (i) the sum of any amounts attributable
to (a) goodwill, (b) intangible items such as unamortized debt discount and
expense, patents, trade and service marks and names, copyrights and research and
development expenses except prepaid expenses, and (c) all reserves not already
deducted from assets, and (ii) Total Liabilities.
"TOTAL LIABILITIES" means at any date as of which the amount thereof
shall be determined, all obligations that should, in accordance with GAAP be
classified as liabilities on the consolidated balance sheet of Borrower,
including in any event all Indebtedness, but specifically excluding Subordinated
Debt.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
SECTION 2 LOAN AND TERMS OF PAYMENT
2.1 ADVANCES. Subject to and upon the terms and conditions of this
Agreement, Bank agrees to make Advances to Borrower in an aggregate amount not
to exceed (i) the Committed Revolving Line or the Borrowing Base, whichever is
less, minus (ii) the face amount of all outstanding Letters of Credit (including
drawn but unreimbursed Letters of Credit). For purposes of this Agreement,
"BORROWING BASE" shall mean an amount equal to (i) seventy-five percent (75%) of
Eligible Accounts plus (ii) one hundred percent (100%) of Cash or Cash
Equivalents. Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this SECTION 2.1 may be repaid and reborrowed at any time
during the term of this Agreement.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. Pacific time, on the
Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
EXHIBIT B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of Advances made under this SECTION 2.1 to Borrower's deposit
account.
Borrower promises to pay to the order of Bank, in lawful money of the
United States of America, the aggregate unpaid principal amount of all Advances
made by Bank to Borrower hereunder. Borrower shall also pay interest on the
aggregate unpaid principal amount of such Advances at the rates and in
accordance with the terms hereof.
The Committed Revolving Line shall terminate on the Revolving Maturity
Date, at which time all Advances under this SECTION 2.1 and other amounts due
under this Agreement (except as otherwise expressly specified herein) shall be
immediately due and payable.
6.
<PAGE> 8
2.1.1 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit for the
account of Borrower in an aggregate face amount not to exceed (i) the lesser of
the Committed Revolving Line or the Borrowing Base minus (ii) the then
outstanding principal balance of the Advances provided that the face amount of
outstanding Letters of Credit (including drawn but unreimbursed Letters of
Credit) shall not in any case exceed Four Million Dollars ($4,000,000). Each
such letter of credit shall have an expiry date no later than ninety (90) days
after the Revolving Maturity Date provided that Borrower's letter of credit
reimbursement obligation shall be secured by cash on terms acceptable to Bank at
any time after the Revolving Maturity Date if the term of this Agreement is not
extended by Bank. All such letters of credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject to the terms and
conditions of Bank's form of application and letter of credit agreement.
(b) The Obligation of Borrower to immediately
reimburse Bank for drawings made under Letters of Credit shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement and such Letters of Credit, under all
circumstances whatsoever. Borrower shall indemnify, defend and hold Bank
harmless from any loss, cost, expense or liability, including, without
limitation, reasonable attorneys' fees, arising out of or in connection with any
letters of credit.
2.1.2 LETTER OF CREDIT REIMBURSEMENT; RESERVE.
(a) Borrower may request that Bank issue a letter of
credit payable in a currency other than United States Dollars. If a demand for
payment is made under any such letter of credit, Bank shall treat such demand as
an advance to Borrower of the equivalent of the amount thereof (plus cable
charges) in United States currency at the then prevailing rate of exchange in
San Francisco, California, for sales of that other currency for cable transfer
to the country of which it is the currency.
(b) Upon the issuance of any letter of credit payable
in a currency other than United States Dollars, Bank shall create a reserve
under the Committed Revolving Line for letters of credit against fluctuations in
currency exchange rates, in an amount equal to twenty percent (20%) of the face
amount of such letter of credit. The amount of such reserve may be amended by
Bank from time to time to account for fluctuations in the exchange rate. The
availability of funds under the Committed Revolving Line shall be reduced by the
amount of such reserve for so long as such letter of credit remains outstanding.
2.1.3 EQUIPMENT ADVANCES.
(a) At any time from the date hereof through February
19, 1997 (the "EQUIPMENT AVAILABILITY END DATE"), Borrower may from time to time
request advances (each an "Equipment Advance" and collectively, the "Equipment
Advances") from Bank in an aggregate amount not to exceed the Committed
Equipment Line. To evidence the Equipment Advance or Equipment Advances,
Borrower shall deliver to Bank, at the time of each Equipment Advance request,
an invoice for the equipment to be purchased. The Equipment Advances shall be
used only to purchase equipment, software, and leaseholds and shall not exceed
One Hundred Percent (100%) of the invoice amount of such equipment approved from
time to time by Bank, excluding taxes, shipping, warranty charges, freight
discounts and installation expense.
(b) Interest shall accrue from the date of each
Equipment Advance at the rate specified in Section in SECTION 2.3.1(b), and
shall be payable monthly for each month through the month in which the Equipment
Availability End Date falls.
(c) When Borrower desires to obtain an Equipment
Advance, Borrower shall notify Bank (which notice shall be irrevocable) by
facsimile transmission to be received no later than 3:00 p.m. Pacific time one
(1) Business Day before the day on which the Equipment Advance is to be made.
Such notice shall be substantially in the form of EXHIBIT B. The notice shall be
signed by a Responsible Officer and include a copy of the invoice for the
Equipment to be financed.
7.
<PAGE> 9
2.2 OVERADVANCES. If, at any time or for any reason, the amount of
Obligations owed by Borrower exceeds the lesser of (i) the Committed Revolving
Line or (ii) the Borrowing Base, Borrower shall immediately pay to Bank, in
cash, the amount of such excess.
2.3. INTEREST RATES, PAYMENTS, AND CALCULATIONS.
2.3.1 INTEREST RATE. The interest rate on all Advances shall
be applied as follows:
(a) Any Advances under the Committed Revolving Line shall bear
interest, on the average Daily Balance, at a rate equal to one-half of one
(0.50) percentage point above the Prime Rate.
(b) Any Advances under the Committed Equipment Line shall bear
interest, on the average Daily Balance, at a rate equal to one and one-half
(1.50) percentage points above the Prime Rate.
2.3.2 DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence of an Event of Default, at a rate equal to five (5)
percentage points above the interest rate applicable immediately prior to the
occurrence of the Event of Default.
2.3.3 PAYMENTS. Interest hereunder shall be due and payable on
the Payment Date of each month during the term hereof. Borrower hereby
authorizes Bank to debit any accounts with Bank, including, without limitation,
Account Number __________ for payments of principal and interest due on the
Obligations and any other amounts owing by Borrower to Bank. Bank will notify
Borrower of all debits which Bank makes against Borrower's accounts. Any such
debits against Borrower's accounts in no way shall be deemed a set-off. Any
interest not paid when due shall be compounded by becoming a part of the
Obligations, and such interest shall thereafter accrue interest at the rate then
applicable hereunder.
2.3.4 COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of Default,
Bank shall credit a wire transfer of funds, check or other item of payment to
such deposit account or Obligation as Borrower specifies. After the occurrence
of an Event of Default, the receipt by Bank of any wire transfer of funds,
check, or other item of payment shall be immediately applied to conditionally
reduce Obligations, but shall not be considered a payment on account unless such
payment is of immediately available federal funds or unless and until such check
or other item of payment is honored when presented for payment. Notwithstanding
anything to the contrary contained herein, any wire transfer or payment received
by Bank after 12:00 noon Pacific time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of such
extension.
2.5 FEES. Borrower shall pay to Bank the following:
2.5.1 FACILITY FEE. A Facility Fee equal to Twenty Thousand
Dollars ($20,000) for the Committed Revolving Line and a Facility Fee equal to
Ten Thousand Dollars ($10,000) for the Committed Equipment Line, for a total
Facility Fee of Thirty Thousand Dollars ($30,000) which fee shall be due on the
Closing Date and shall be fully earned and non-refundable;
2.5.2 FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents;
8.
<PAGE> 10
2.5.3 BANK EXPENSES. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses.
2.6 ADDITIONAL COSTS. In case any law, regulation, treaty or official
directive or the interpretation or application thereof by any court or any
governmental authority charged with the administration thereof or the compliance
with any guideline or request of any central bank or other governmental
authority (whether or not having the force of law):
2.6.1 subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
2.6.2 imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
2.6.3 imposes upon Bank any other condition with respect to
its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans, Bank shall notify Borrower thereof. Borrower agrees to pay to Bank
the amount of such increase in cost, reduction in income or additional expense
as and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 TERM. Except as otherwise set forth herein, this Agreement shall
become effective on the Closing Date and, subject to SECTION 12.7, shall
continue in full force and effect for a term ending on the later of the
Revolving Maturity Date or the Equipment Maturity Date. Notwithstanding the
foregoing, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the occurrence
and during the continuance of an Event of Default. Notwithstanding termination,
Bank's Lien on the Collateral shall remain in effect for so long as any
Obligations are outstanding.
SECTION 3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCE. The obligation of Bank to
make the initial Advances under the Committed Revolving Line and the Committed
Equipment Line is subject to the condition precedent that Bank shall have
received, in form and substance satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) financing statements (Forms UCC-1);
(d) insurance certificate;
(e) payment of the fees and Bank Expenses then due specified
in SECTION 2.5 hereof;
(f) an audit of Borrower,s accounts receivable with results
satisfactory to the Bank is required for initial Advances under the Committed
Revolving Line only;
9.
<PAGE> 11
(g) an equity infusion in the amount of at least Eight Million
Dollars ($8,000,000) is required for initial Advances under the Committed
Equipment Line only; and
(h) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of Bank to make
each Advance, including the initial Advance, is further subject to the following
conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in SECTION 2.1; and
(b) the representations and warranties contained in SECTION 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Advance as though made at
and as of each such date, and no Event of Default shall have occurred and be
continuing, or would result from such Advance. The making of each Advance shall
be deemed to be a representation and warranty by Borrower on the date of such
Advance as to the accuracy of the facts referred to in this SECTION 3.2(b).
SECTION 4 CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to Bank a
continuing security interest in all presently existing and hereafter acquired or
arising Collateral in order to secure prompt repayment of any and all
Obligations and in order to secure prompt performance by Borrower of each of its
covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Borrower acknowledges that Bank may place a "hold" on any Deposit Account
pledged as Collateral to secure the Obligations.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall from
time to time execute and deliver to Bank, at the request of Bank, all Negotiable
Collateral, all financing statements and other documents that Bank may
reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees, or
agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
4.4 SINGLE LOAN. All of the Obligations of Borrower to Bank arising
under or in connection with this Agreement or any of the Loan Documents, shall
constitute one general obligation of Borrower and shall be secured by all of the
Collateral.
SECTION 5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary is
a corporation duly existing and in good standing under the laws of its state of
incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified.
10.
<PAGE> 12
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations. The property giving rise to such Eligible Accounts has
been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material respects
of good and marketable quality, free from all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in SECTION 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 SOLVENCY. Borrower is solvent and able to pay its debts (including
trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met the
minimum funding requirements of ERISA with respect to any employee benefit plans
subject to ERISA. No event has occurred resulting from Borrower's failure to
comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations G, T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any Subsidiary's
properties or assets has ever been used by Borrower or any Subsidiary or, to the
best of Borrower's knowledge, by previous owners or operators, in the disposal
of, or to produce, store, handle, treat, release, or transport, any hazardous
waste or hazardous substance other than in accordance with applicable law; to
the best of Borrower's knowledge, none of Borrower's properties or assets has
ever been designated or identified in any manner pursuant to any
11.
<PAGE> 13
environmental protection statute as a hazardous waste or hazardous substance
disposal site, or a candidate for closure pursuant to any environmental
protection statute; no lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned by
Borrower or any Subsidiary; and neither Borrower nor any Subsidiary has received
a summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal, state or other governmental agency concerning any
action or omission by Borrower or any Subsidiary resulting in the releasing, or
otherwise disposing of hazardous waste or hazardous substances into the
environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes reflected therein.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained all
consents, approvals and authorizations of, made all declarations or filings
with, and given all notices to, all governmental authorities that are necessary
for the continued operation of Borrower's business as currently conducted.
5.15 FULL DISCLOSURE. No representation, warranty or other statement
made by Borrower in any certificate or written statement furnished to Bank
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements contained in such certificates or
statements not misleading.
SECTION 6 AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall cause each
Subsidiary to meet, the minimum funding requirements of ERISA with respect to
any employee benefit plans subject to ERISA. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall deliver
to Bank: (a) as soon as available, but in any event within thirty (30) days
after the end of each month when there is an Outstanding Balance, a company
prepared consolidated balance sheet and income statement covering Borrower's
consolidated operations during such period, certified by an officer of Borrower
reasonably acceptable to Bank; (b) as soon as available, but in any event within
thirty (30) days after the end of each quarter when there is NOT an Outstanding
Balance, a company prepared consolidated balance sheet and income statement
covering Borrower's consolidated operations during such period, certified by an
officer of Borrower reasonably acceptable to Bank, (c) as soon as available, but
in any event within ninety (90) days after the end of Borrower's fiscal year,
audited consolidated financial statements of Borrower prepared in accordance
with GAAP, consistently applied, together with an unqualified opinion on such
financial statements of an independent certified public accounting firm
reasonably acceptable to Bank; (d) within five (5) days of filing, copies of all
statements, reports and notices sent or made available generally by Borrower to
its security holders or to any holders of Subordinated Debt and all reports on
Form 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission; (e)
promptly upon receipt of notice thereof; a report of any legal actions pending
or threatened against Borrower or any Subsidiary that could
12.
<PAGE> 14
result in damages or costs to Borrower or any Subsidiary of One Hundred Thousand
Dollars ($100,000) or more; and (f) such budgets, sales projections, operating
plans or other financial information as Bank may reasonably request from time to
time.
When there is an Outstanding Balance under the Committed Revolving
Line, within fifteen (15) days after the last day of each month, or prior to the
issuance of a Letter of Credit secured by Accounts Receivable, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
substantially the form of Exhibit C hereto, together with aged listings of
accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of EXHIBIT D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, provided that such audits will be conducted no
more often than every six (6) months, if there is an Outstanding Balance under
the Committed Revolving Line, unless an Event of Default has occurred and is
continuing.
Bank shall also have a right to audit Borrower's Accounts at Borrower's
expense within thirty (30) days of the issuance of a letter of credit which is
not secured by Cash or Cash Equivalents.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in good and
marketable condition, free from all material defects. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement. Borrower shall
promptly notify Bank of all returns and recoveries and of all disputes and
claims, where the return, recovery, dispute or claim involves more than Fifty
Thousand Dollars ($50,000).
6.5 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 INSURANCE.
6.6.1 Borrower, at its expense, shall keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as ordinarily insured against by other
owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
6.6.2 All such policies of insurance shall be in such form, with such
companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Borrower
shall deliver to Bank certified copies of such policies of insurance and
evidence of the payments of all premiums therefor.
13.
<PAGE> 15
All proceeds payable under any such policy shall, at the option of Bank, be
payable to Bank to be applied on account of the Obligations.
6.7 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.8 QUICK RATIO. Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities of at least 1.5
to 1.0.
6.9 DEBT-NET WORTH RATIO. Borrower shall maintain, as of the last day
of each calendar month, a ratio of Total Liabilities to Tangible Net Worth plus
Subordinated Debt of not more than 2.0 to 1.0.
6.10 TANGIBLE NET WORTH. Borrower shall maintain, as of the last day of
each calendar month, a Tangible Net Worth of not less than Three Million Seven
Hundred and Fifty Thousand Dollars ($3,750,000).
6.11 PROFITABILITY. Borrower may suffer a loss not to exceed (i) a loss
of Four Million Four Hundred Thousand Dollars ($4,400,000) for the second
quarter of 1996, and (ii) a loss of Two Million Six Hundred Thousand Dollars
($2,600,000) for the third quarter of 1996. Borrower shall be profitable for
each fiscal quarter beginning the fourth quarter of 1996. Borrower shall be
profitable for each fiscal year beginning the fiscal year 1997.
6.12 MINIMUM LIQUIDITY. Through the Equipment Availability End Date,
Borrower shall maintain, as of the last calendar day of each month, a ratio of
Liquid Assets to the Committed Equipment Line of not less than 2.0 to 1.0.
"LIQUID ASSETS" means unrestricted Cash and Cash Equivalents plus either (i)
fifty percent (50%) of net accounts receivable or (ii) net available under the
Committed Revolving Line. Beginning January 23, 1997, Borrower shall maintain,
as of the last calendar day of each month, a ratio of Liquid Assets to the
Outstanding Balance under the Committed Equipment Line of not less than 2.0 to
1.0.
6.13 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further action
as may reasonably be requested by Bank to effect the purposes of this Agreement.
SECTION 7 NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make any Advances, Borrower will
not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than: (i) Transfers of Inventory
in the ordinary course of business, (ii) Transfers of non-exclusive licenses and
similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment; or (iv) the
sale or other disposition of that portion of the business of Borrower
encompassing a software development team located in Boston, Massachusetts and
referred to as "Advanced Game Technology."
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of its
Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership,
management or directors. Borrower will not, without thirty (30) days prior
written notification to Bank, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person.
14.
<PAGE> 16
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution or
payment on account of or in redemption, retirement or purchase of any capital
stock.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or
permit to exist any material transaction with any Affiliate of Borrower except
for transactions that are in the ordinary course of Borrower's business, upon
fair and reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a nonaffiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any Subordinated
Debt, or permit any of its Subsidiaries to make any such payment, except in
compliance with the terms of such Subordinated Debt, or amend any provision
contained in any documentation relating to the Subordinated Debt without Bank's
prior written consent.
7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in SECTION 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
SECTION 8 EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any of the
Obligations.
8.2 COVENANT DEFAULT.
8.2.1 If Borrower fails to perform any obligation under
Sections 6.7, 6.8, 6.9, 6.10, 6.11, or 6.12 or violates any of the covenants
contained in Article 7 of this Agreement, or
8.2.2 If Borrower fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term,
15.
<PAGE> 17
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives notice thereof or
any officer of Borrower becomes aware thereof; provided, however, that if the
default cannot by its nature be cured within the ten (10) day period or cannot
after diligent attempts by Borrower be cured within such ten (10) day period,
and such default is likely to be cured within a reasonable time, then Borrower
shall have an additional reasonable period (which shall not in any case exceed
thirty (30) days) to attempt to cure such default, and within such reasonable
time period the failure to have cured such default shall not be deemed an Event
of Default (provided that no Advances will be required to be made during such
cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse change
in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral:
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to which
Borrower is a party with a third party or parties resulting in a right by such
third party or parties, whether or not exercised, to accelerate the maturity of
any Indebtedness in an amount in excess of One Hundred Thousand Dollars
($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of money in
an amount, individually or in the aggregate, of at least Fifty Thousand Dollars
($50,000) shall be rendered against Borrower and shall remain unsatisfied and
unstayed for a period of ten (10) days (provided that no Advances will be made
prior to the satisfaction or stay of such judgment); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or material
misstatement exists now or hereafter in any warranty or representation set forth
herein or in any certificate delivered to Bank by any Responsible Officer
pursuant to this Agreement or to induce Bank to enter into this Agreement or any
other Loan Document.
SECTION 9 BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the continuance
of an Event of Default, Bank may, at its election, without notice of its
election and without demand, do any one or more of the following, all of which
are authorized by Borrower:
16.
<PAGE> 18
9.1.1 Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
SECTION 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
9.1.2 Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
9.1.3 Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
9.1.4 Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
9.1.5 Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
9.1.6 Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this SECTION 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this SECTION 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
9.1.7 Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable;
9.1.8 Bank may credit bid and purchase at any public sale; and
9.1.9 Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and during
the continuance of an Event of Default, Borrower hereby irrevocably appoints
Bank (and any of Bank's designated officers, or employees) as Borrower's true
and lawful attorney to: (a) send requests for verification of Accounts or notify
account debtors of Bank's security interest in the Accounts; (b) endorse
Borrower's name on any checks or other forms of payment or security that may
come into Bank's possession; (c) sign Borrower's name on any invoice or bill of
lading relating to any Account, drafts against account debtors, schedules and
assignments of Accounts, verifications of Accounts, and notices to account
debtors; (d) make, settle, and adjust all claims under and decisions with
respect to Borrower's policies of insurance; and (e) settle and adjust disputes
and claims respecting the accounts directly with account debtors, for amounts
and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment
17.
<PAGE> 19
of Bank as Borrower's attorney in fact, and each and every one of Bank's rights
and powers, being coupled with an interest, is irrevocable until all of the
Obligations have been fully repaid and performed and Bank's obligation to
provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. At any time from the date of this Agreement, Bank
may notify any Person owing funds to Borrower of Bank's security interest in
such funds and verify the amount of such Account. Borrower shall collect all
amounts owing to Borrower for Bank, receive in trust all payments as Bank's
trustee, and immediately deliver such payments to Bank in their original form as
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish any
required proof of payment due to third persons or entities, as required under
the terms of this Agreement, then Bank may do any or all of the following: (a)
make payment of the same or any part thereof; (b) set up such reserves under the
Committed Revolving Line as Bank deems necessary to protect Bank from the
exposure created by such failure; or (c) obtain and maintain insurance policies
of the type discussed in SECTION 6.6 of this Agreement, and take any action with
respect to such policies as Bank deems prudent. Any amounts so paid or deposited
by Bank shall constitute Bank Expenses, shall be immediately due and payable,
and shall bear interest at the then applicable rate hereinabove provided, and
shall be secured by the Collateral. Any payments made by Bank shall not
constitute an agreement by Bank to make similar payments in the future or a
waiver by Bank of any Event of Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
reasonable banking practices, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this Agreement,
the Loan Documents, and all other agreements shall be cumulative. Bank shall
have all other rights and remedies not inconsistent herewith as provided under
the Code, by law, or in equity. No exercise by Bank of one right or remedy shall
be deemed an election, and no waiver by Bank of any Event of Default on
Borrower's part shall be deemed a continuing waiver. No delay by Bank shall
constitute a waiver, election, or acquiescence by it. No waiver by Bank shall be
effective unless made in a written document signed on behalf of Bank and then
shall be effective only in the specific instance and for the specific purpose
for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of protest,
notice of default or dishonor, notice of payment and nonpayment, notice of any
default, nonpayment at maturity, release, compromise, settlement, extension, or
renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Bank on which Borrower may in any way be liable.
SECTION 10 NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
delivery service, certified mail, postage prepaid, return receipt requested, or
by telefacsimile to Borrower or to Bank, as the case may be, at its addresses
set forth below:
If to Borrower 3Dfx Interactive, Inc.
415 Clyde Avenue, Suite 105
Mountain View, CA 94043
Attn: Gary Martin
Fax: (415) 934-2424
18.
<PAGE> 20
If to Bank Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Legal Department
Fax: 408/496-2419
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
SECTION 11 CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance with,
the internal laws of the State of California, without regard to principles of
conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
SECTION 12 GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure to the
benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses; or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys' fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of all
obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement shall
be severable from every other provision of this Agreement for the purpose of
determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject maw of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
19.
<PAGE> 21
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in SECTION 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run,
provided that so long as the obligations set forth in the first sentence of this
SECTION 12.7 have been satisfied, and Bank has no commitment to make any
Advances or to make any other loans to Borrower, Bank shall release all security
interests granted hereunder and redeliver all Collateral held by it in
accordance with applicable law.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Agreement
except that disclosure of such information may be made (i) to the subsidiaries
or affiliates of Bank in connection with their present or prospective business
relations with Borrower, (ii) to prospective transferees or purchasers of any
interest in the Loans, provided that they have entered into a comparable
confidentiality agreement in favor of Borrower and have delivered a copy to
Borrower. MD as required by law, regulations, rule or order, subpoena, judicial
order or similar order and (iv) as may be required in connection with the
examination, audit or similar investigation of Bank. Confidential information
hereunder shall not include information that either: (a) is in the public domain
or in the knowledge or possession of Bank when disclosed to Bank, or becomes
part of the public domain after disclosure to Bank through no fault of Bank; or
(b) is disclosed to Bank by a third party, provided Bank does not have actual
knowledge that such third party is prohibited from disclosing such information.
20.
<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
SILICON VALLEY BANK 3DFX INTERACTIVE, INC.
By: [SIG] By: Gary Martin
-------------------------------- -----------------------------------
Title: VICE PRESIDENT Title: VP FINANCE
21.
<PAGE> 23
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) Silicon Valley Bank Certificate of Deposit, together with all
renewals and proceeds of the foregoing.
(g) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether Published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(h) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
1.
<PAGE> 24
EXHIBIT C
BORROWING BASE CERTIFICATE
Borrower: 3Dfx Interactive, Inc.
Bank: Silicon Valley Bank
Commitment Amount: $4,000,000
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
5. Balance of 50% over 90 day accounts $
6. Concentration Limits, including one 35% concen. $
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (#3 minus #13) $
15. LOAN VALUE OF ACCOUNTS (75% of #14) $
CASH AND CASH EQUIVALENTS
16. Cash Value as of $
17. LOAN VALUE OF CASH (100% of #16) $
BALANCES
18. Maximum Loan Amount $4,000.000
19. Total Funds Available Lesser of #18 or (#15 plus #17) $
20. Present balance owing on Line of Credit $
21. Outstanding under Sublimits ( ) $
22. RESERVE POSITION (#19 minus #20 and #21) $
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
- ----------------------------------
BANK USE ONLY
By: Rec'd By:
-------------------------------- ------------------------
Authorized Signer Auth. Signer
Date:
----------------------------
Verified:
------------------------
Auth. Signer
Date:
----------------------------
1.
<PAGE> 25
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: 3DFX INTERACTIVE, INC.
The undersigned authorized officer of 3Dfx Interactive. Inc. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES"
COLUMN.
<TABLE>
<CAPTION>
REPORTING COVANENT REQUIRED COMPLIES
- ------------------ -------- --------
<S> <C> <C>
Monthly financial statements* Monthly within 30 days Yes No
Quarterly financial statements* Quarterly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings** Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
</TABLE>
* Due monthly when there is an Outstanding Balance, as defined in the Loan
Agreement, otherwise due quarterly.
** Also due prior to the issuance of a Letter of Credit secured by Accounts
Receivable.
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.5:l.0 __:1.0 Yes No
Minimum Tangible Net Worth $3,750,000 $_____ Yes No
Maximum Debt/Tangible Net Worth 2.0:1.0 __:1.0 Yes No
Profitability: Maximum Loss 2Q96 ($4,400,000) Yes No
Maximum Loss 3Q96 ($2,600,000)
Quarterly, begin 4Q96 Profitable $_____
Annually, begin FY97 Profitable $_____
Liquidity***: 2.0:1.0 __:1.0 Yes No
***2x Commitment until 2/19/97, then 2x Outstanding.
Comments Regarding Exceptions: See Attached.
Sincerely, BANK USE ONLY
- ------------------------------- Received By:
SIGNATURE ---------------------
AUTHORIZED SIGNER
TITLE Date:
----------------------------
DATE Verified:
------------------------
AUTHORIZED SIGNER
Date:
----------------------------
1.
<PAGE> 26
AGREEMENT TO PROVIDE INSURANCE
Grantor: 3Dfx Interactive, Inc. Bank: Silicon Valley Bank
INSURANCE REQUIREMENTS. 3Dfx Interactive, Inc. ("Grantor") understands
that insurance coverage is required in connection with the extending of a loan
or the providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that coverage
will not be canceled or diminished without a minimum of
twenty (20) days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of August 19, 1996, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance
agent or company) all information Bank deems appropriate, whether regarding
the Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING. READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AUGUST 19,
1996.
GRANTOR:
/s/ Gary Martin
- --------------------------
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
AGENT'S NAME:
INSURANCE COMPANY:
POLICY NUMBER:
EFFECTIVE DATES:
COMMENTS:
1.
<PAGE> 27
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: 3Dfx Interactive, Inc. Bank: Silicon Valley Bank
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $4,000,000 and an Equipment Line of Credit of a principal amount up
to $2,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of the Revolving Line is: Short Term
Working Capital. The specific purpose of the Revolving Line is: Purchase of
Equipment.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Line
<S> <C>
Amount paid to Borrower directly: $
Undisbursed Funds $
Principal $
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $
$ Loan Fee
$ Accounts Receivables Audit
Other Charges Paid in Cash: $
$ UCC Search Fees
$ UCC Filing Fees
$ Patent Filing Fees
$ Trademark Filing Fees
$ Copyright Filing Fees
$ Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment. At any time and for any reason,
Borrower or Bank may voluntarily terminate Automatic Payments.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF AUGUST 19, 1996.
BORROWER:
/s/ Gary Martin
- -----------------------------
Authorized Officer
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C>
This STATEMENT is presented for filing pursuant to the California Uniform Commercial Code UCC-2
- ------------------------------------------------------------------------------------------------------------------------------------
FILE NO. OF ORIG. FINANCING STATEMENT 1A. DATE OF FILING OF ORIG. FINANCING STATEMENT 1B. DATE OF ORIG. FINANCING STATEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
DEBTOR (LAST NAME FIRST)
3Dfx Interactive, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MAILING ADDRESS 2C. CITY, STATE
415 Clyde Avenue, Suite 105 Mountain View, CA
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL DEBTOR (IF ANY) (LAST NAME FIRST)
- ------------------------------------------------------------------------------------------------------------------------------------
MAILING ADDRESS 3C. CITY, STATE
- ------------------------------------------------------------------------------------------------------------------------------------
SECURED PARTY
NAME SILICON VALLEY BANK
MAILING ADDRESS
3003 TASMAN DRIVE
CITY SANTA CLARA STATE CA ZIP CODE 95054
- ------------------------------------------------------------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY (IF ANY)
NAME
MAILING ADDRESS
CITY STATE ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------
1C. PLACE OF FILING ORIG. FINANCING STATEMENT
Secretary of State
- ---------------------------------------------
2A. SOCIAL SECURITY NO./FEDERAL TAX NO.
- ---------------------------------------------
2D. ZIP CODE
94043
- ---------------------------------------------
3A SOCIAL SECURITY NO. FEDERAL TAX NO.
- ---------------------------------------------
3D. ZIP CODE
- ---------------------------------------------
4A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR
BANK TRANSIT AND A.B.A. NO.
- ---------------------------------------------
5A. SOCIAL SECURITY NO., FEDERAL TAX NO. OR
BANK TRANSIT AND A.B.A. NO.
- ---------------------------------------------
A [ ] CONTINUATION - The original Financing Statement between the foregoing Debtor and Secured Party bearing the file
number and date shown above is continued. If collateral is crops or timber, check here [ ] and insert description
of real property on which growing or to be grown in Item 7 below.
---------------------------------------------------------------------------------------------------------------------
B [ ] RELEASE - From the collateral described in the Financing Statement bearing the file number shown above, the Secured
Party releases the collateral decribed in Item 7 below.
---------------------------------------------------------------------------------------------------------------------
C [ ] ASSISNGMENT - The Secured Party certifies that the Secured Party has assigned to the Assignee above named, all the
Secured Party's rights under the Financing Statement bearing the file number shown above in the collateral described
in Item 7 below.
---------------------------------------------------------------------------------------------------------------------
D [ ] TERMINATION - The Secured Party certifies that the Secured Party no longer claims a security interest under the
Financing Statement bearing the file number shown above.
---------------------------------------------------------------------------------------------------------------------
E [X] AMENDMENT - The Financing Statement bearing the file number shown above is amended as set forth in Item 7 below.
(Signature of Debtor required on all amendments.)
---------------------------------------------------------------------------------------------------------------------
F [ ] OTHER
- ------------------------------------------------------------------------------------------------------------------------------------
This serves to amend the address of Debtor shown in line 2B. The new address is 4435 Fortran Drive, San Jose, CA 95134.
- ------------------------------------------------------------------------------------------------------------------------------------
(Date) 9-6 19 96 9. This Space for Use of Filing
3Dfx Interactive, Inc. Officer
By: /s/ Gary Martin VP Finance (Date, Time, Filing Office)
----------------------------------
SIGNATURE(S) OF DEBTOR(S) TITLE
----------------------------------
Silicon Valley Bank
By:
---------------------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(IES) (TITLE)
- ---------------------------------------------------------------------------------------------
Return Copy to
NAME Silicon Valley Bank
ADDRESS Attn: Loan Services
30003 Tasman Drive
CITY AND STATE Santa Clara, CA 95054
CODE
1
2
3
4
5
6
7
8
9
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 29
CORPORATE BORROWING RESOLUTION
BORROWER: 3Dfx Interactive, Inc. BANK: Silicon Valley Bank
415 Clyde Avenue, Suite 105
Mountain View, CA 94043
I THE UNDERSIGNED, hereby certify that 3Dfx Interactive, Inc. ("Borrower"), is
duly organized, validly existing and in good standing as a corporation under
and by virtue of the laws of the State of California, and that I am its duly
appointed and acting Secretary/Assistant Secretary and the Borrower's name
shown above is the complete and correct name of Borrower.
I FURTHER CERTIFY that at a meeting of the Board of Directors of Borrower (or
by other duly authorized company action in lieu of a meeting), duly called and
held, at which a quorum were present and voting, the following resolutions were
adopted:
BE IT RESOLVED, that ANY ONE (1) of the following officers, employees or agents
of Borrower, whose actual signatures are shown below:
NAME TITLE SIGNATURE
Gordon Campbell Chief Executive Officer /s/ Gordon Campbell
Gary Martin Chief Financial Officer /s/ Gary Martin
may enter into any agreements of any nature with Bank, and those agreements
will bind Borrower, and acting for and on behalf of Borrower and as its act and
deed be, and he or she hereby is, authorized and empowered in the name of
Borrower:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank, on such
terms as may be agreed upon between the officers, employees, or agents and
Bank, such sum or sums of money as in their judgment should be borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in which Borrower may have an interest, and
either to receive cash for the same or to cause such proceeds to be
credited to the account of Borrower with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
1.
<PAGE> 30
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as
in the judgment of the undersigned party or parties is authorized.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances
thereunder, and in ail cases, to do and perform such other acts and
things, to pay any and all fees and costs, and to execute and deliver
such other documents and agreements, including agreements waiving the
right to a trial by jury, as they may in their discretion deem
reasonably necessary or proper in order to carry into effect the
provisions of these resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these resolutions shall remain in full force and
effect and Bank may rely on these resolutions. Any such notice shall not affect
any of Borrower's agreements or commitments in effect at the time notice is
given.
I FURTHER CERTIFY that the persons named above and the undersigned are duly
elected, appointed, or employed by or for Borrower, as the case may be, and
occupy the positions set opposite their names and the signatures set forth
opposite their names are their genuine signatures; that the foregoing
resolutions now stand of record on the books of Borrower, and that the
resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever; and that the copies of Borrower's Restated Certificate
of Incorporation and Bylaws previously delivered to Bank are true and correct
and in full force and effect as of the date hereof without modification or
amendment.
IN WITNESS WHEREOF, I have hereunto set my hand on August 19, 1996.
/s/ Gary Martin
-----------------------------
Secretary/Assistant Secretary
2.
<PAGE> 1
EXHIBIT 10.12.2
LOAN MODIFICATION AGREEMENT
This Loan Modification Agreement is entered into as of August 18, 1997,
by and between 3Dfx Interactive, Inc. ("Borrower") whose address is 4435 Fortran
Drive, San Jose, CA 95134, and Silicon Valley Bank ("Bank") whose address is
3003 Tasman Drive, Santa Clara, CA 95054.
1. DESCRIPTION OF EXISTING INDEBTEDNESS: Among other indebtedness which may
be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to, among
other documents, a Loan and Security Agreement, dated August 19, 1996, as may be
amended from time to time (the "Loan Agreement"). The Loan Agreement provided
for, among other things, a Committed Revolving Line in the original principal
amount of Four Million and 00/100 Dollars ($4,000,000.00) (the "Revolving
Facility"). Defined terms used but not otherwise defined herein shall have the
same meanings as in the Loan Agreement.
Hereinafter, all indebtedness owing by Borrower to Bank shall be referred to as
the "Indebtedness."
2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the indebtedness
is secured by the Collateral as described in the Loan Agreement.
Hereinafter, the above-described security documents and guaranties, together
with all other documents securing repayment of the Indebtedness shall be
referred to as the "Security Documents". Hereinafter, the Security Documents,
together with all other documents evidencing or securing the Indebtedness shall
be referred to as the "Existing Loan Documents".
3. DESCRIPTION OF CHANGE IN TERMS
A. Modification(s) to Loan Agreement
1. The defined term "Revolving Maturity Date" is hereby amended
to mean November 18, 1997.
2. Notwithstanding anything to the contrary contained in Section
6.11 entitled "Profitability", Bank has agreed with Borrower
not to test the Profitability covenant for the quarter ending
September 30, 1997.
B. Waiver of Default
1. Bank hereby waives Borrower's existing default under the Loan
Agreement by virtue of Borrower's failure to comply with the
Profitability covenant as of the quarters ended March 31,
1997 and June 30, 1997. Bank's waiver of this covenant shall
apply only to the foregoing period.
Bank's agreement to waive the above-described default (1) in
no way shall be deemed an agreement by the Bank to waive
Borrower's compliance with the above-described covenant as of
all other dates and (2) shall not limit or impair the Bank's
right to demand strict performance of this covenant as of all
other dates and (3) shall not limit or impair the Bank's
right to demand strict performance of all other covenants as
of any date.
4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended
wherever necessary to reflect the changes described above.
5. NO DEFENSES OF BORROWER. Borrower (and each guarantor and pledgor
signing below) agrees that it has no defenses against the obligations to pay any
amounts under the Indebtedness.
<PAGE> 2
6. CONTINUING VALIDITY. Borrower (and each guarantor and pledgor signing
below) understands and agrees that in modifying the existing Indebtedness, Bank
is relying upon Borrower's representations, warranties, and agreements, as set
forth in the Existing Loan Documents. Except as expressly modified pursuant to
this Loan Modification Agreement, the terms of the Existing Loan Documents
remain unchanged and in full force and effect. Bank's agreement to modifications
to the existing Indebtedness pursuant to this Loan Modification Agreement in no
way shall obligate Bank to make any future modifications to the Indebtedness.
Nothing in this Loan Modification Agreement shall constitute a satisfaction of
the Indebtedness. It is the intention of Bank and Borrower to retain as liable
parties all makers and endorsers of Existing Loan Documents, unless the party is
expressly released by Bank in writing. No maker, endorser, or guarantor will be
released by virtue of this Loan Modification Agreement. The terms of this
paragraph apply not only to this Loan Modification Agreement, but also to all
subsequent loan modification agreements.
This Loan Modification Agreement is executed as of the date first written
above.
BORROWER: BANK:
3Dfx INTERACTIVE, INC. SILICON VALLEY BANK
By: /s/ Gary Martin By: /s/ Michael J. Rose
--------------------------- ----------------------
Name: Gary Martin Name: Michael J. Rose
------------------------- --------------------
Title: VP Administration & CFO Title: Vice President
------------------------ -------------------
<PAGE> 1
EXHIBITS 10.12.3
SECOND AMENDMENT AND LIMITED WAIVER TO
LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT AND LIMITED WAIVER TO LOAN AND SECURITY AGREEMENT
dated as of December 9, 1997 (the "Amendment"), is entered into by and among
3DFX INTERACTIVE, INC., a California corporation ("Borrower"), and SILICON
VALLEY BANK, ("Bank"). Capitalized terms used herein without definition shall
have the same meanings herein as given to them in the Loan Agreement (defined
below).
RECITALS
A. The Borrower and the Bank have entered into that certain Loan and
Security Agreement dated as of August 19, 1996 and amended by that certain Loan
Modification Agreement dated as of August 18, 1997 (as so amended, the "Loan
Agreement") pursuant to which the Bank has agreed to extend and make available
to the Borrower certain advances of money.
B. The Borrower desires that the Bank further amend and waive certain
terms under the Loan Agreement upon the terms and conditions more fully set
forth herein.
C. Subject to the representations and warranties of the Borrower herein
and upon the terms and conditions set forth in this Amendment, the Bank is
willing to so amend the Loan Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing Recitals and
intending to be legally bound, the parties hereto agree as follows:
SECTION 1. THE BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower
represents and warrants that, immediately before and immediately after giving
effect to this Amendment, no event shall have occurred and be continuing which
constitutes an Event of Default.
SECTION 2. AMENDMENTS TO THE LOAN AGREEMENT.
2.1 Section 1.1 of the Loan Agreement, "Definitions", is
hereby amended by replacing certain definitions and adding new definitions of
the following terms to read as follows:
"'ADVANCE' or 'ADVANCES' means an Advance under the Committed
Revolving Line, the Committed Equipment Line-A, or the
Committed Equipment Line-B."
"'COMMITTED EQUIPMENT LINE-B' means Three Million Dollars
($3,000,000)."
1.
<PAGE> 2
"'COMMITTED REVOLVING LINE' means Seven Million Dollars
($7,000,000)."
Subparagraph (i) of "ELIGIBLE ACCOUNTS" is hereby
deleted and replaced in its entirety as follows: "(I) Accounts
with respect to an account debtor, including Subsidiaries and
Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such
obligations exceed the aforementioned percentage, provided
however, (i) a thirty-five percent (35%) concentration limit
is allowed for Diamond Multimedia, (ii) a thirty-five percent
(35%) concentration limit is allowed for any single account
debtor during any one month, or (iii) as otherwise approved in
writing by Bank;"
"'EQUIPMENT LINE-B MATURITY DATE' means December 9, 2001."
"'EXCHANGE CONTRACT' has the meaning set forth in SECTION
2.1.3."
"'OUTSTANDING BALANCE' means any outstandings, including
Letters of Credit and Exchange Contracts, under the Committed
Equipment Line-A, the Committed Equipment Line-B, or the
Committed Revolving Line."
A new subparagraph (c) is hereby added to the
definition of Permitted Investments" as follows: "(C) Other
investments for the acquisition of assets, intellectual
property, or other products complementary to Borrower's
business in an aggregate amount not to exceed Five Million
Dollars ($5,000,000) during the term of this Agreement."
"'REVOLVING MATURITY DATE' means December 8, 1998."
2.2 The definitions of "COMMITTED EQUIPMENT LINE" and
"EQUIPMENT MATURITY DATE" under Section 1.1 of the Loan Agreement,
"Definitions", are hereby deleted and replaced in their entirety to read as
follows:
"'COMMITTED EQUIPMENT LINE-A' means Two Million Dollars
($2,000,000)."
"'EQUIPMENT LINE-A MATURITY DATE' means August 18, 1998."
All references in the Loan Agreement to "Committed Equipment Line" and the
"Equipment Maturity Date" shall be replaced with "Committed Equipment Line-A"
and "Equipment Line-A Maturity Date", respectively.
2.3 Section 2.1, "Advances", is hereby deleted and replaced in
its entirety as follows:
"2.1 ADVANCES. Subject to and upon the terms and
conditions of this Agreement, Bank agrees to make Advances to
Borrower in an aggregate amount not to exceed (i) the
Committed Revolving Line or the Borrowing Base, whichever
2.
<PAGE> 3
is less, minus (ii) the face amount of all outstanding Letters
of Credit (including drawn but unreimbursed Letters of Credit)
and minus (iii) the Foreign Exchange Reserve. For purposes of
this Agreement, "BORROWING BASE" shall mean an amount equal to
(i) eighty percent (80%) of Eligible Accounts, provided,
however, that such Borrowing Base shall only apply when
Outstanding Balances under the Committed Revolving Line exceed
Two Million Five Hundred Thousand Dollars ($2,500,000).
Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this SECTION 2.1 may be repaid and
reborrowed at any time during the term of this Agreement."
2.4 Section 2.1.1(a), "Letters of Credit", is hereby deleted
and replaced in its entirety as follows:
"(a) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters
of credit for the account of Borrower in an aggregate face
amount not to exceed (i) the lesser of the Committed Revolving
Line or the Borrowing Base minus (ii) the then outstanding
principal balance of the Advances minus (iii) the Foreign
Exchange Reserve, provided that the face amount of outstanding
Letters of Credit (including drawn but unreimbursed Letters of
Credit) shall not in any case exceed Seven Million Dollars
($7,000,000). Each such letter of credit shall have an expiry
date no later than ninety (90) days after the Revolving
Maturity Date provided that Borrower's letter of credit
reimbursement obligation shall be secured by cash on terms
acceptable to Bank at any time after the Revolving Maturity
Date if the term of this Agreement is not extended by Bank.
All such letters of credit shall be, in form and substance,
acceptable to Bank in its sole discretion and shall be subject
to the terms and conditions of Bank's form of application and
letter of credit agreement."
2.5 Section 2.1.2, "Equipment Advances" is hereby re-numbered
and renamed to Section 2.1.4, "Equipment Line-A Advances".
2.6 A new Section 2.1.3, "Foreign Exchange Contract; Foreign
Exchange Settlements", is hereby added in its entirety as follows:
"2.1.3 FOREIGN EXCHANGE CONTRACT; FOREIGN EXCHANGE
SETTLEMENTS.
(a) Subject to the terms of this Agreement, Borrower
may enter into foreign exchange contracts (the "Exchange
Contracts") not to exceed an aggregate amount of Seven Million
Dollars ($7,000,000) (the "Contract Limit"), pursuant to which
Bank shall sell to or purchase from Borrower foreign currency
on a spot or future basis. Borrower shall not request any
Exchange Contracts at any time it is out of compliance with
any of the provisions of this Agreement. All Exchange
Contracts must provide for delivery of settlement on or before
December 4, 1998. The amount available under the Committed
Revolving Line at any time shall be reduced by the following
amounts (the "Foreign Exchange Reserve") on any given
3.
<PAGE> 4
day (the "Determination Date"): (i) on all outstanding
Exchange Contracts on which delivery is to be effected or
settlement allowed more than two business days after the
Determination Date, 10% of the gross amount of the Exchange
Contracts; plus (ii) on all outstanding Exchange Contracts on
which delivery is to be effected or settlement allowed within
two business days after the Determination Date, 100% of the
gross amount of the Exchange Contracts.
(b) Bank may, in its discretion, terminate the
Exchange Contracts at any time (i) that an Event of Default
occurs or (ii) that there is no sufficient availability under
the Committed Revolving Line and Borrower does not have
available funds in its bank account to satisfy the Foreign
Exchange Reserve. If Bank terminates the Exchange Contracts,
and without limitation of any applicable indemnities, Borrower
agrees to reimburse Bank for any and all fees, costs and
expenses relating thereto or arising in connection therewith.
(c) Borrower shall not permit the total gross amount
of all Exchange Contracts on which delivery is to be effected
and settlement allowed in any two business day period to be
more than Seven Hundred Thousand Dollars ($700,000) (the
"Settlement Limit") nor shall Borrower permit the total gross
amount of all Exchange Contracts to which Borrower is a party,
outstanding at any one time, to exceed the Contract Limit.
Notwithstanding the above, however, the amount which may be
settled in any two (2) business day period may be increased
above the Settlement Limit up to, but in no event to exceed,
the amount of the Contract Limit under either of the following
circumstances:
(i) if there is sufficient availability
under the Committed Revolving Line in the amount of
the Foreign Exchange Reserve as of each Determination
Date, provided that Bank in advance shall reserve the
full amount of the Foreign Exchange Reserve against
the Committed Revolving Line; or
(ii) if there is insufficient availability
under the Committed Revolving Line, as to settlements
within any two (2) business day period, provided that
Bank, in its sole discretion, may: (A) verify good
funds overseas prior to crediting Borrower's deposit
account with Bank (in the case of Borrower's sale of
foreign currency); or (B) debit Borrower's deposit
account with Bank prior to delivering foreign
currency overseas (in the case of Borrower's purchase
of foreign currency).
(d) In the case of Borrower's purchase of foreign
currency, Borrower in advance shall instruct Bank upon
settlement either to treat the settlement amount as an advance
under the Committed Revolving Line, or to debit Borrower's
account for the amount settled.
4.
<PAGE> 5
(e) Borrower shall execute all standard from
applications and agreements of Bank in connection with the
Exchange Contracts and, without limiting any of the terms of
such applications and agreements, Borrower will pay all
standard fees and charges of Bank in connection with the
Exchange Contracts.
(f) Without limiting any of the other terms of this
Agreement or any such standard form applications and agreement
of Bank, Borrower agrees to indemnify Bank and hold it
harmless, from and against any and all claims, debts,
liabilities, demands, obligations, actions, costs and expenses
(including, without limitation, attorneys' fees of counsel of
Bank's choice), of every nature and description which it may
sustain or incur, based upon, arising out of, or in any way
relating to any of the Exchange Contracts or any transactions
relating thereto or contemplated thereby."
2.7 A new section 2.1.5, "Equipment Line-B Advances" is hereby
added in its entirety as follows:
"2.1.5 EQUIPMENT LINE-B ADVANCES.
(a) Subject to and upon the terms and conditions of
this Agreement, at any time from the date hereof through
December 9, 1998 (the "Equipment-B Availability End Date"),
Bank agrees to make advances (each an "Equipment-B Advance"
and collectively, the "Equipment-B Advances") to Borrower in
an aggregate outstanding amount not to exceed the Committed
Equipment Line-B. To evidence the Equipment Advance or
Equipment Advances, Borrower shall deliver to Bank, at the
time of each Equipment Advance request, an invoice for the
equipment to be purchased. The Equipment Advances shall be
used only to purchase Equipment and shall not exceed One
Hundred Percent (100%) of the invoice amount of such equipment
approved from time to time by Bank, excluding taxes, shipping,
warranty charges, freight discounts and installation expense.
Software and leaseholds may, however, constitute up to Fifty
Percent (50%) of aggregate Equipment Line-B Advances.
(b) Interest shall accrue from the date of each
Equipment Advance at the rate specified in SECTION 2.3(A), and
shall be payable monthly for each month through the month in
which the Equipment Availability End Date falls. Any Equipment
Advances that are outstanding on the Equipment Availability
End Date will be payable in thirty-six (36) equal monthly
installments of principal, and all accrued interest, beginning
on the Payment Date of each month following the Equipment
Availability End Date and ending on the Equipment Line-B
Maturity Date. Equipment Advances, once repaid, my not be
reborrowed.
(c) When Borrower desires to obtain an Equipment
Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later
than 3:00 p.m. Pacific time one (1) Business Day before the
5.
<PAGE> 6
day on which the Equipment Advance is to be made. Such notice
shall be substantially in the form of Exhibit B. The notice
shall be signed by a Responsible Officer or its designee and
include a copy of the invoice for the Equipment to be
financed."
2.8 Section 2.3.1, "Interest Rate", is hereby deleted and
replaced in its entirety as follows:
"2.3.1 INTEREST RATE. The interest rate on all Advances shall
be applied as follows:
(a) Any Advances under the Committed Revolving Line
shall bear interest, on the average Daily Balance, at a rate
equal to one-quarter of one (0.25) percentage point above the
Prime Rate.
(b) Any Advances under the Committed Equipment Line-A
shall bear interest, on the average Daily Balance, at a rate
equal to one and one-half (1.50) percentage points above the
Prime Rate.
(c) Any Advances under the Committed Equipment Line-B
shall bear interest, on the average Daily Balance, at a rate
equal to three-quarters of one (0.75) percentage point above
the Prime Rate."
2.9 Section 2.5.1, "Facility Fee", is hereby deleted and
replaced in its entirety as follows:
"2.5.1 FACILITY FEE. A Facility Fee equal to Fourteen
Thousand Dollars ($14,000) for the Committed Revolving Line
and a Facility Fee equal to Six Thousand Dollars ($6,000) for
the Committed Equipment Line-B, for a total Facility Fee of
Twenty Thousand Dollars ($20,000) which fee shall be due upon
execution of this Amendment and shall be fully earned and
non-refundable;"
2.10 Section 2.7, "Term", is hereby deleted and replaced in
its entirety as follows:
"TERM. Except as otherwise set forth herein, this
Agreement shall become effective on the Closing Date and,
subject to SECTION 12.7, shall continue in full force and
effect for a term ending on the later of the Revolving
Maturity Date, the Equipment Line-A Maturity Date, or the
Equipment Line-B Maturity Date. Notwithstanding the foregoing,
Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice
upon the occurrence and during the continuance of an Event of
Default. Notwithstanding termination, Bank's Lien on the
Collateral shall remain in effect for so long as any
Obligations are outstanding."
6.
<PAGE> 7
2.11 Section 6.3, "Financial Statements, Reports,
Certificates", is hereby deleted and replaced in its entirety as follows:
"6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
Borrower shall deliver to Bank: (a) within five (5) days of
filing, copies of all statements, reports and notices sent or
made available generally by Borrower to its security holders
or to any holders of Subordinated Debt and all reports on Form
10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (b) promptly upon receipt of notice thereof, a
report of any legal actions pending or threatened against
Borrower or any Subsidiary that could result in damages or
costs to Borrower or any Subsidiary of One Hundred Thousand
Dollars ($100,000) or more; and (c) such budgets, sales
projections, operating plans or other financial information as
Bank may reasonably request from time to time.
Immediately prior to an Advance under the Committed
Revolving Line which would increase the Outstanding Balance in
excess of Two Million Five Hundred Thousand Dollars
($2,500,000) under the Committed Revolving Line, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a
Responsible Officer in substantially the form of EXHIBIT C
hereto, together with aged listings of accounts receivable and
accounts payable. When there is an Outstanding Balance in
excess of Two Million Five Hundred Thousand Dollars
($2,500,000) under the Committed Revolving Line, within twenty
(20) days after the last day of each month, Borrower shall
deliver to Bank a Borrowing Base Certificate signed by a
Responsible Officer in substantially the form of EXHIBIT C
hereto, together with aged listings of accounts receivable and
accounts payable.
When there is an Outstanding Balance, Borrower shall
deliver to Bank within twenty (20) days after the end of each
month a Compliance Certificate signed by a Responsible Officer
in substantially the form of EXHIBIT D hereto. When there is
not an Outstanding Balance, Borrower shall deliver to Bank
with the Form 10-Q a Compliance Certificate signed by a
Responsible Officer in substantially the form of EXHIBIT D
hereto.
Bank shall have a right from time to time hereafter
to audit Borrower's Accounts at Borrower's expense, provided
that such audits will be conducted no more often than every
twelve (12) months."
2.12 Section 6.8, "Quick Ratio", is hereby deleted and
replaced in its entirety as follows:
"6.8 QUICK RATIO. When there is an Outstanding
Balance, Borrower shall maintain, as of the last day of each
calendar month, a ratio of Quick Assets to Current Liabilities
of at least 2.0 to 1.0. When there is not an Outstanding
Balance, Borrower shall maintain, as of the last day of each
calendar quarter, a ratio of Quick Assets to Current
Liabilities of at least 2.0 to 1.0"
7.
<PAGE> 8
2.13 Section 6.9, "Debt-Net Worth Ratio", is hereby deleted
and replaced in its entirety as follows:
"6.9 DEBT-NET WORTH RATIO. When there is an
Outstanding Balance, Borrower shall maintain, as of the last
day of each calendar month, a ratio of Total Liabilities to
Tangible Net Worth of not more than 1.0 to 1.0. When there is
not an Outstanding Balance, Borrower shall maintain, as of the
last day of each calendar quarter, a ratio of Total
Liabilities to Tangible Net Worth of not more than 1.0 to
1.0."
2.14 Section 6.10, "Tangible Net Worth" is hereby deleted and
replaced in its entirety as follows:
"6.10 MINIMUM DEBT SERVICE COVERAGE RATIO. Upon the
attainment of two consecutive quarters of Minimum Debt Service
Coverage of 1.75:1.00, maintenance of a minimum Debt Service
Coverage shall be required. Borrower shall maintain, as of the
last calendar day of each quarter, a Debt Service Coverage
ratio of at least 1.75 to 1.00. "DEBT SERVICE COVERAGE" is
defined as (A) (i) earnings after taxes plus (ii) total
interest expense plus (iii) non-cash items, divided by (B) (i)
total interest expense plus (ii) current maturities of long
term debt plus (iii) current maturities of capital leases."
2.15 Section 6.11, "Profitability", is hereby deleted and
replaced in its entirety as follows:
"6.11 PROFITABILITY. Borrower may suffer a loss not
to exceed (i) a loss of Two Million Dollars ($2,000,000) for
the third quarter of 1997, (ii) a loss of One Million Dollars
($1,000,000) for the fourth quarter of 1997, (iii) a loss of
Five Hundred Thousand Dollars ($500,000) for the first quarter
of 1998. Borrower shall be profitable for each fiscal quarter
beginning the second quarter of 1998. Borrower shall be
profitable for each fiscal year beginning the fiscal year
1998."
2.16 Section 6.12, "Minimum Liquidity", is hereby deleted and
replaced in its entirety as follows:
"6.12 MINIMUM LIQUIDITY. When there is an Outstanding
Balance under the Committed Equipment Line-A or the Committed
Equipment Line-B, Borrower shall maintain, as of the last
calendar day of each month, a ratio of (i) Liquid Assets to
(ii) the Outstanding Balance under the Committed Equipment
Line-A and the Committed Equipment Line-B of not less than
1.75 to 1.00. Through the Equipment Availability End Date,
when there is not Outstanding Balance under the Committed
Equipment Line-A or the Committed Equipment Line-B, Borrower
shall maintain, as of the last calendar day of each quarter, a
ratio of (i) Liquid Assets to (ii) the Committed Equipment
Line-B of not less than 1.75 to 1.00. "LIQUID ASSETS" means
unrestricted Cash and Cash Equivalents plus net available
8.
<PAGE> 9
under the Committed Revolving Line. Upon the attainment of two
consecutive quarters of Debt Service Coverage of at least 1.75
to 1.00, maintenance of a Minimum Liquidity Ratio shall no
longer be required."
2.16 The Borrower's address set forth in Section 10, "Notices"
is hereby deleted and replaced in its entirety as follows:
"3Dfx Interactive, Inc.
4435 Fortran Drive
San Jose, CA 95134
Attn: Gary Martin
Fax: 408/262-8874"
SECTION 3. LIMITED WAIVER. Bank hereby gives formal notice that
Borrower is in default under Section 7.2, "Change in Business", under the Loan
Agreement due to Borrower's relocation to 4435 Fortran Drive, San Jose, CA
95134.
Bank hereby waives Borrower's breach of Section 7.2 for the relocation
to 4435 Fortran Drive, San Jose, CA 95134, only. Any further breach of this
section or any other section is not waived.
SECTION 4. LIMITATION. The amendments and waivers set forth in this
Amendment shall be limited precisely as written and shall not be deemed (a) to
be a modification or waiver of any other term or condition of the Loan Agreement
or of any other instrument or agreement referred to therein or to prejudice any
right or remedy which the Bank may now have or may have in the future under or
in connection with the Loan Agreement or any instrument or agreement referred to
therein; or (b) to be a consent to any future amendment or modification to any
instrument or agreement the execution and delivery of which is consented to
hereby, or to any waiver of any of the provisions thereof. Except as expressly
amended hereby, the Loan Agreement shall continue in full force and effect.
SECTION 5. EFFECTIVENESS.
5.1 This Amendment shall become effective upon the last to
occur of:
(A) The execution and delivery of a copy hereof by
the Borrower to the Bank;
(B) The execution and delivery of a copy of the
Corporate Borrowing Resolution; and
(C) The payment of the Facility Fees due under
Section 2.5.1 of the Loan Agreement.
9.
<PAGE> 10
SECTION 6. RELEASE AND WAIVER. BORROWER HEREBY REPRESENTS AND WARRANTS
TO THE BANK THAT IT HAS NO KNOWLEDGE OF ANY FACTS THAT WOULD SUPPORT A CLAIM,
COUNTERCLAIM, DEFENSE OR RIGHT OF SET-OFF, AND HEREBY RELEASES BANK FROM ALL
LIABILITY ARISING UNDER OR WITH RESPECT TO AND WAIVES ANY AND ALL CLAIMS,
COUNTERCLAIMS, DEFENSES AND RIGHTS OF SET-OFF, AT LAW OR IN EQUITY, THAT
BORROWER MAY HAVE AGAINST BANK EXISTING AS OF THE DATE OF THIS AMENDMENT ARISING
UNDER OR RELATED TO THIS AMENDMENT, THE LOAN AGREEMENT OR ANY OF THE OTHER LOAN
DOCUMENTS OR TO THE LOANS CONTEMPLATED HEREBY OR THEREBY OR TO ANY ACT OR
OMISSION TO ACT BY THE BANK WITH RESPECT HERETO OR THERETO.
SECTION 7. COUNTERPARTS. This Amendment may be signed in any number of
counterparts, and by different parties hereto in separate counterparts, with the
same effect as if the signatures to each such counterpart were upon a single
instrument. All counterparts shall be deemed an original of this Amendment.
10.
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the date first written above.
BORROWER 3DFX INTERACTIVE, INC.
By: /s/ Gary Martin
---------------------------------
Printed Name: Gary Martin
-----------------------
Title: VP Finance
------------------------------
BANK SILICON VALLEY BANK
By:
---------------------------------
Printed Name:
-----------------------
Title:
------------------------------
11.
<PAGE> 12
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
FAX#: (408) 432-3249 TIME:
FROM:
CLIENT NAME (BORROWER)
REQUESTED BY:
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
PHONE NUMBER:
FROM ACCOUNT # ______________________ TO ACCOUNT #
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
-------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_______________
PRINCIPAL PAYMENT (ONLY) $_______________
INTEREST PAYMENT (ONLY) $_______________
PRINCIPAL AND INTEREST (PAYMENT) $_______________
OTHER INSTRUCTIONS:
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
Phone #
- ----------------------------------------- -----------------
Authorized Requester
Phone #
- ----------------------------------------- -----------------
Received By (Bank)
---------------------------------------------
Authorized Signature (Bank)
1.
<PAGE> 13
EXHIBIT C
BORROWING BASE CERTIFICATE*
Borrower: 3Dfx Interactive, Inc.
Bank: Silicon Valley Bank
Commitment Amount: $7,000,000
- -------------------------------------------------------------------------------
*To be utilized when the Outstanding Balance under the Committed Revolving Line
exceeds $2,500,000.
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of $
2. Additions (please explain on reverse) $
3. TOTAL ACCOUNTS RECEIVABLE $
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
5. Balance of 50% over 90 day accounts $
6. Concentration Limits $
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
10. Promotion or Demo Accounts $
11. Intercompany/Employee Accounts $
12. Other (please explain on reverse) $
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
14. Eligible Accounts (#3 minus #13) $
15. LOAN VALUE OF ACCOUNTS (80% of #14) $
BALANCES
16. Maximum Loan Amount $7,000,000
17. Total Funds Available Lesser of #16 or #15 $
18. Present balance owing on Line of Credit $
19. Outstanding under Sublimits ( ) $
20. RESERVE POSITION (#17 minus #18 and #19) $
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
- ---------------------------------
By:
------------------------------
Authorized Signer
BANK USE ONLY
Rec'd By:
-------------
Auth. Signer
Date:
-----------------
Verified:
-------------
Auth. Signer
Date:
------------------
1.
<PAGE> 14
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: 3DFX INTERACTIVE, INC.
The undersigned authorized officer of 3Dfx Interactive, Inc. hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending ___________________________ with
all required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
10Q and 10K Within 5 days after filing with the SEC Yes No
A/R & A/P Agings Monthly within 20 days* Yes No
A/R Audit Initial and Annual Yes No
</TABLE>
*Due prior to any Advances under the Committed Revolving Line of
$2,500,000 or greater. Due monthly when there is an Outstanding Balance
under the Committed Revolving Line in excess of $2,500,000.
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain on a Monthly Basis**:
Minimum Quick Ratio 2.0:1.0 ______:1.0 Yes No
Maximum Debt/Tangible Net Worth 1.0:1.0 ______:1.0 Yes No
Liquidity*** 1.75:1.00 ______:1.0 Yes No
Maintain on a Quarterly Basis
Debt Service Coverage**** 1.75:1.00 _____:1.0 Yes No
Profitability: Maximum Loss 3Q97 ($2,000,000) $______ Yes No
Maximum Loss 4Q97 ($1,000,000) $______ Yes No
Maximum Loss 1Q98 ($ 500,000) $______ Yes No
Quarterly, begin 2Q98 Profitable $______ Yes No
Annually, begin FY98 Profitable $______ Yes No
</TABLE>
**Maintain on a monthly basis when there is an Outstanding Balance.
When there is not an Outstanding Balance, maintain on a quarterly
basis.
2.
<PAGE> 15
***Upon the attainment of two consecutive quarters of Debt Service
Coverage of at least 1.75:1.00, Minimum Liquidity shall no longer be
measured. When there is an Outstanding Balance under the Committed
Equipment Line-A or the Committed Equipment Line-B, measurement of this
ratio shall be (i) Liquid Assets divided by (ii) the Outstanding
Balance under the Committed Equipment Line-A and the Committed
Equipment Line-B. through the Equipment Availability End Date, when
there is not an Outstanding Balance under the Committed Equipment
Line-A or the Committed Equipment Line-B, measurement of this ratio
shall be (i) Liquid Assets divided by (ii) the Committed Equipment
Line-B. "Liquid Assets" means unrestricted Cash and Cash Equivalents
plus net available under the Committed Revolving Line.
****Upon the attainment of two consecutive quarters of Debt Service
Coverage of at least 1.75:1.00, the Debt Service Coverage covenant
shall replace the Minimum Liquidity covenant. "DEBT SERVICE COVERAGE"
is defined as (A) (i) earnings after taxes plus (ii) total interest
expense plus (iii) non-cash items, divided by (B) (i) total interest
expense plus (ii) current maturities of long term debt plus (iii)
current maturities of capital leases.
Comments Regarding Exceptions: See Attached.
Sincerely,
- --------------------------
SIGNATURE
TITLE
---------------------
DATE
----------------------
BANK USE ONLY
Received by:
-------------------------------------------------------------
AUTHORIZED SIGNER
Date:
--------------------------------------------------------------------
Verified:
----------------------------------------------------------------
AUTHORIZED SIGNER
Date:
--------------------------------------------------------------------
Compliance Status: Yes No
3.
<PAGE> 16
CORPORATE BORROWING RESOLUTION
Borrower: 3Dfx Interactive, Inc. Bank: Silicon Valley Bank
4435 Fortran Drive 3003 Tasman Drive
San Jose, CA 95134 Santa Clara, CA 95054
I, the undersigned Secretary or Assistant Secretary of 3Dfx
Interactive, Inc. ("Borrower"), hereby certify that Borrower is a corporation
duly organized and existing under and by virtue of the laws of the State of
California.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by
other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of Borrower, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
- ----- --------- -----------------
<S> <C> <C>
L. Gregory Ballard Chief Executive Officer ________________________
Gary P. Martin VP Administration and ________________________
Chief Financial Officer
</TABLE>
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of Borrower
and Bank, such sum or sums of money as in their judgment should be borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan
documents of Borrower, on Bank's forms, at such rates of interest and on such
terms as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank one or
more renewals, extensions, modifications, refinancings, consolidations, or
substitutions for one or more of the loan documents, or any portion of the loan
documents.
GRANT SECURITY. To grant a security interest to Bank in any of
Borrower's assets, which security interest shall secure all of Borrower's
obligations to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to Borrower or in
1.
<PAGE> 17
which Borrower may have an interest, and either to receive cash for the same or
to cause such proceeds to be credited to the account of Borrower with Bank, or
to cause such other disposition of the proceeds derived therefrom as they may
deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in the
judgment of the officer or officers herein authorized.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements,
including agreements waiving the right to a trial by jury, as they may in their
discretion deem reasonably necessary or proper in order to carry into effect the
provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these Resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers
of the Borrower and occupy the positions set opposite their respective names;
that the foregoing Resolutions now stand of record on the books of the Borrower;
and that they are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on December 9, 1997 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ Gary Martin
- -------------------------------------------
*Secretary or Assistant Secretary
X
- -------------------------------------------
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
2.
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C>
This STATEMENT is presented for filing pursuant to the California Uniform Commercial Code
- ------------------------------------------------------------------------------------------------------------------------------------
FILE NO. OF ORIG. FINANCING STATEMENT 1A. DATE OF FILING OF ORIG. FINANCING STATEMENT 1B. DATE OF ORIG. FINANCING STATEMENT
- ------------------------------------------------------------------------------------------------------------------------------------
DEBTOR (LAST NAME FIRST)
3Dfx Interactive, Inc.
- ------------------------------------------------------------------------------------------------------------------------------------
MAILING ADDRESS 2C. CITY, STATE
415 Clyde Avenue, Suite 105 Mountain View, CA
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL DEBTOR (IF ANY) (LAST NAME FIRST)
- ------------------------------------------------------------------------------------------------------------------------------------
MAILING ADDRESS 3C. CITY, STATE
- ------------------------------------------------------------------------------------------------------------------------------------
SECURED PARTY
NAME SILICON VALLEY BANK
MAILING ADDRESS
3003 TASMAN DRIVE
CITY SANTA CLARA STATE CA ZIP CODE 95054
- ------------------------------------------------------------------------------------------------------------------------------------
ASSIGNEE OF SECURED PARTY (IF ANY)
NAME
MAILING ADDRESS
CITY STATE ZIP CODE
- ------------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------
1C. PLACE OF FILING ORIG. FINANCING STATEMENT
Secretary of State
- ---------------------------------------------
2A. SOCIAL SECURITY NO./FEDERAL TAX NO.
- ---------------------------------------------
2D. ZIP CODE
94043
- ---------------------------------------------
3A SOCIAL SECURITY NO. FEDERAL TAX NO.
- ---------------------------------------------
3D. ZIP CODE
- ---------------------------------------------
4A. SOCIAL SECURITY NO., FEDERALL TAX NO. OR
BANK TRANSIT AND A.B.A. NO.
- ---------------------------------------------
5A. SOCIAL SECURITY NO., FEDERALL TAX NO. OR
BANK TRANSIT AND A.B.A. NO.
- ---------------------------------------------
A [ ] CONTINUATION - The original Financing Statement between the foregoing Debtor and Secured Party bearing the file
number and date shown above is continued. If collateral is crops or timber, check here [ ] and insert description
of real property on which growing or to be grown in item 7 below.
---------------------------------------------------------------------------------------------------------------------
B [ ] RELEASE - From the collateral described in the Financing Statement bearing the file number shown above, the Secured
Party releases the collateral decribed in item 7 below.
---------------------------------------------------------------------------------------------------------------------
C [ ] ASSISNGMENT - The Secured Party certifies that the Secured Party has assigned to the Assignee above named, all the
Secured Party's rights under the Financing Statement bearing the file number shown above in the collateral described
in Item 7 below.
---------------------------------------------------------------------------------------------------------------------
D [ ] TERMINATION - The Secured Party certifies that the Secured Party no longer claims a security interest under the
financing Statement bearing the file number shown above.
---------------------------------------------------------------------------------------------------------------------
E [X] AMENDMENT - The Financing Statement bearing the file number shown above is amended as set forth in Item 7 below.
(Signature of Debtor required on all amendments.)
---------------------------------------------------------------------------------------------------------------------
F [ ] OTHER
- ------------------------------------------------------------------------------------------------------------------------------------
This serves to amend the address of Debtor shown in line 2B. The new address is 4435 Fortran Drive, San Jose, CA 95134.
- ------------------------------------------------------------------------------------------------------------------------------------
(Date) 19 9. This Space for Use of Filing
3Dfx Interactive, Inc. Officer
By: /s/ Gary Martin VP Finance (Date, Time, Filing Office)
Silicon Valley Bank
By:
---------------------------------------------------------------------------
SIGNATURE(S) OF SECURED PARTY(ES) (TITLE)
- ---------------------------------------------------------------------------------------------
Return Copy to
Siliconn Valley Bank
Attn: Loan Services
30003 Tasman Drive
Santa Clara, CA 95054
- ---------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.16
DATE: January 6, 1998
----------------------------------------------------------
LANDLORD: GEOMAX, a California general partnership
------------------------------------------------------
TENANT: 3DFX Interactive, Inc. (TDFX), a California corporation
--------------------------------------------------------
PREMISES: 110 Nortech Parkway, San Jose, California
------------------------------------------------------
LEASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph Page
- --------- ----
<S> <C> <C>
1. Fundamental Lease Provisions.......................................... 1
2. Premises.............................................................. 1
3. Use................................................................... 1
4. Rent.................................................................. 2
5. Term.................................................................. 3
6. Possession............................................................ 3
7. Rules and Regulations and Common Area................................. 3
8. Parking............................................................... 3
9. Expenses of Operation and Maintenance of the Complex.................. 3
10. Acceptance and Surrender of Premises.................................. 3
11. Alterations and Additions............................................. 4
12. Tenant Maintenance.................................................... 4
13. Utilities............................................................. 4
14. Taxes................................................................. 4
15. Liabilities Insurance................................................. 5
16. Tenant's Property Insurance and Worker's Compensation................. 5
17. Landlord's Insurance; Waiver of Subrogation........................... 5
18. Indemnification; Exemption of Landlord from Liability................. 5
19. Compliance............................................................ 5
20. Liens................................................................. 5
21. Assignment and Subletting............................................. 5
22. Subordination and Mortgages........................................... 6
23. Entry by Landlord..................................................... 6
24. Bankruptcy; Tenant's Default.......................................... 6
25. Abandonment........................................................... 6
26. Destruction........................................................... 6
27. Eminent Domain........................................................ 7
28. Sale or Conveyance by Landlord........................................ 7
29. Attornment to Lender or Third Party................................... 7
30. Holding Over.......................................................... 7
31. Certificate of Estoppel............................................... 7
32. Construction Changes.................................................. 7
33. Right of Landlord to Perform.......................................... 7
34. Attorney's Fees....................................................... 7
35. Waiver................................................................ 8
36. Notices............................................................... 8
37. Examination of Lease.................................................. 8
38. Default by Landlord................................................... 8
39. Corporate Authority................................................... 8
40. Limitation of Liability............................................... 8
41. Brokers............................................................... 8
42. Signs................................................................. 8
43. Hazardous Materials................................................... 8
44. Interest.............................................................. 9
45. Miscellaneous and General Provisions.................................. 9
Exhibits
- --------
A Legal Description
B Site Plan of Complex and Building
C Tenant Improvements Work Letter
D Acknowledgement of Commencement
E Hazardous Materials
F Estimated 1998 NNN Expenses
Riders
- ------
Rider One
---------
---------
---------
</TABLE>
<PAGE> 2
LEASE AGREEMENT
---------------
DATED: January 6, 1998
---------------
LANDLORD: GEOMAX, a California general partnership
----------------------------------------
TENANT: 3DFX Interactive, Inc. (TDFX), a California corporation
-------------------------------------------------------
1. FUNDAMENTAL LEASE PROVISIONS.
A. PREMISES: Approximately 52,040 square feet of leasable area in the building
containing approximately 52,040 leasable square feet located on a parcel of
land in the County of Santa Clara, State of California, as more
particularly described in the legal description attached as Exhibit A
hereto, with a common address of 110 Nortech Parkway, San Jose, CA. The
location of Premises is indicated on the site plan attached as Exhibit B
hereto. (Paragraph 2)
B. LEASE TERM: 105 full calendar months, plus any partial month at the
beginning of the Lease Term. (Paragraph 5)
C. COMMENCEMENT DATE: August 1, 1998 or 60 days after Landlord delivers
possession of the Premises to Tenant whichever is later. (Paragraph 5)
D. INITIAL BASIC RENT: (Paragraph 4A)
<TABLE>
<S> <C> <C>
Lease Months (inclusive) Basic Rent (per leasable sq. ft.) Basic Rent (total)
----------------------- --------------------------------- ------------------
01-4.2857 * 0 0
--------- --------------------------------- ------------------
4.2858-12 $1.40 $72,856.00
---------- --------------------------------- ------------------
</TABLE>
13-105 see paragraph H below. *The base monthly rent for
the initial 4.2857 months of the lease are hereby abated. Tenant shall,
however, pay the NNN charges during such period.
E. ADDITIONAL RENT: Real Property Taxes, insurance premiums, tenant
association dues (if any), maintenance and other costs and expenses under
this Lease. (Paragraph 4.E)
F. TENANT'S SHARE: One Hundred percent (100%). (Paragraph 4.E)
G. PREPAID RENT: $72,856.00 for the 5th month(s) of the Lease Term.
(Paragraph 4.H)
H. BASIC RENT ADJUSTMENT: The Basic Rent shall be subject to a four percent
(4%) increase on the first day of each of the following full calendar month
the lease term: Annually. (Paragraph 4.B)
I. SECURITY DEPOSIT: $72,856.00. (Paragraph 4.G)
J. PERMITTED USE: The Premises shall be used for corporate headquarters,
sales, marketing, engineering, design and testing, and
storage of semiconductors (Paragraph 3).
K. NUMBER OF PARKING SPACES: 100%. (Paragraph 8)
L. ADDRESSES FOR NOTICES AND PAYMENT OF RENT (Paragraphs 4.F and 36):
<TABLE>
<C> <S>
To Landlord: GEOMAX To Tenant: 3DFX Interactive, Inc.
----------------------------- -----------------------------
2025 Gateway Pl., Ste. 124 4435 Fortran Dr.
----------------------------- -----------------------------
San Jose, CA 95110 San Jose, CA 95134
----------------------------- -----------------------------
Facsimile No.: (408) 452-0268 Facsimile No.: (408) 262-8874
-------------- -------------
</TABLE>
<PAGE> 3
M. TENANT'S BROKER: GRUBB & ELLIS . (Paragraph 41)
---------------------------------------
N. GUARANTORS: N/A
-------------------------------------------
O. OTHER PROVISIONS: The following Riders are added hereto and included as
part of this Lease:
Rider No. Paragraph No. Title
--------- ------------- --------------------
One 46-61 Rider One
--- ---- --------------------
--- ---- --------------------
--- ---- --------------------
Each reference in this Lease to any of the provisions in this Paragraph 1 shall
be construed to incorporate all of the terms of each such provision. In the
event of any conflict between this Paragraph 1 and the balance of the Lease, the
balance of the Lease shall control.
2. PREMISES.
A. Premises. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord for the Lease Term, at the Rent and upon the terms and
conditions hereinafter set forth, that certain space ("Premises") within that
certain building ("Building") described in Paragraph 1.A. As used herein, the
"Complex" shall mean and include all of the land described in Exhibit A and
shown on Exhibit B attached hereto, and all of the buildings, improvements,
fixtures and equipment now or hereafter situated on said land.
Said letting and hiring is upon and subject to the terms, covenants and
conditions hereinafter set forth, and Tenant covenants as a material part of
the consideration for this Lease to perform and observe each and all of said
terms, covenants and conditions. This Lease is made upon the condition of such
performance and observance.
Landlord agrees to construct any improvements to the Premises ("Tenant
Improvements") as may be described in Exhibit C attached hereto and
incorporated herein by reference, upon such terms and conditions as are set
forth in such Exhibit C. The Tenant improvements shall be deemed substantially
complete when Landlord notifies Tenant in writing that the Tenant Improvements
(if any) are substantially completed in accordance with Exhibit C, subject
only to "punch list" items that do not materially diminish the usefulness of
the Premises.
B. Square Footage. Landlord and Tenant conclusively agree that the
statements of rentable square footage contained herein shall be deemed to be
correct and binding upon the parties for all purposes under this Lease, even if
subsequent measurements determine that one or more of such figures is incorrect.
3. USE. Tenant shall use the Premises only in conformance with
applicable governmental laws, regulations, rules and ordinances, including
without limitation the Americans With Disabilities Act of 1990 (the "ADA"), and
solely for the purpose specified in Paragraph 1.J and for no other purpose.
Tenant shall not do or permit to be done in or about the Premises or the Complex
nor bring or keep or permit to be brought or kept in or about the Premises or
the Complex anything which is prohibited by or will in any way increase the
existing rate of (or otherwise affect) fire or any insurance covering the
Premises or the Complex or any part thereof, or any of its contents, or will
cause a cancellation of any insurance covering the Premises or the Complex or
any part thereof, or any of its contents. Tenant shall not do or permit to be
done anything in, on or about the Premises or the Complex which will in any way
obstruct or interfere with the rights of other tenants or occupants of the
Complex or injure or annoy them, or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises or the Complex. No
sale by auction shall be permitted on the Premises. Tenant shall not place any
loads upon the floors, walls, or ceiling, which endanger the structure, or place
any harmful fluids or other
-1-
<PAGE> 4
materials in the drainage system of the Building therein, or overload existing
electrical or other mechanical systems. No waste materials or refuse shall be
dumped upon or permitted to remain upon any part of the Premises or outside of
the Premises, except in trash containers placed inside exterior enclosures
designated by Landlord for that purpose or inside of the Building proper where
designated by Landlord. No materials, supplies, equipment, finished products or
semi-finished products, raw materials or articles of any nature shall be stored
upon or permitted to remain outside the Premises. No loudspeaker or other
device, system or apparatus which can be heard outside the Premises shall be
used in or at the Premises without the prior written consent of Landlord.
Tenant shall not commit or suffer to be committed any waste in or upon the
Premises.
4. RENT
A. Basic Rent. Tenant agrees to pay to Landlord the sum set forth in
Paragraph 1.D hereof as "Basic Rent", in lawful money of the United States of
America, without deduction, offset, prior notice, or demand, on the first day
of every calendar month of the Lease Term, and Landlord agrees to accept such
sum as Basic Rent for the Premises.
B. Basic Rent Adjustment. On the first day of each calendar month
described in Paragraph 1.H hereof (hereinafter referred to as an "Adjustment
Date"), the Basic Rent provided for in Paragraph 4.A above shall be adjusted in
accordance with the following formula based on the Consumer Price Index ("CPI")
for all Urban Consumers "All Items", San Francisco-Oakland-San Jose (1982-84 =
100, standard reference base) published by the Bureau of Labor Statistics, U.S.
Department of Labor (the "Index") published nearest but prior to the first day
of the Lease Term or the last previous Adjustment Date, as applicable (the
"Beginning Index") and the Index which is published nearest but prior to the
current Adjustment Date (the "Adjustment Index"). On each Adjustment Date, the
Basic Rent shall be increased by an amount equal to the product obtained by
multiplying the then current Basic Rent by a fraction, the numerator of which
is the Adjustment Index and the denominator of which is the Beginning Index. On
or about each Adjustment Date, the parties shall execute an amendment to the
Lease stating the new (adjusted) Basic Rent. If the Index is changed so that
the Base Year of the Index differs from that used as of the month immediately
preceding the month in which the term commences, the Index shall be converted
in accordance with the conversion factor published by the United States
Department of Labor, Bureau of Labor Statistics. If the Index is discontinued
or revised during the Lease Term, such other government index or other
computation with which it is replaced shall be used in order to obtain
substantially the same result as would be obtained if the Index had not been
discontinued or revised. In no event shall the Basic Rent following any
Adjustment Date be less than the Basic Rent in existence immediately prior to
such Adjustment Date.
C. Partial Months. In the event that the Lease Term commences on a date
other than the first day of a calendar month, on the Commencement Date Tenant
shall pay to Landlord as Basic Rent for the period from such Commencement Date
to the first day of the first full calendar month that proportion of the
monthly Basic Rent hereunder which the number of days between such Commencement
Date and the first day of the next succeeding calendar month bears to thirty
(30), and such partial first month shall not be counted when computing the
number of months in the term of this Lease. In the event that the Lease Term is
terminated for any reason on a date other than the last day of a calendar
month, on the first day of the last calendar month of the Lease Term Tenant
shall pay to Landlord as Basic Rent for the period from said first day of said
last calendar month to and including the last day of the Lease Term that
proportion of the monthly Basic Rent hereunder which the number of days between
said first day of said last calendar month and the last day of the term hereof
bears to thirty (30).
D. Late Charge. Notwithstanding any other provision of this Lease, if
Tenant is delinquent in the payment of Rent as set forth in this Paragraph 4,
or any part thereof, Tenant agrees to pay Landlord, in addition to the
delinquent Rent due, a late charge for each Rent payment which is not received
by Landlord within ten (10) days after due date for such payment. Said late
charge shall equal ten (10%) of each Rent payment so in default. In the event
that a late charge is payable hereunder and not paid by Tenant for three (3)
consecutive months, then Rent shall automatically become due and payable three
(3) months in advance, rather than monthly notwithstanding Paragraph 4 or any
other provision of this Lease to the contrary.
E. Additional Rent. Beginning with the Commencement Date, Tenant shall
pay to Landlord in addition to the Basic Rent and as Additional Rent the
following:
(1) Tenant's proportionate share ("Tenant's Share") as specified in
Paragraph 1.F, of all Real Property Taxes relating to the Complex, as set forth
in Paragraph 14, and
(2) Tenant's Share of all property insurance premiums relating to
the Complex, as set forth in Paragraph 15, and
(3) Tenant's Share of expenses for the operation, management,
maintenance and repair of the Building (including Common Areas of the Building)
and Common Areas of the Complex in which the Premises are located, as set forth
in Paragraph 9, and
(4) The sums required to reimburse Landlord for the cost of repairs
and maintenance to the Premises, as set forth in Paragraph 12; and
<PAGE> 5
(5) All charges, costs and expenses, which Tenant is
required to pay hereunder, together with all interest and penalties, costs and
expenses including without limitation attorneys' fees and legal expenses, that
may accrue thereto in the event of Tenant's failure to pay such amounts, and all
damages, reasonable costs and expenses which Landlord may incur by reason of
default of Tenant or failure on Tenant's part to comply with the terms of this
Lease. In the event of nonpayment by Tenant of Additional Rent, Landlord shall
have all the rights and remedies with respect thereto as Landlord has to
nonpayment of Basic Rent.
The Additional Rent due hereunder shall be paid to Landlord or
Landlord's agent (i) within thirty (30) days for taxes and insurance and within
thirty (30) days for all other Additional Rent items after presentation of an
invoice from Landlord or Landlord's agent setting forth such Additional Rent,
and/or (ii) at the option of Landlord, directly to the designated recipient
thereof, as and when such amounts are due, in accordance with statements or
invoices presented to Tenant; and/or (iii) at the option of Landlord, to
Landlord monthly, in advance, in an amount estimated by Landlord to be
Landlord's approximate average monthly expenditure for such Additional Rent
items, which estimated amount shall be reconciled at the end of each calendar
year as compared to Landlord's actual expenditure for said Additional Rent
items, with Tenant paying to Landlord, upon demand, any amount of actual
expenses expended by Landlord in excess of said estimated amount, or Landlord
applying any amount of estimated payments made by Tenant in excess of
Landlord's actual expenditures for said Additional Rent items to Basic Rent
and/or Additional Rent next becoming due.
The respective obligations of Landlord and Tenant under this
Paragraph shall survive the expiration or other termination of this Lease, and
if the Lease Term shall expire or shall otherwise terminate on a day other than
the last day of a calendar year, the actual Additional Rent incurred for the
calendar year in which the Lease Term expires or otherwise terminates shall be
determined and settled on the basis of the statement of actual Additional Rent
for such calendar year and shall be prorated in the proportion which the number
of days in such calendar year preceding such expiration or termination bears to
365.
F. Place of Payment of Rent and Additional Rent. All Basic Rent
hereunder and all payments hereunder for Additional Rent shall be paid to
Landlord at the address of Landlord as specified in Paragraph 1.L or such other
place as Landlord may from time to time designate in writing.
G. Security Deposit. Concurrently with Tenant's execution of this
Lease, Tenant shall deposit with Landlord the sum specified in Paragraph 1.1
hereof as a "Security Deposit". Said sum shall be held by Landlord as a security
deposit for the faithful performance by Tenant of all of the terms, covenants,
and conditions of this Lease to be kept and performed by Tenant during the Lease
Term, and shall not in any event be used or applied by Tenant as "last month's
rent." If Tenant defaults with respect to any provision of this Lease,
including, but not limited to, the provision relating to the payment of Rent,
Landlord may (but shall not be required to) use, apply or retain all or any part
of the Security Deposit for the payment of any amount which Landlord may spend
by reason of Tenant's default or to compensate Landlord for any other loss or
damage which Landlord may suffer by reason of Tenant's default. If any portion
of said Security Deposit is so used or applied, Tenant shall, within ten (10)
days after written demand therefor, deposit cash with Landlord in the amount
sufficient to restore the Security Deposit to its original amount. Tenant's
failure to do so shall be a material breach of this Lease. Landlord shall not be
required to keep this Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on such Security Deposit. If Tenant
fully and faithfully performs every provision of this Lease to be performed by
it, the Security Deposit or any balance thereof shall be returned to Tenant (or
at Landlord's option, to the last assignee of Tenant's interest hereunder) at
the expiration of the Lease Term and after Tenant has vacated the Premises. In
the event of termination of Landlord's interest in this Lease, Landlord shall
transfer said Security Deposit to Landlord's successor in interest whereupon
Landlord shall be released from liability for the return of such Security
Deposit or any accounting therefor.
H. Prepaid Rent. Concurrently with Tenant's execution of this
Lease, Tenant shall pay to Landlord the sum specified in Paragraph 1.G as
prepaid Rent for the months designated therein.
I. Definition of Rent. The term "Rent" as used in this Lease
shall mean Basic Rent. Additional Rent, and any and all other sums, however,
designated, required to be paid by Tenant under this Lease, whether payable to
Landlord or third parties.
J. Additional Rights of Landlord. In addition to any late payment
or interest charges payable to Landlord hereunder and any other rights or
remedies that Landlord may have under his Lease or applicable law, all of which
rights and remedies shall be cumulative, Tenant, as a material part of the
consideration for this Lease, hereby agrees as follows:
-2-
<PAGE> 6
(1) If Tenant makes any payment under this Lease by check and such
check is dishonored or otherwise returned unpaid to Landlord due to insufficient
funds, then Landlord, at its option, may require Tenant to make all future
payments under this Lease by cashier's check or wire transfer in accordance
with wiring instructions given to Tenant by Landlord.
(2) If Landlord fails to receive any payment that Tenant is required
to make under this Lease when due and Landlord thereafter, and prior to
receiving such payment, proceeds to serve a "3-Day Notice" or similar notice to
Tenant as permitted under Section 1162 of the California Code of Civil
Procedure, then in each such instance, and regardless of whether Tenant
thereafter makes such payment, Tenant shall pay to Landlord, upon demand, as
Additional Rent, an administrative charge in the amount of $200. Tenant
acknowledges that such charge constitutes liquidated damages and not a penalty
and represents a reasonable estimate of the additional administrative costs that
Landlord will incur in serving such notice.
(3) If Landlord fails to receive any payment that Tenant is required
to make under this Lease within ten (10) days after the due date for such
payment, and such delinquency occurs on two (2) separate occasions, then, at
Landlord's election, exercisable by written notice to Tenant at any time after
the second such delinquency, any and all rights of first offer with respect to
any premises in the Building or Complex, rights of first refusal with respect to
any such premises, and options to renew or extend the term of this Lease, which
in any case may be granted to Tenant under this Lease or any exhibit, rider or
amendment thereto (each referred to in this Lease as an "Option") shall
terminate. In such event, Tenant shall execute a quitclaim deed or other similar
document as may be requested by Landlord to evidence the termination of such
Option.
(4) If Landlord fails to receive any payment that Tenant is required
to make under this Lease within ten (10) days after the due date (or such
payment, and such delinquency occurs on three (3) separate occasions, then
Landlord, at its election, exercisable by one or more written notices to Tenant
at any time after the third such delinquency, may require any or all of the
following: (i) that all future payments of Basic Rent be paid three (3) months
in advance; (ii) that, subject to annual reconciliation as provided in Paragraph
4.E above, all future payments of Additional Rent shall be payable three (3)
months in advance based upon an amount estimated by Landlord to be Landlord's
average quarterly expenditure for such items of Additional Rent; and (iii) that
the Security Deposit specified in Paragraph 1.H be immediately increased by one
hundred percent (100%), in which event Tenant shall, within ten (10) days after
written demand therefor, deposit such additional amount in cash with Landlord.
5. TERM. The term of this Lease shall be for the period of time specified in
Paragraph 1.B (unless sooner terminated as hereinafter provided) and, subject to
Paragraph 6, shall commence on the commencement date ("Commencement Date")
specified in Paragraph 1.C. Within 10 days following the Commencement Date of
the Lease Term, Tenant will execute and deliver to Landlord a certificate
substantially in the form of Exhibit D indicating any exceptions thereto which
may exist at that time. Tenant's failure to execute and deliver such certificate
within such time limit shall constitute an unqualified acceptance of the
Premises and acknowledgement that the statements contained in Exhibit D are true
and correct without exception.
6. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver
possession of said Premises to Tenant on the date set forth in Paragraph 1.C or
any other date, this Lease shall not be void or voidable; no obligation of
Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be
liable to Tenant for any loss or damage resulting therefrom; but in that event
the commencement date and not the termination date of the Lease, and any other
dates affected thereby shall be revised to conform to the date of Landlord's
delivery to Tenant of possession of the Premises, and the Lease Term shall not
be extended for a period equal to the delay in delivery of possession, plus the
number of days necessary to end the Lease Term on the last day of a month. The
above is, however, subject to the provision that the period of delay of delivery
of the Premises shall not occur later than December 31, 1998 in which instance
Tenant, at its option, may, by written notice to Landlord on or before January
10, 1999, terminate the Lease and the parties shall have no further liability
thereafter accruing under this Lease.
7. COMMON AREAS. Subject to the terms and conditions of this Lease, Tenant
shall have the non-exclusive right to use the access roads, parking areas, and
facilities provided and designated by Landlord for the general use and
convenience of the occupants of the Complex, which areas and facilities are
referred to herein as "Common Areas". This right shall terminate upon the
termination of this Lease.
8. PARKING. Subject to the terms and conditions of this Lease, Tenant shall
have the exclusive right to use the number of parking spaces in the common
parking areas of the Complex as is specified in Paragraph 1.K. Neither Tenant
nor Tenant's employees, agents, representatives and/or invitees shall use
parking spaces in excess of said number of spaces allocated to Tenant
hereunder. Landlord shall also have the right to implement a system of parking
charges, vouchers, fines or other parking control fees to be paid by Tenant
and/or the users of the Complex, if so required by any governmental agency
having jurisdiction over the Complex or if required to meet parking programs
mandated by government.
Tenant shall not, at any time, park, or permit to be parked, any trucks
or vehicles adjacent to the loading areas so as to interfere in any way with the
use of such areas, nor shall Tenant at any time park, or permit the parking of
Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's
suppliers or others, in any portion of the common area not designated by
Landlord for such use by Tenant. Tenant shall not park nor permit to be parked,
any inoperative vehicles or equipment on any portion of the parking area or
outside areas of the Complex, or use the same for storage. Tenant agrees to
assume responsibility for compliance by its employees with the parking
provisions contained herein.
<PAGE> 7
If Tenant or its employees park in other than such designated parking
areas, then Landlord may charge Tenant, as Additional Rent, and Tenant agrees
to pay, ten ($10.00) dollars per day for each day or partial day each such
vehicle is parked in any area other than that designated. Tenant hereby
authorizes Landlord at Tenant's sole expense to tow away from the Complex any
vehicle belonging to Tenant or Tenant's employees parked in violation of these
provisions, or to attach violation stickers or notices to such vehicles and
levy fines for such violations. Landlord shall have no obligation to Tenant to
police the parking areas or enforce any private or public parking restrictions,
which enforcement shall be at Landlord's sole and absolute discretion.
9. EXPENSES OF OPERATION AND MAINTENANCE OF THE COMPLEX. As Additional Rent
and in accordance with Paragraph 4.E of this Lease, and except for those
expenses required to be paid exclusively by Tenant as set forth in Paragraphs 12
and 13 or elsewhere in this Lease, Tenant shall pay to Landlord Tenant's Share
of all expenses of operation, management, maintenance and repair of the
Building, Complex and Common Areas including, but not limited to, all sums
expended in connection with the Common Areas and Building exteriors for all
general maintenance and repairs; license, permit, and inspection fees; security;
utility charges associated with exterior landscaping and lighting (including
water and sewer charges); janitorial services; trash removal; fire protection
systems; general liability insurance protecting against claims related to the
condition, use or occupancy of the Common Ares (in such amounts and providing
such coverage as determined in Landlord's sole discretion); exterior window
cleaning; maintenance of landscaped areas, irrigation systems, parking lots,
sidewalks, driveways, and stairways, including without limitation resurfacing,
restriping, cleaning and sweeping; maintenance, repair and replacement of all
Building systems and fixtures, including without limitation electrical,
mechanical, lighting, plumbing, and telecommunication systems, including without
limitation intra-Building telephone, telecommunication and network cabling which
telecommunication systems are located outside of the Premises, except as
otherwise provided in Paragraph 12 below; repair and replacement of roofs of the
buildings (excluding new capital improvement(s); salaries and employee benefits
of personnel (and payroll taxes applicable thereto) to the extent they are
engaged in the operation, supervision, and/or maintenance of the Complex;
reasonable attorneys' fees with respect to matters of common interest to
occupants of the Complex or relating to the Complex; fees for accounting,
bookkeeping, expense collection, and other management services rendered by
Landlord and/or by a third party manager engaged by Landlord (which may be a
party affiliated with Landlord), except that the total amount charged for such
management services and included in Tenant's share of expenses shall not exceed
three percent (3%) of the then current Basic Rent payable by Tenant for each
respective month; taxes on personal property, equipment and machinery utilized
in the operation of the Complex; supplies, materials, equipment and tools;
maintenance and/or insurance contracts covering all or any of the repairs or
maintenance described in this Paragraph 9; and the cost of complying with rules,
regulations and orders of governmental authorities, including without limitation
maintenance, alterations and repairs required in connection therewith.
"Additional Rent" as used herein shall not include Landlord's debt
repayments; interest on charges; expenses directly or indirectly incurred by
Landlord for the benefit of any other tenant; cost for the installation of
partitioning or any other tenant improvements; cost of attracting tenants;
depreciation; interest; or executive salaries.
10. ACCEPTANCE AND SURRENDER OF PREMISES. By taking possession hereunder,
Tenant accepts the Premises as being in good and sanitary, condition and
repair and accepts the Building, the Premises and the Common Areas in their
then existing condition and without representation or warranty by Landlord as
to its condition, the use or occupancy which may be made thereof, or the
precise square footage of the Building or the Premises. Any exceptions to the
foregoing must be by written agreement executed by Landlord and Tenant. Subject
to Paragraphs 26 and 27, Tenant agrees on the last day of the Lease Term, or on
the sooner termination of this Lease, to surrender the Premises promptly and
peaceably to Landlord in good condition and repair (normal wear and tear
excepted in broom clean condition), with all interior walls repaired and
replaced, if damaged; the air conditioning and heating equipment serviced by a
reputable and licensed service firm and in good operating condition (provided
the maintenance of such equipment has been Tenant's responsibility during the
term of this Lease) together with all alterations, additions, and improvements
which may have been made in, to, or on the Premises (except movable trade
fixtures installed at the expense of Tenant); provided, however, that Tenant
shall ascertain from Landlord within thirty (30) days before the end of the
Lease Term whether Landlord desires to have the Premises or any part or parts
thereof restored to their condition and configuration as when the Premises were
delivered to Tenant and if Landlord shall so desire, then Tenant shall restore
said Premises or such part or parts thereof before the end of this Lease at
Tenant's sole cost and expense. Tenant, on or before the end of the Lease Term
or sooner termination of this Lease, shall remove all of Tenant's personal
property and trade fixtures from the Premises, and all property not so removed
on or before the end of the Lease Term or sooner termination of this Lease
shall be deemed abandoned by Tenant and title to same shall thereupon pass to
Landlord without compensation to Tenant. Landlord may, upon termination of this
Lease, remove all moveable furniture and equipment so abandoned by Tenant,
-3-
<PAGE> 8
at Tenant's sole cost, and repair any damage caused by such removal at Tenant's
sole cost. If the Premises are not surrendered at the end of the term or sooner
termination of this Lease, Tenant shall indemnify Landlord against loss or
liability resulting from the delay by Tenant in so surrendering the Premises
including, without limitation, consequential damages to Landlord caused, in
whole or in part, by such delay. Nothing contained herein shall be construed as
an extension of the term hereof or as a consent of Landlord to any holding over
by Tenant. The voluntary or other surrender of this Lease or the Promissory
Tenant or a mutual cancellation of this Lease shall not work as a merger and,
at the option of Landlord, shall either terminate all or any existing subleases
or operate as an assignment to Landlord of all or any such subleases.
11. ALTERATIONS AND ADDITIONS. Other than the initial tenant improvements,
Tenant shall not make, or suffer to be made, any alteration or addition to the
Premises, or any part thereof, without the prior written consent of Landlord.
All work with respect to any alteration or addition shall be done in a good
and workmanlike manner, shall be under the supervision of a competent architect
or competent licensed structural engineer approved by Landlord, and shall be
made in accordance with all applicable laws, ordinances, codes and regulations
related thereto and the plans and specifications with respect thereto shall be
approved in writing by Landlord before commencement of work. Landlord's
approval of Tenant's plans and specification shall create no responsibility or
liability on the part of Landlord for the completeness, design sufficiency or
compliance with governmental laws, rules or regulations.
Tenant agrees that it will not proceed to make such alteration or
additions without having obtained consent from Landlord to do so, and until
ten (10) days after the receipt of such consent, in order that Landlord may
post appropriate notices to avoid any liability to contractors or material
suppliers for payment for Tenant's improvements. Tenant will at all times
permit such notices to be posted and to remain posted until the completion of
work. Tenant shall, if required by Landlord, secure at Tenant's own cost and
expense, a completion and lien indemnity bond, satisfactory to Landlord, for
such work. Tenant further covenants and agrees that any mechanic's lien filed
against the Premises or against the Complex for work claimed to have been done
for, or materials claimed to have been furnished to, Tenant will be discharged
by Tenant, by bond or otherwise, within ten (10) days after the imposition
thereof, at the cost and expense of Tenant. Any exceptions to the foregoing
must be made in writing and executed by both Landlord and Tenant. Upon
completion of the work, Tenant shall file a Notice of Completion as permitted
by law in the Office of the County Recorder where the Premises is located.
Any addition to, or alteration of, the Premises, except moveable furniture
and trade fixtures, shall at once become a part of the Premises and belong to
Landlord. Tenant shall retain title to all moveable furniture and trade
fixtures placed in the Premises. All heating, lighting, electrical, air
conditioning, floor to ceiling partitioning, drapery, carpeting, and floor
installations made by Tenant, together with all property that has become an
integral part of the Premises, shall not be deemed trade fixtures.
12. REPAIR AND MAINTENANCE OF THE PREMISES.
A. Landlord's Obligations. So long as no Event of Default (as defined in
Paragraph 24) has occurred, which remains uncured beyond the applicable cure
period (if any) set forth in this Lease, Landlord shall, at its sole cost and
expense, maintain and repair the building foundations, structural elements of
the exterior walls and structural elements of the roof, except to the extent
of any non-insured damage (or deductible portion of any insured damage) that is
the result of the negligence or willful act of Tenant or Tenant's employees,
agents or contractors, in which case Tenant shall be liable for the repair at
Tenant's sole cost and expense. Landlord shall also maintain and repair (i) the
roof membrane, (ii) the exterior surface of the building (including,
maintenance of equipment located on the roof top, exterior window washing and
exterior painting), and (iii) at Landlord's election, the HVAC equipment
(through a contract with a service company of Landlord's choice); provided,
however, that Tenant shall reimburse Landlord for the cost thereof as
Additional Rent in accordance with Paragraph 4.E. Landlord shall have no
obligation to make repairs under this Paragraph until a reasonable time after
receipt of written notice from Tenant of the need for such repairs. In no event
shall any payments owed by Tenant under this Lease be abated on account of
Landlord's failure to make repairs under this Paragraph. Tenant hereby waives
all statutory rights to make repairs for or at the expense of Landlord.
B. Tenant's Obligations. Except to the extent of Landlord's express
obligations under Paragraph 12.A, Tenant shall, at its sole cost and expense,
keep and maintain the Premises (including appurtenances) and every part thereof
in a high standard of maintenance and repair, and in good and sanitary
condition. Tenant's maintenance and repair responsibilities herein referred to
include, but are not limited to, all windows, window frames, plate glass,
glazing, truck doors, plumbing systems, (such as water and drain lines, sinks,
toilets, faucets, drains, showers and water fountains), electrical systems (such
as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts),
heating and air conditioning distribution and temperature control systems (such
as fans, air handlers, ducts, mixing boxes, thermostats, time clocks, supply and
return grills), telecommunication systems within the Premises (including,
without limitation all distribution throughout the Premises from Tenant's
computer closets), and telecommunication systems located outside of the Premises
(including without limitation intra Building telephone, telecommunication and
network cabling) installed to exclusively serve all or any portion of the
Premises, all interior improvements within the Premises including but not
limited to wall coverings, window coverings, carpet, floor coverings,
partitioning, ceilings, doors (both interior and exterior, including closing
mechanisms, latches, and locks), skylights (if any), automatic fire
extinguishing systems, and all other interior improvements of any nature
whatsoever. Tenant also agrees to provide janitorial services for the Premises.
If Landlord elects to require Tenant to maintain the HVAC equipment, Tenant
shall contract with a service company for the quarterly maintenance of the
heating and air conditioning equipment, with a copy of the service contract to
be furnished to Landlord within ten (10) days after opening for business, and a
copy of any subsequent contracts to be furnished from time to time. If Tenant
needs to access Building system, including without limitation the Building
telecommunication system, Tenant shall have the right to do so only upon the
prior written consent of Landlord and by utilization of a contractor consented
to by Landlord, provided that despite any such consent by Landlord, Tenant shall
remain fully responsible for the acts, omissions and negligence of any such
contractor.
<PAGE> 9
13. UTILITIES. Tenant shall pay, directly to the provider of such services,
as the same shall become due, all charges for water, gas, electricity,
telephone, telex and other electronic communications service, sewer service,
waste pick-up and any other utilities, materials or services furnished directly
to or used by Tenant on or about the Premises during the Lease Term, including,
without limitation, any temporary or permanent utility surcharge or other
exactions whether or not hereinafter imposed. If any such services and utilities
are jointly metered and not directly billed to Tenant, Tenant shall pay an
equitable portion of all charges as Additional Rent, with the determination of
Tenant's equitable portion to be made by Landlord. At Landlord's request, Tenant
shall pay Landlord for the cost of installing separate meters. Tenant shall pay
for any and all telecommunication or other utility system modifications or
additions which it may require and which Landlord expressly agrees to provide
pursuant to the terms of this Lease or any subsequent written agreement;
provided, however, that nothing in this Lease shall require Landlord to provide,
modify or install any utility system or utility system component for Tenant's
use except to the extent that the same is required by law or by an express
written agreement between Landlord and Tenant. Landlord shall not be liable for,
and Tenant shall not be entitled to, any abatement or reduction or Rent or other
compensation by reason of any interruption or failure of utility services to the
Premises.
14. TAXES.
A. Real Property Taxes. As Additional Rent and in accordance with
Paragraph 4.E of this Lease, Tenant shall pay to Landlord Tenant's Share of all
Real Property Taxes that accrue during the Lese Term and which constitute Real
Property Taxes pertaining to the Complex. This obligation shall survive the
expiration or earlier termination of this Lease, and if any Real Property Taxes
are imposed by the County Assessor or other governmental authority for the
period of time constituting the Lease Term, whether or not Landlord is billed
for the same during the Lease Term. Tenant shall pay such Real Property Taxes
when they are ultimately billed, in accordance with Paragraph 4.E. The term
"Real Property Taxes," as used herein, shall mean (i) all taxes, assessments,
levied and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all installments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by any new improvements now or
hereafter imposed by any governmental or quasi-governmental authority or special
district having the direct or indirect power to tax or levy assessments, which
are levied or assessed against, or with respect to the value, occupancy or use
of, all or any portion of the Complex (as not constructed or as may at any time
hereafter be constructed, altered, or otherwise changed) or Landlord's interest
therein; any improvements located within the Complex (regardless of ownership);
the fixtures, equipment and other property of Landlord, real or personal, that
are an integral part of and located in the Complex; or parking areas, public
utilities, or energy within the Complex; (ii) all charges, levies or fees
imposed by reason of environmental regulation or other governmental control of
the Complex; and (iii) all costs and fees (including attorneys' fees) incurred
by Landlord in protesting any Real Property Tax and in negotiating with public
authorities as to any Real Property Tax, but only if Tenant has requested
Landlord to contest such taxes. If at any time during the term of this Lease the
taxation or assessment of the Complex prevailing as to the commencement date of
this Lease shall be altered to that in lieu or in addition to any Real Property
Tax described above there shall be levied, assessed or imposed (whether by
reason of a change in the method of taxation or assessment, creation of a new
tax or charge or any other cause) an alternate or additional tax or charge (i)
on the value, use or occupancy of the Complex, or Landlord's interest therein or
(ii) on or measured by the gross receipts, income or rentals from the Complex,
on Landlord's business of leasing the Complex, or computed in any manner with
respect to the operation of the Complex, then any such tax or charge, however
designated, shall be included within the meaning of the term "Real Property
Taxes" for purposes of the Lease. If any Real Property Tax is based upon
property or rents unrelated to the Complex, then only that part of such Real
Property Tax that is fairly allocable to the Complex shall be included within
the meaning of the term "Real Property Taxes." Notwithstanding the foregoing,
the term "Real Property Taxes" shall not include estate, inheritance, gift or
franchise taxes of Landlord or the federal or state net income tax imposed on
Landlord's income from all sources.
B. Taxes on Tenant's Property.
(1) Tenant shall be liable for and shall pay ten (10) days before
delinquency, taxes levied against any personal property or trade fixtures
placed by Tenant in or about the Premises. If any such taxes on Tenant's
personal property or trade fixtures are levied against Landlord or Landlord's
property or if the assessed value of the Premises is increased by the inclusion
therein of a value placed upon such personal property or trade fixtures of
Tenant and if Landlord, after written notice to Tenant, pays the taxes based on
such increased assessment, which Landlord shall have the right to do regardless
of the validity (but only under proper protest if requested by Tenant), Tenant
shall upon demand, as in the case may be, repay to Landlord the taxes so levied
against Landlord, or the proportion of such taxes resulting from such increase
in the assessment; provided that in any such event Tenant shall have the right,
in the name of Landlord and with Landlord's full cooperation (but without cost
to Landlord), to bring suit in any court of competent jurisdiction to recover
the amount of any such taxes so paid under protest, and any amount so recovered
shall belong to Tenant.
(2) If the Tenant improvements in the Premises, whether
installed, and/or paid for by Landlord or Tenant and whether or not affixed to
the real property so as to become a part thereof, are assessed for real property
tax purposes at a valuation higher than the valuation at which standard office
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<PAGE> 10
improvements in other space in the Complex are assessed, then the real property
taxes and assessments levied against Landlord or the Complex by reason of such
excess assessed valuation shall be deemed to be taxes levied against personal
property of Tenant and shall be governed by the provisions of Paragraph
4.B.(1) above. If the records of the County Assessor are available and
sufficiently detailed to serve as a basis for determining whether said Tenant
improvements are assessed at a higher valuation than standard office
improvements in other space in the Complex, such records shall be binding on
both the Landlord and the Tenant. If the records of the County Assessor are not
available or sufficiently detailed to serve as a basis for making said
determination, the actual cost of construction shall be used.
15. LIABILITY INSURANCE. Tenant, at Tenant's expense, agrees to obtain and
keep in force during the term of this Lease a policy of comprehensive public
liability insurance against any and all claims for personal injury, death,
property damage, or other liabilities related to the condition, use or
occupancy of the Premises or to Tenant's operations on the Premises, including
an extended liability endorsement providing contractual liability and broad
form property damage coverage. Such insurance shall also contain a
cross-liability clause and shall insure Tenant's performance of the indemnity
agreement set forth in Paragraph 18, although Tenant's obligations pursuant to
such indemnity shall not be limited to the amount of any insurance required of,
or otherwise carried by, Tenant. Such liability insurance shall have a
combined single limit of not less than Two Million Dollars ($2,000,000) and
certificates evidencing such insurance shall be furnished to Landlord prior to
Tenant's occupancy of the Premises. The policy or policies affecting such
insurance shall name Landlord and the beneficiary or mortgagee of any deed of
trust or mortgage affecting the Premises as additional insureds, and shall
insure any liability of Landlord, contingent or otherwise, with respect to any
act of omission of Tenant, its agents, employees or invitees or otherwise by
any conduct or transactions of any of said persons in or about or concerning
the Premises, including any failure of Tenant to observe or perform any of
its obligations hereunder; shall be issued by an insurance company admitted to
transact business in the State of California having a rating of A or better in
"Best's Insurance Guide"; and shall provide that the insurance effected thereby
shall not be canceled, except upon thirty (30) days' prior written notice to
Landlord. Said liability insurance shall be primary and not contributing to any
insurance available to Landlord, and Landlord's insurance shall be in excess
thereto. If, during the Lease Term, in the considered opinion of Landlord's
lender, insurance advisor, or counsel, the amount of insurance described in
this Paragraph 15 is not adequate, Tenant agrees to increase said coverage to
such reasonable amount as Landlord's lender, insurance advisor, or counsel
shall deem adequate.
16. TENANT'S PROPERTY INSURANCE AND WORKER'S COMPENSATION. Tenant shall
maintain a policy or policies of fire and property damage insurance in "all
risk" form with a sprinkler leakage endorsement insuring the personal property,
inventory, trade fixtures, and leasehold improvements within the Premises for
the full replacement value thereof. The proceeds from any of such policies
shall be used for the repair or replacement of such items so insured. Tenant
shall also maintain a policy or policies of worker's compensation insurance
and any other employee benefit insurance sufficient to comply with all laws.
17. LANDLORD'S INSURANCE; WAIVER OF SUBROGATION.
A. Landlord's Property Insurance. Landlord shall purchase and keep
in force, a policy or policies of casualty insurance covering loss or damage to
the Premises, Building and related Common Area improvements in the amount of
the full replacement value thereof, providing protection against those perils
covered by "all risk" insurance, and including such other casualty endorsements
as Landlord may elect. Landlord shall also maintain at Landlord's election, or
if required by Landlord's lender from time to time, earthquake and/or flood
damage insurance, worker's compensation insurance, sprinkler leakage insurance
and rental income insurance in the amount of one hundred (100%) percent of
twelve (12) months Basic Rent, plus sums paid as Additional Rent. Tenant shall
pay to Landlord Tenant's Share of the cost of Landlord's insurance, as
described herein, as Additional Rent in accordance with Paragraph 4.E thereof.
If such insurance cost is increased due to the Tenant's use of the Premises or
the Complex, Tenant agrees to pay to Landlord the full cost of such increase.
Tenant shall have no interest in nor any right to the proceeds of any insurance
procured by landlord as described in this Paragraph 17.
B. Waiver of Subrogation. Each party hereby releases the other
party, and its partners, officers, agents, employees, and servants, from any
and all claims, demands, loss, expense, or injury to the Premises or to the
furnishings, fixtures, equipment, inventory, or other property in, about, or
upon the premises, which is caused by or results from perils, events, or
happenings which are the subject of fire or other casualty insurance in force
at the time of such loss irrespective of any negligence on the part of the
released party which may have contributed to or caused such loss; subject to
the following limitations: (i) the party being released shall not be released
from any liability to the extent that such damages are not covered by the
insurance recovery obtained by the releasing party, and (ii) the party being
released shall be responsible for reimbursing the releasing party for any
deductible owed as a result of such damages. Each party shall use commercially
reasonable efforts to obtain, if needed, appropriate endorsements to its
policies of insurance with respect to the foregoing releases; provided,
however, that failure to obtain such endorsements shall not affect the releases
hereinabove given.
18. INDEMNIFICATION; EXEMPTION OF LANDLORD FROM LIABILITY
A. Indemnification. Subject to Section 2782 of the California
Civil Code, and provided such matters have not be waived under the waiver of
subrogation in Section 17B above, Tenant shall defend, protect, indemnify, and
hold Landlord and its agents, contractors and employees harmless (except for
gross negligence or willful misconduct of Landlord and then only to the extent
that such loss is not waived under Paragraph 17.B) from and against any and all
obligations, losses, costs, expenses, liabilities, claims, damages, demands,
fines, penalties, attorneys' fees, investigation costs, court costs or expert
witness fees incurred in connection with or on account of, or arising from any
injury or death or property damage resulting from (i) the use, condition or
occupancy of the Premises or (ii) any act or omission or negligence of Tenant
or Tenant's agents, contractors, employees, or invitees or (iii) any occurrence
in, upon or at the Premises from any cause whatsoever or (iv) any breach,
violation or non-performance by Tenant of any of its obligations hereunder.
<PAGE> 11
B. Exemption of Landlord from Liability. Neither Landlord nor its agents
or contractors or employees shall be liable to Tenant, and Tenant waives all
claims against Landlord, and its agents, contractors and employees for injury or
death to any person (including without limitation Tenant and Tenant's employees)
or for damage or loss to Tenant's business (including consequential damages) or
for damage or loss to any property (including without limitation Tenant's
personal property) by and from all causes, including without limitation (i) any
latent or patent defect in the Premises, Building or Complex, or (ii) fire,
steam, electricity, gas, dampness, water or rain which may leak or flow from or
into any part of the Premises or the Complex, or (iii) interruption, breakage,
leakage, obstruction or defects of pipes, sprinklers, wires, appliances, or
Building Systems, including without limitation plumbing, heating, air condition,
telecommunications or lighting systems or fixtures, whether the damage or injury
results from conditions arising in, upon, or about the Premises, Building or
Complex or from other sources or (iv) any act or omission or neglect of any
other tenant of the Building or Complex. Tenant shall immediately notify
Landlord in writing of any known defect in the Premises. The provisions of this
Paragraph 18.B shall not apply to any damage or injury caused by Landlord's
willful misconduct or gross negligence, except to the extent the same is waived
under Paragraph 17.B.
19. COMPLIANCE. Tenant, at its sole cost and expense, shall promptly comply
with all laws, statutes, ordinances and governmental rules, regulations or
requirements now or hereafter in effect; with the requirements of any board of
fire underwriters or other similar body now or hereafter constituted; and with
any direction or occupancy certificate issued pursuant to law by any public
officer; provided, however, that no such failure shall be deemed a breach of
these provisions if Tenant, immediately upon notification, commences to remedy
or rectify said failure. The judgment of any court of competent jurisdiction or
the admission by Tenant in any action against Tenant, whether Landlord be a
party thereto or not, that Tenant has violated any such law, statute, ordinance
or governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. This Paragraph shall not
be interpreted as requiring Tenant to make structural changes or structural
improvements, except to the extent such changes or improvements are required as
a result of Tenant's use or alteration of the Premises. Tenant shall, at its
cost and expense, comply with any and all requirements pertaining to said
premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering the
Premises.
20. LIENS. Tenant shall keep the Premises and the Complex free from any liens
arising out of any work performed, materials furnished or obligation occurred by
Tenant. In the event that Tenant shall not, within ten (10) days following the
imposition of such lien, cause the same to be released of record, by bond or
otherwise, Landlord shall have, in addition to all other remedies provided
herein and by law, the right, but not the obligation, to cause the same to be
released by such means as it shall deem proper, including payment of the claim
giving rise to such lien. All sums paid by Landlord for such purpose, and all
expenses incurred by it in connection therewith, shall be payable to Landlord by
Tenant on demand with interest thereon as specified in Paragraph 44 below.
21. ASSIGNMENT AND SUBLETTING.
A. Landlord's Consent Required. Tenant shall not assign, transfer, or
hypothecate the leasehold estate under this Lease, or any interest therein, and
shall not sublet the Premises, or any part thereof, or any right or privilege
appurtenant thereto (including, but not limited to the parking spaces to be used
in connection with Tenant's occupancy), or suffer any other person or entity to
occupy or use the Premises, or any portion thereof, without, in each case, the
prior written consent of Landlord, which consent will not be unreasonably
withheld. Any attempt to do so without such prior consent shall be wholly void
and shall constitute a default by Tenant under this Lease. In the event Landlord
consents to any assignment or subletting, such consent shall not constitute
waiver of any of the restrictions of this Paragraph 21 and the same shall apply
to each successive assignment or subletting hereunder, if any. In no event shall
Landlord's consent to an assignment or subletting affect the continuing primary
liability of Tenant (which, following assignment shall be joint and several with
the assignee), or relieve Tenant of any of its obligations hereunder without an
express written release being given by Landlord. In the event that Landlord
shall consent to an assignment or subletting under this Paragraph 21, such
assignment or subletting shall not be effective until the assignee or sublessee
shall assume all of the obligations of this Lease on the part of Tenant to be
performed or observed and whereby the assignee or sublessee shall agree that the
provisions contained in this Lease shall, notwithstanding such assignment or
subletting, continue to be binding upon it with respect to all future
assignments and sublettings. Such assignment or sublease agreement shall be duly
executed and a fully executed copy thereof shall be delivered to Landlord, and
Landlord may collect Rent due hereunder directly from the assignee or sublessee.
Collection of Rent directly from an assignee or sublessee shall not constitute a
consent or a waiver of the necessity of consent to such assignment or
subletting, nor shall such collection constitute a recognition of such assignee
or sublessee as the Tenant hereunder or a release of Tenant from the performance
of all of its obligations hereunder.
B. Reasonable Consent. If Tenant complies with the following conditions,
Landlord shall not unreasonably withhold its consent to the assignment of the
Lease or the subletting of the Premises or any portion thereof: Tenant shall
submit in writing to Landlord (a) the name and legal composition of the proposed
assignee or subtenant; (b) the nature of the proposed assignee's or subtenant's
business to be carried on in the Premises; (c) the terms and provisions of the
proposed assignment or sublease; (d) such reasonable financial information as
Landlord may request concerning the proposed assignee of subtenant including,
without limitation, financial history, credit rating and business experience.
Tenant acknowledges that Landlord has entered into this Lease.
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<PAGE> 12
in reliance on the particular skills, knowledge and experience of Tenant and/or
the principal officer of Tenant with respect to the conduct of business in the
Premises. Without limiting Landlord's right to refuse to give such consent on
any other reasonable grounds, Landlord reserves the right to refuse to give such
consent if in Landlord's reasonable business judgment (i) the quality of
operation of the Complex may be in any way adversely affected during the Lease
Term; (i) the financial worth of the proposed new tenant is less than that of
Tenant executing this Lease; (iii) the proposed assignee's or subtenant's use of
the Premises involves the storage, use of disposal of any Hazardous Materials;
(iv) the proposed assignee or subtenant has been required by any governmental
authority to clean up Hazardous Materials; (v) the proposed assignee or
subtenant is subject to investigation or enforcement by any governmental
authority in connection with the use, disposal or storage of a Hazardous
Material; or (vi) investigation discloses other information reasonably
unsatisfactory to Landlord.
C. Bonus Rent. Tenant agrees that fifty percent (50%) of any amounts
paid by the assignee or sublessee as Basic Rent or its equivalent, however
described, in excess of the Basic Rent payable by Tenant hereunder (or, in the
case of sublease of a portion of the Premises, in excess of the Basic Rent
reasonably allocable to such portion), shall be the property of Landlord and
such amounts shall be payable directly to Landlord by the assignee or sublessee.
At Landlord's request, a written agreement shall be entered into by and among
Tenant, Landlord and the proposed assignee or sublessee confirming the
requirements of this paragraph.
D. Certain Transactions. The sale of all or substantially all of
Tenant's assets (other than bulk sales in the ordinary course of business), or,
if Tenant is a corporation, limited liability company, an unincorporated
association, or a partnership, the transfer, assignment or hypothecation of any
stock or interest in such corporation, company, association or partnership in
the aggregate in excess of twenty-five percent (25%) (except for publicly traded
shares of stock constituting a transfer of fifty-one percent (51%) or more in
the aggregate, so long as no change in the controlling interests of Tenant
occurs as a result thereof) shall be deemed an assignment within the meaning and
provisions of this Paragraph 21.
E. Costs; Acknowledgement of Reasonableness. Tenant agrees to reimburse
Landlord for Landlord's expenses (including attorneys' fees and costs) incurred
in connection with processing and documentation associated with any consents
requested by Tenant under this Paragraph 21. Tenant agrees that the provisions
of this Paragraph 21 are not unreasonable standards or conditions for any
purpose, including for purposes of the California Civil Code Section 1951.4(b).
22. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold
interest in the Premises or the Complex is now or hereafter encumbered by the
lien of any mortgage or deed of trust to secure a loan from a lender
(hereinafter referred to as a "Lender") to Landlord, Tenant shall, at the
request of Landlord or Lender, execute in writing an agreement subordinating its
rights under this Lease to the lien of such mortgage or deed of trust, or, if so
requested, agreeing that the lien of Lender's mortgage or deed of trust shall be
or remain subject and subordinate to the rights of Tenant under this Lease.
Notwithstanding any such subordination, Tenant's possession under this Lease
shall not be disturbed if Tenant is not in default and so long as Tenant shall
pay all Rent and fully and faithfully observe and perform all of the provisions
set forth in this Lease. Tenant acknowledges that upon receipt from a lender of
"Demand to Pay Rent to Party other than Landlord" under Section 2936 of the
California Civil Code, Tenant shall be required to pay all Rents to the Lender
as they become due.
23. ENTRY BY LANDLORD. At all reasonable times after 24 hours prior notice
(except in emergencies, in which case no notice is required) Landlord shall
have, the right to enter the Premises to inspect them subject to compliance with
Tenant's security procedures to perform any services to be provided by Landlord
hereunder; to submit the Premises to prospective purchasers, lenders, or tenants
and to post "For Rent" or "For Sale" or other signs relative to the same; to
post notices of nonresponsibility; and to alter, improve, repair the Premises,
all without abatement of Rent; and may erect scaffolding and other necessary
structures in or through the Premises where reasonably required by the character
of the work to be performed; provided, however that Landlord shall endeavor not
to unreasonably interfere with Tenant's use of the Premises. For each of the
foregoing purposes, Landlord shall at all times have and retain a key with which
to unlock all of the doors in an emergency. Any entry to the Premises obtained
by Landlord by any of said means, or otherwise, shall not under any
circumstances be construed or deemed to be forcible unlawful entry into or a
detainer of the premises or an eviction, actual or constructive, of Tenant from
the Premises or any portion thereof.
24. TENANT'S DEFAULT. The occurrence of any of the following shall be an
"Event of Default" (sometimes referred to herein as a "default") by Tenant and a
material breach of this Lease:
(1) Tenant shall fail to make any payment owed by Tenant under this
Lease, as and when due, and such failure is not cured within three (3) days
after Tenant receives written notice from Landlord specifying such failure. At
Landlord's election, any such notice shall be concurrent with, and in addition
to, any notice required under Section 1161 of the California Code of Civil
Procedure;
(2) Tenant shall fail to observe, keep or perform any of the terms,
covenants, agreements or conditions under this Lease that Tenant is obligated to
observe or perform, other than that described in subsection (1) above, for a
period thirty (30) days after Tenant receives written notice from Landlord of
said failure; provided, however, that if the nature of Tenant's default is such
that more than thirty (30) days are reasonably required for its cure, then
Tenant shall not be deemed to be in default under this Lease if Tenant shall
commence the cure of such default within said thirty (30) day period and
diligently execute the same to completion within such time period as is
reasonably needed but not to exceed ninety (90) days from the date of Landlord's
notice. At Landlord's election, any such notice from Landlord shall be
concurrent with, and not in addition to, any notice required under Section 1151
of the California Code of Civil Procedure;
<PAGE> 13
(3) Tenant shall (i) make any general arrangement or
assignment for the benefit of creditors; (ii) become a "debtor" as defined in
11 U.S.C. Section 101 or any successor statute thereto (unless, in case of a
petition filed against Tenant, the same is dismissed within 60 days); (iii)
suffer the appointment of a trustee or receiver to take possession of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within 30
days; or (iv) suffer the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within 30 days. The
provisions of this subparagraph 24(3) shall also apply to any Guarantor of this
Lease. However, in the event that any provision of this subparagraph is contrary
to any applicable law, such provision shall be of no force or effect; or
(4) Tenant shall vacate or abandon the Premises at any time
during the Lease Term (except that Tenant may vacate so long as it pays Rent,
provides an on site security guard during normal business hours from Monday
through Friday, and otherwise performs its obligations hereunder).
25. LANDLORD'S REMEDIES AND RIGHTS
A. Termination of Lease. In case of an event of Default by Tenant,
Landlord shall have the right, in addition to all other rights available to
Landlord under this Lease or now or hereafter permitted by law or in equity, to
terminate this Lease by providing Tenant with a notice of termination. Upon
termination, Landlord may recover any damages proximately caused by Tenant's
failure to perform under this Lease, or which are likely in the ordinary course
of business to be incurred, including any amount expended or to be expended by
Landlord in an effort to mitigate damages, as well as any other damages which
Landlord is entitled to recover under any statute now or hereafter in effect.
Landlord's damages include, without limitation, the following:
(1) the worth at the time of the award of any unpaid Rent
which had been earned at the time of termination;
(2) the worth at the time of the award of the amount by
which the unpaid Rent which would have been earned after termination until the
time of the award exceeds the amount of the loss of such Rent that Tenant proves
could have been reasonably avoided; and
(3) the worth at the time of the award of the amount by
which the unpaid Rent for the balance of the term after the time of the award
exceeds the amount of the loss of such Rent that Tenant proves could have been
reasonably avoided.
As used in subparagraphs (1) and (2) above, the "worth at the
time of award" shall be determined by allowing interest at the maximum rate of
interest permitted by applicable law. As used in subparagraph (3), the "worth
at the time of award" shall be determined by discounting to present value such
amount at one percent (1%) more than the discount rate of the Federal Reserve
Bank in San Francisco in effect at the time of the award.
B. Continuation of Lease. In accordance with California Civil Code
Section 1951.4 (or any successor statute). Tenant acknowledges that in the event
Tenant has breached this Lease and abandoned the Premises, this Lease shall
continue in effect for so long as Landlord does not terminate Tenant's right to
possession, and Landlord may enforce all its rights and remedies under this
Lease, including the right to recover the Rent as it becomes due under this
Lease. Acts of maintenance or preservation or efforts to relet the Premises or
the appointment of a receiver upon initiative of Landlord to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession.
C. Right of Entry. In case of an Event of Default by Tenant,
Landlord shall also have the right, in accordance with all applicable laws with
or without terminating this Lease, to enter the Premises and remove all persons
and personal property from the Premises, such property being removed and stored
in a public warehouse or elsewhere at Tenant's sole cost and expense for at
least thirty (30) days, and after such thirty (30) day period. Landlord shall
have the right to discard or otherwise dispose of such property in accordance
with California law. No removal by Landlord of any persons or property in the
Premises shall constitute an election to terminate this Lease. Such an election
to terminate may only be made by Landlord in writing, or decreed by an
arbitrator or a court of competent jurisdiction. Landlord's right of entry
shall include the right to restore the Premises to the condition required at
the expiration of the Lease Term and relet the Premises. All costs incurred in
such entry and reletting shall be paid by Tenant. Rents collected by Landlord
from any other tenant which occupies the Premises shall be offset against the
amounts owed to Landlord by Tenant. Tenant shall be responsible for any amounts
not recovered by Landlord from any other tenant which occupies the Premises.
Any payments made by Tenant shall be credited to the amounts owed by Tenant in
the sole order and discretion of Landlord, irrespective of any designation or
request by Tenant. No entry by Landlord shall prevent Landlord from later
terminating this Lease by written notice.
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<PAGE> 14
D. REMEDIES. Tenant hereby waives, for itself and all persons claiming
by, through or under Tenant, all rights and privileges which it might have
under any present or future law to redeem the Premises or to continue this
Lease after being legally dispossessed or ejected from the Premises. The rights
and remedies of Landlord set forth in this Lease are not exclusive, and
Landlord may exercise any other right or remedy available to it under this
Lease at law or in equity.
26. DESTRUCTION. In the event the Premises are destroyed in whole or in part
from any cause, except damage and destruction caused from vandalism or accident
for which Tenant is responsible for under Paragraph 12, Landlord may, at its
option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction, or
(b) Terminate this Lease, provided that the Premises is damaged to the
extent of twenty percent (20%) of the replacement cost thereof or to any extent
if (i) the damage is not covered by insurance, and/or (ii) the damage occurs
during the last twelve (12) months of the Lease Term.
Landlord shall give Tenant notice in writing within thirty (30) days from
the destruction of the Premises of its election to either rebuild and restore
them, or to terminate this Lease. In the event Landlord agrees to rebuild or
restore the Premises, Landlord shall do so promptly at its expense. Except
when such damage is caused by Tenant or Tenant's agents, employees or
contractors and there is no rental loss insurance proceeds payable, Tenant
shall be entitled to a reduction in Rent while such repair is being made in the
proportion that the area of the Premises rendered untenantable by such damage
bears to the total area of the Premises. If Landlord initially estimates that
the rebuilding or restoration will exceed 180 days or if Landlord does not
complete the rebuilding or restoration within one hundred eighty (180) days
following the date of destruction (such period of time to be extended for
delays caused by the fault or neglect of Tenant or because of Acts of God, acts
of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or
stormy weather, inability to obtain materials, supplies or fuels, acts of
contractors or subcontractors, or delay of the contractors or subcontractors
due to such causes or other contingencies beyond the control of Landlord), then
Tenant shall have the right to terminate this Lease by giving thirty (30) days
prior written notice to Landlord. Notwithstanding anything herein to the
contrary, Landlord's obligation to rebuild or restore shall include the initial
Tenant Improvements, but shall not include restoration of Tenant's fixtures,
equipment, (including telecommunication equipment, whether or not located
within the Premises), merchandise, or any improvements, alterations, or
additions made by Tenant to the Premises, which Tenant shall forthwith replace
or fully repair at Tenant's sole cost and expense provided this Lease is not
cancelled according to the provisions above.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives any
statutory rights of termination which may arise by reason of any partial or
total destruction of the Premises.
In the event the damage or destruction of the Premises is caused by Tenant
or Tenant's employees, agents or independent contractors, Tenant shall pay the
deductible portion of Landlord's insurance proceeds.
27. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any
public or quasi-public authority under the power of eminent domain or
conveyance in lieu thereof, this Lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests in the condemnor,
and Landlord shall be entitled to any and all payment, income, rent, award, or
any interest therein whatsoever which may be paid or made in connection with
such taking or conveyance, and Tenant shall have no claim against Landlord or
otherwise for the value or any unexpired term of this Lease. Notwithstanding
the foregoing Paragraph, any compensation specifically awarded to Tenant for
loss of business, Tenant's personal property, moving cost or loss of goodwill,
shall be and remain the property of Tenant.
If (i) any action or proceeding is commenced for such taking of the
Premises or any part thereof, or if Landlord is advised in writing by any
entity or body having the right or power of condemnation of its intention to
condemn the Premises or any portion thereof, or (ii) any of the foregoing
events occur with respect to the taking of any other space in the Complex, or
(iii) any such spaces are taken or conveyed in lieu of such taking, Landlord
shall have the right to terminate this Lease by giving Tenant written notice
thereof within sixty (60) days of the date of receipt of said written advice,
or commencement of said action or proceeding, taking or conveyance, which
termination shall take place as of the first to occur of the last day of the
calendar month next following the month in which such notice is given or the
date on which title to the Premises shall vest in the condemnor.
In the event of a partial taking or conveyance of the Premises, if the
portion of the Premises taken or conveyed is so substantial that the Tenant
can no longer reasonably conduct its business, Tenant shall have the privilege
of terminating this Lease within sixty (60) days from the date of such taking
or conveyance upon written notice to Landlord of its intention to do so, and
upon giving of such notice this Lease shall terminate on the last day of the
calendar month next following the month in which such notice is given, upon
payment by Tenant of the Rent from the date of such taking or conveyance to the
date of termination.
If a portion of the Premises shall be taken by condemnation or conveyance
in lieu thereof and neither Landlord nor Tenant terminate this Lease as
provided herein, this Lease shall continue in full force and effect as to the
part of the Premises not so taken or conveyed, and the Rent herein shall be
apportioned as of the date of such taking or conveyance so that thereafter the
Rent to be paid by Tenant shall be in the ratio that the area of the portion of
the Premises not so taken or conveyed bears to the total area of the Premises
prior to such taking.
28. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of
the Complex or any interest therein, by any owner of the reversion then
constituting Landlord, the transferor shall thereby be released from any further
liability upon any of the terms, covenants or conditions (express or implied)
herein contained in favor of Tenant, and in such event, insofar as such
transfer is concerned, Tenant agrees to look solely to the responsibility of
the successor in interest of such transferor in and to the Complex and this
Lease. This Lease shall not be affected by any such sale or conveyance, and
Tenant agrees to attorn to the successor in interest of such transferor.
<PAGE> 15
29. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of
Landlord in the Complex is encumbered by mortgage or deed of trust, and such
interest is acquired by the lender or any third party through judicial
foreclosure, non-judicial foreclosure, or conveyance in lieu thereof, Tenant
hereby agrees to attorn to such purchaser or transferee and to recognize such
purchaser or transferee as the landlord under this Lease. In the event the lien
of the deed of trust securing the loan from a lender to Landlord is prior and
paramount to the Lease, this Lease shall nonetheless continue in full force and
effect for the remainder of the unexpired term hereof, all the same rental
herein reserved and upon all the other terms, conditions and covenants herein
contained.
30. HOLDING OVER. Any holding over by Tenant after expiration or other
termination of the Lease Term shall not constitute a renewal of the Lease or
give Tenant any rights to the Premises except as expressly provided in this
Lease. Any holding over after the expiration or other termination of the Lease
Term, with the prior written consent of Landlord, shall be construed to be a
tenancy from month to month, on the same terms and conditions herein specified
insofar as applicable except that the monthly Basic Rent shall be increased to
an amount equal to one hundred ten (110%) percent of the monthly Basic Rent
required during the last month of the Lease Term.
31. CERTIFICATE OF ESTOPPEL. Tenant shall within twenty (20) days after
written notice from Landlord, at any time, execute, acknowledge and deliver to
Landlord a statement in writing (i) certifying that this Lease is unmodified and
in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect) and the date to which the rent and other charges are paid in
advance, if any; (ii) acknowledging that there are not, to tenant's knowledge,
any uncured defaults on the part of Landlord hereunder, or specifying such
defaults, if any are claimed; and (iii) certifying to such other matters
concerning the Premises, the Lease or Tenant's tenancy as Landlord may request.
Any such statement may be conclusively relied upon by any prospective purchaser
or encumbrancer of the Premises. Tenant's failure to deliver such statement
within such time shall be conclusive upon Tenant that this Lease is in full
force and effect, without modification except as may be represented by
Landlord, that there are no uncured defaults in Landlord's performance, and
that not more than one month's Rent has been paid in advance.
32. CONSTRUCTION CHANGES. It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein
are subject to such minor changes as Landlord or Landlord's architect determines
to be desirable in the course of construction of the Premises, and no such
changes, or any changes in plans for any other portions of the Premises or the
Complex shall affect this Lease or entitle Tenant to any reduction of Rent
hereunder or result in any liability of Landlord to Tenant. Landlord does not
guarantee the accuracy of any drawings supplied to Tenant and verification of
the accuracy of such drawings rests with Tenant.
33. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of
this Lease to be performed or observed by Tenant shall be performed or observed
by Tenant at Tenant's sole cost and expense and without any reduction of Rent.
If Tenant shall fail to pay Rent, required to be paid by it hereunder or shall
fail to perform any other term or covenant required to be performed by it
hereunder after expiration of any applicable cure periods, and such failure
shall continue for five (5) days after written notice thereof from Landlord,
Landlord, without waiving or releasing Tenant from any obligation of Tenant
hereunder, may, but shall not be obligated to, make any such payment or perform
any such other term or covenant on Tenant's part to be performed. All sums so
paid by Landlord and all necessary costs of such performance by Landlord
together with interest thereon at the rate of interest specified in Paragraph
44 below, shall be paid to Landlord on demand as Additional Rent, and Landlord
shall have (in addition to any other right or remedy of Landlord) the same
rights and remedies in the event of nonpayment by Tenant of Rent hereunder.
34. ATTORNEY'S FEES. In the event that either Landlord or Tenant should
bring suit or become involved in any proceeding for the possession of the
Premises, for the recovery of any sum due under this Lease, or because of the
breach of any provision of this Lease, or for any other relief against the
other party hereunder, then all costs and expenses, including reasonable
attorneys' fees, incurred by the prevailing party therein shall be paid by the
other party, which obligation on the part of the other party shall be deemed to
have accrued on the date of the commencement of such action or proceeding and
shall be enforceable whether or not the action or proceeding is prosecuted to
judgment. Should Landlord be named as a defendant in any suit brought against
Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant
shall pay to Landlord its costs and expenses incurred in such suit, including a
reasonable attorneys' fees.
7
<PAGE> 16
35. WAIVER. No covenant, term or condition or the breach thereof shall be
deemed waived, except by written consent of the party against whom the waiver
is claimed, and any waiver of the breach of any covenant, term or condition
shall not be deemed to be a waiver of any other covenant, term or condition or
any subsequent failure of the party failing to perform or observe the same or
any other such term, covenant or condition. Acceptance by Landlord of any
performance by Tenant after the time the same shall have become due shall
constitute a waiver by Landlord of such breach or default of any covenant,
term or condition.
36. NOTICES. All notices, demands, requests, advises or designations
(collectively "Notices") which may be or are required to be given by either
party to the other party hereunder shall be in writing. All Notices shall be
sufficiently given, made or delivered if (i) to Tenant, personally served on
Tenant at 4435 Fortran Dr. by leaving the same at the Premises, or (ii) to
Landlord, if personally served on a general partner of Landlord executing this
Lease. Notice shall also be sufficiently given made or delivered if sent by (a)
postage prepaid United States mail or overnight courier, addressed as specified
in Paragraph 1.L. or (b) facsimile transmission to the numbers specified in
Paragraph 1.L. with confirming copy sent by United States mail. Each Notice
referred to in this Paragraph shall be deemed received on the date of the
personal service or facsimile transmission, the next business day after sending
via overnight courier, or on the third (3rd) day after mailing thereof by United
States mail, postage prepaid, as the case may be. The address to which Notices
are to be delivered may be changed by either party by delivering notice of such
pursuant to this Section.
37. EXAMINATION OF LEASE. Submission of this instrument for examination or
signature by Tenant does not constitute a reservation of or option for a lease,
and this instrument is not effective as a lease or otherwise until its
execution and delivery by both Landlord and Tenant.
38. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time, but
in no event earlier than thirty (30) days after written notice by Tenant to
Landlord and to the holder of any mortgage or deed of trust covering the
Premises whose name and address shall have previously been furnished to Tenant
in writing, specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall
not be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
39. AUTHORITY. If Tenant is a corporation (or other entity) each individual
executing this Lease on behalf of said corporation (or other entity) represents
and warrants that he or she is duly authorized to execute and deliver this
Lease on behalf of said corporation (or other entity) in accordance with the
by-laws of said corporation (or in accordance with the agreement of such other
entity) and that this Lease is binding upon said corporation (or other entity)
in accordance with its terms. Tenant shall, within thirty (30) days after
execution of this Lease, deliver to Landlord a certified copy of the resolution
of the Board of Directors or other governing members of said corporation (or
other entity) authorizing or ratifying the execution of this Lease.
40. LIMITATION OF LIABILITY. In consideration of the benefits accruing
hereunder, Tenant and all successors and assigns covenant and agree that, in
the event of any actual or alleged failure, breach or default hereunder by
Landlord:
(i) the sole and exclusive remedy and source or recovery for any
judgment or award shall be against Landlord's interest in the Premises:
(ii) no partner of Landlord shall be sued or named as a party in any
suit or action (except as may be necessary to secure jurisdiction of the
partnership);
(iii) no service of process shall be made against any partner of Landlord
(except as may be necessary to secure jurisdiction of the partnership);
(iv) no partner of Landlord shall be required to answer or otherwise
plead to any service of process;
(v) no judgment will taken against any partner of Landlord;
(vi) any judgment taken against any partner of Landlord may be vacated
and set aside at any time without hearing;
(vii) no writ of execution will ever be levied against the asset of any
partner of Landlord;
(viii) these covenants and agreements are enforceable both by Landlord and
also by any partner of Landlord.
Tenant agrees that each of the foregoing covenants and agreements shall be
applicable to any covenant or agreement either expressly contained in this Lease
or imposed by statute or at common law.
41. BROKERS. Tenant warrants that it has had dealings with only the real
estate broker(s) or agent(s) specified in Paragraph 1.M in connection with the
negotiation of this Lease and that it knows of no other real estate broker or
agent who is entitled to a commission in connection with this Lease. Tenant
shall indemnity, defend, protect and hold harmless Landlord and Landlord's
agents, employees and independent contractors from and against any and all
liabilities, losses, costs, expenses and damages (including attorneys' fees and
costs) arising out of any allegations or claim by any third party, other than
the broker(s) specified above, for a commission or fee in connection with the
negotiation of this Lease.
<PAGE> 17
42. SIGNS. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on or to any part of the outside of
the Premises or any exterior windows of the Premises without the prior written
consent of Landlord. If Tenant does not obtain Landlord's prior written consent
pursuant to the preceding sentence, Landlord shall have the right to remove any
such sign, placard, picture, advertisement, name or notice without notice to and
at the expense of Tenant. If Tenant is allowed to print or affix or in any way
place a sign in, on, or about the Premises, upon expiration or other sooner
termination of this Lease, Tenant at Tenant's sole cost and expense shall both
remove such sign and repair all damage in such a manner as to restore all
aspects of the appearance of the Premises to the condition prior to the
placement of said sign.
All approved signs or lettering on outside doors shall be printed, painted,
affixed or inscribed at the expense of Tenant or by a person approved of by
Landlord.
Tenant shall not place anything or allow anything to be placed near the
glass of any window, door partition or wall which may, in Landlord's judgment,
appear unsightly from outside the Premises.
43. HAZARDOUS MATERIALS.
A. Definitions. As used herein, the term "Hazardous Material" shall mean
any substance or material which has been determined by any state, federal, or
local governmental authority to be capable of posing a risk of injury to health,
safety or property including all of those materials and substances designated as
hazardous or toxic by the Environmental Protection Agency, the California Water
Quality Control Board, the Department of Labor, the California Department of
Industrial Relations, the Department of Transportation, the Department of
Agriculture, the Department of Human Services, the Food and Drug Agency or any
other governmental agency which regulates hazardous or toxic substances in the
environment. Without limiting the generality of the foregoing, the term
"Hazardous Material" shall include (i) all of those materials and substances
defined as "Toxic Materials" in Sections 66680 through 66685 of Title 22 of the
California Administrative Code, Division 4, Chapter 30, as the same shall be
amended from time to time, or any other federal, state or local statute, law,
ordinance, resolution, code, rule, regulation, order or decree regulating,
relating to, or imposing liability or standards of conduct concerning, any
hazardous, toxic or dangerous waste, substance or material as now or at any time
hereafter in effect, (ii) any substance, product, waste or other material of any
nature whatsoever which may give rise to liability under any statutory or common
law theory based on negligence, trespass, intentional tort, nuisance or strict
liability or under any reported decisions of a state or federal court, or (iii)
petroleum or crude oil other than petroleum and petroleum products which are
contained within regularly operated motor vehicles.
B. Restriction on Use. Tenant shall not cause or permit any Hazardous
Material to be used, generated, released, discharged, transported to or from,
stored, or disposed of in or about the Premises, the Complex, or any other land
or improvements in the vicinity of the Premises or the Complex, without the
prior written consent of Landlord, which consent may be withheld in Landlord's
sole and absolute discretion. However, subject to the terms and conditions set
forth herein, Landlord agrees that so long as the original party named herein as
Tenant remains the Tenant under this Lease, and so long as no uncured Event of
Default exists under this Lease, Tenant shall be permitted to use and store in
the Premises only the substances listed on Exhibit E attached hereto (however,
the inclusion of Exhibit E shall in no way be deemed to create any obligation on
Landlord's part to review the list of Hazardous Materials for conformity to
laws). Without limiting the generality of the foregoing, Tenant, at its sole
cost and expense, shall comply with all laws relating to the storage, use,
generation, release, transportation and disposal of Hazardous Materials. If the
presence of any Hazardous Material on the Premises caused or permitted by Tenant
results in contamination of the Premises, the Complex, or any nearby premises,
Tenant, at its sole cost and expense, shall promptly take all actions necessary
to return the same to the condition existing prior to such contamination.
Tenant shall indemnify, defend, protect and hold harmless Landlord and
Landlord's agents, employees and independent contractors from and against any
and all claims, judgments, damages (including, without limitation, punitive
damages), losses, penalties, fines, demands, liabilities (including strict
liability), encumbrances, liens, costs and expenses of investigation and defense
of any claim, including, without limitation, reasonable attorneys' fees and
disbursements and consultants' fees, arising out of, relating to or resulting
from any storage, use, generation, discharge, treatment, transportation, release
or disposal by Tenant, or Tenant's agents, employees or independent contractors,
of any Hazardous Material upon, about, above or beneath the Premises, the
Complex or any nearby premises. This indemnity shall survive the expiration or
earlier termination of this Lease. Tenant shall not suffer any lien to be
recorded against the Premises or the Complex as a consequence of a Hazardous
Material, including any so-called state, federal or local "super fund" lien
related to the "clean up" of a Hazardous Material in or about the Premises, the
Complex or any other premises.
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<PAGE> 18
C. Compliance. Tenant shall immediately notify Landlord of any inquiry,
test, investigation, or enforcement proceeding by or against Tenant or the
Premises concerning a Hazardous Material. Tenant acknowledges that Landlord,
as the owner of the Premises, at its election, shall have the sole right, at
Tenant's expense, to negotiate, defend, approve and appeal any action taken or
order issued with regard to a Hazardous Material by an applicable governmental
authority. Landlord shall have the right to appoint a consultant, at Tenant's
expense, to conduct an investigation to determine whether any Hazardous
Materials being used, stored and disposed of in an appropriate manner. Tenant,
at its expense, shall comply with all recommendations of the consultant.
D. Certification Upon Termination of Lease. Upon the expiration or
earlier termination of the Lease, Tenant, at its sole cost, shall remove all
Hazardous Materials from the Premises and shall provide a certificate to
Landlord at Landlord's request certifying that there is no contamination of
soil in or about the Premises and that there is no other contamination of
Hazardous Materials in the Premises. If Tenant fails to so surrender the
Premises, Tenant shall, in addition to its obligations under Paragraph 43.B
above, indemnify, defend, protect and hold harmless Landlord and Landlord's
agents, employees and independent contractors from and against any and all
damages arising out of, related to or resulting from Tenant's failure to
surrender the Premises as required by this Paragraph, including without
limitation any claims or damages in connection with the condition of the
Premises such as 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 Hazardous Material upon, about, above or beneath the
Premises, the Complex or any nearby premises.
E. Clean-up Activities. If any action is required to be taken by a
governmental authority to clean-up Hazardous Materials from the Premises 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 in addition to the requirements
of Paragraph 30, 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 relet the Premises or a
reduction of the fair market and/or rental value of the Premises.
44. INTEREST. Any sum accruing to Landlord under the provisions of this
Lease which shall not be paid by Tenant within thirty (30) days after such sum
becomes due, shall bear interest from the expiration of such 30 day period,
until paid, at the rate of twelve percent (12%) per annum, or the maximum rate
then permitted under applicable law, whichever is less.
45. MISCELLANEOUS AND GENERAL PROVISIONS.
A. Use of Building Name. Tenant shall not, without the written consent
of Landlord, use the name of the Building for any purpose other than as the
address of the business conducted by Tenant in the Premises.
B. Governing Law, Partial Invalidity. This Lease shall in all respects
be governed by and construed in accordance with the laws of the State of
California. If any provision of this Lease shall be invalid, unenforceable or
ineffective for any reason whatsoever, all other provisions hereof shall be and
remain in full force and effect.
C. Definitions; Binding Effect. The term "Premises" includes the space
leased hereby and any improvements now or hereafter installed therein or
attached thereto. The term "Landlord" or any pronoun used in place thereof
includes the plural as well as singular and the successors and assigns of
Landlord. The term "Tenant" or any pronoun used in place thereof includes the
plural as well as the singular and individuals, firms, associations,
partnerships and corporations, and their and each of their respective
heirs, executors, administrators, successors and permitted assigns, according to
the context hereof, and the provisions of this Lease shall inure to the benefit
of and bind such heirs, executors, administrators, successors and permitted
assigns.
The term "person" includes the plural as well as the singular and
individuals, firms, associations, partnerships and corporations. Words used in
any gender include other genders. If there be more than one Tenant,
the obligations of Tenant hereunder are joint and several. The paragraph
headings of this Lease are for convenience of reference only and shall have no
effect upon the construction or interpretation of any provision hereof.
D. Time of the Essence. Time is of the essence of this Lease and of
each and all of its provisions.
E. Quitcalm of Leasehold interest. At the expiration or earlier
termination of this Lease. Tenant shall execute, acknowledge and deliver to
Landlord, within ten (10) days after written demand from Landlord to Tenant,
any quitclaim deed or other document required by any reputable title company
licensed to operate in the State of California, to remove the cloud or
encumbrance created by this Lease from the real property of which Tenant's
Premises are a part.
F. Entire Agreement. All exhibits, riders and attachments referenced in
this Lease are hereby incorporated into this Lease. This instrument along with
any exhibits, riders and attachments hereto constitutes the entire agreement
between Landlord and Tenant relative to the Premises and this agreement and the
exhibits and attachments may be altered, amended or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
hereby acknowledge that neither party has relied upon any representation
concerning the Premises that is not set forth in this Lease and agree that all
prior or contemporaneous oral agreements between and among themselves and their
agents or representatives relative to the leasing of the Premises are merged
in or revolved by this agreement.
G. Recording of Lease. Neither Landlord nor Tenant shall record this
Lease or a short form memorandum hereof without the consent of the other.
<PAGE> 19
H. Amendments Required by Lender. Tenant further agrees to execute any
amendments required by a lender to enable Landlord to obtain financing, so long
as Tenant's rights hereunder are not substantially or adversely affected.
I. Air Rights Retained by Landlord. Tenant covenants and agrees that no
diminution or shutting off of light, air or view by any structure which may be
hereafter erected (whether or not by Landlord) shall in any way affect this
Lease, entitle Tenant to any reduction of Rent hereunder or result in any
liability of Landlord to Tenant.
K. Options Personal to Tenant. Any Options shall (i) be personal to the
original Tenant executing this Lease (ii) not be assignable and (iii) not be
separated from this Lease in any manner, whether by reservation or otherwise.
Any such Option may be exercised only by the original Tenant executing this
lease while occupying the Premises and provided that such Option shall be
exercised in good faith without the intention of thereafter assigning this
Lease or subletting the Premises, or any portion thereof, and may not be
exercised or assigned, voluntarily or involuntarily, by or to any other person
or entity.
IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this
Lease as of the day and year first above written.
LANDLORD: GEOMAX, a California TENANT: 3DFX Interactive, Inc. (TDFX),
general partnership a California corporation
By GEORGE L. QUINN JR. By GARY MARTIN
------------------------------- -----------------------------------
Print Name Print Name
/s/ GEORGE L. QUINN JR. /s/ GARY MARTIN
------------------------------- -----------------------------------
Signature Signature
PARTNER V.P. FINANCE
------------------------------- -----------------------------------
Title of Signatory Title of Signatory
By MAHMOUD GAHRAHMAT By
------------------------------- -----------------------------------
Print Name Print Name
/s/ MAHMOUD GAHRAHMAT
------------------------------- -----------------------------------
Signature Signature
PARTNER
------------------------------- -----------------------------------
Title of Signatory Title of Signatory
Landlord's Initials
--------
Tenant's Initials
--------
-9-
<PAGE> 20
EXHIBIT A
LEGAL DESCRIPTION OF COMPLEX
The real property referred to in this Lease as the "Complex" shall mean and
include all that certain real property situated in the County of Santa Clara,
State of California, more particularly described as follows:
PARCEL 3, as shown on that certain Map entitled, "Parcel Map", which was
filed for record in the office of the Recorder of the County of Santa
Clara, State of California on November 2, 1984 in Book 535 of Maps, at
page(s) 52 and 53.
<PAGE> 21
EXHIBIT B
SITE PLAN OF COMPLEX AND BUILDING
<PAGE> 22
EXHIBIT C
WORK LETTER AGREEMENT
Landlord and Tenant hereby agree as follows with regard to the Tenant
Improvements:
1. TENANT IMPROVEMENTS. Reference herein to "Tenant Improvements" shall
include all work to be done in the Premises pursuant to the Tenant Improvement
Plans described in Paragraph 2 below, for example, partitioning, doors,
ceilings, floor coverings, finishes (including paint and wall covering),
electrical (including lighting, switching, receptacles, telephone outlets etc.),
plumbing, restrooms, locker rooms, heating, ventilating and air conditioning,
and fire protection.
2. TENANT IMPROVEMENT PLANS. Prior to execution of the Lease, or as soon as
reasonably practicable thereafter, Tenant shall submit to Landlord a space plan
for Landlord's approval. Landlord's approval shall not be unreasonably withheld.
Such approved space plan shall be attached hereto as Exhibit "C-1". No material
changes shall be made to the approved space plan without the consent of
Landlord. The final working drawings and specifications for the Tenant
Improvements shall be prepared by Tenant's architect based upon the approved
space plan. Such final working drawings and specifications may be referred to
herein as the "Tenant Improvement Plans."
Tenant Improvement Plans shall be submitted to the appropriate governmental
body for plan checking and a building permit. Tenant, with Landlord's
cooperation, agrees to make all changes required by any public agency to conform
with governmental regulations. Any costs resulting from changes to the approved
space plan and/or the Tenant Improvement Plans shall be paid by Tenant.
3. CONSTRUCTION OF TENANT IMPROVEMENTS. Upon approval from the City of San
Jose, Tenant shall enter into a construction contract with a licensed contractor
of Tenant's choice for the installation of the Tenant Improvements in accordance
with the Tenant Improvement Plan. Such contract shall be approved and initialed
by Landlord and attached hereto as Exhibit "C-2". Tenant shall supervise the
completion of such work and shall use diligent efforts to secure completion of
the work in a timely manner.
4. PAYMENT OF COST OF THE TENANT IMPROVEMENTS. All tenant improvement costs
shall be paid by the Tenant.
5. NOTICES OF NON-RESPONSIBILITY. Landlord may place at any time during the
construction phase "notices of non-responsibility" in accordance with mechanics'
lien laws.
Landlord: GEOMAX, a California Tenant: 3DFX Interactive, Inc. (TDFX),
general partnership a California corporation
By: /s/ GEORGE L. QUINN JR. By: /s/ GARY MARTIN
--------------------------- ---------------
Its: Partner Its: V.P. Finance
-------------------------- --------------
By: /s/ MAHMOUD GAHRAHMAT Date: 1-22-98
--------------------------- -------------
Its: Partner
--------------------------
Date: 1-22-98
-------------------------
<PAGE> 23
EXHIBIT D
ACKNOWLEDGMENT OF COMMENCEMENT
Landlord: GEOMAX, a California general partnership
--------------------------------------------------------------
Tenant: 3DFX Interactive, Inc. (TDFX), a California corporation
----------------------------------------------------------------
Complex:
---------------------------------------------------------------
Premises: 110 Nortech Parkway, San Jose, California
--------------------------------------------------------------
For the Lease dated January 6, 1998, the undersigned hereby certifies:
I. That the undersigned Tenant occupies the above-described Premises
consisting of approximately 52,040 square feet.
II. That the initial Lease term commenced on _________, 19___ and will
terminate on April 30, 2007.
III. That Tenant's obligation to pay monthly Basic Rent in the amount of
$72,856.00 commenced or will commence on ____________, 19___.
IV. That a security deposit of $72,856.00 has been paid by Tenant to
Landlord.
V. That all construction to be performed by Landlord is complete and has
been accepted by Tenant.
Dated as of this _____ day of ___________, 19__.
LANDLORD: GEOMAX, a California TENANT: 3DFX Interactive, Inc. (TDFX)
general partnership a California corporation
By By GARY MARTIN
---------------------------------- -----------------------------------
Print Name Print Name
/s/ GARY MARTIN
---------------------------------- -----------------------------------
Signature Signature
V.P. FINANCE
---------------------------------- -----------------------------------
Title of Signatory Title of Signatory
By By
---------------------------------- -----------------------------------
Print Name Print Name
---------------------------------- -----------------------------------
Signature Signature
---------------------------------- -----------------------------------
Title of Signatory Title of Signatory
DO NOT EXECUTE UNTIL THE EXACT COMMENCEMENT DATE HAS
BEEN ESTABLISHED PURSUANT TO PARAGRAPH 6.B OF THE LEASE.
-13-
<PAGE> 24
EXHIBIT E
HAZARDOUS MATERIALS
Subject to the terms and conditions set forth in Paragraph 43 of the
Lease, so long as the original party named therein as Tenant remains the
Tenant under the Lease, and so long as no uncured Event of Default exists under
the Lease, Tenant shall be permitted to use and store in the Premises only the
substances listed below. If no items are listed, then Tenant shall not be
entitled to use or store any Hazardous Material on or about the Premises.
Any Hazardous Material used for general office purposes.
<PAGE> 25
EXHIBIT F
ESTIMATED 1998 NNN EXPENSES
FOR
110 NORTECH PARKWAY, SAN JOSE, CALIFORNIA
Annual Per S.F./Month
--------- --------------
Taxes (including assessments*): $ 86,334 $0.138
Insurance: $ 5,352 $0.103
Ground Maintenance: $ 9,367 $0.015
Repair and Maintenance: $ 6,245 $0.010
Exterior Utilities: $ 2,498 $0.004
Capital Reserves: $ 11,865 $0.019
Property Management: $ 26,228 $0.042
-------- ------
TOTAL ANNUAL ESTIMATED EXPENSES: $147,889 $0.237
Tenant always pays inside water, PG&E, HVAC maintenance contract.
Capital Reserves are for roof replacement, HVAC replacement and outside paint.
* See attached tax bill
<PAGE> 26
RIDER ONE
THIS RIDER ONE SHALL BE ATTACHED TO AND MADE A PART OF THAT CERTAIN LEASE
AGREEMENT BY AND BETWEEN GEOMAX, A CALIFORNIA GENERAL PARTNERSHIP ("LANDLORD")
AND 3DFX INTERACTIVE, INC. (TDFX) ("TENANT") FOR THE PREMISES LOCATED AT 110
NORTECH PARKWAY, SAN JOSE, CALIFORNIA AND DATED JANUARY 6, 1998, FOR REFERENCE
PURPOSES ONLY.
46. OPTION TO RENEW - ARBITRATED RENT: Tenant is given the option to extend the
term subject to all the provisions contained in this Lease, except for
minimum monthly rent, for a period of three (3) years ("extended term")
following the expiration of the initial term, by giving notice of exercise
of the option ("option notice") to Landlord at least four (4) months but no
more than six (6) months before the expiration of the initial term.
Provided that, if Tenant is in material default on the date of giving the
option notice, the option notice shall be totally ineffective, or if tenant
is in material default on the date the extended term is to commence,
Landlord may elect that the extended term shall not commence and this Lease
shall expire at the end of the initial term.
The minimum monthly rent is to be set at 100% of market rent. The parties
shall have thirty (30) days after Landlord receives the option notice in
which to agree on minimum monthly rent during the extended term. If the
parties agree on the minimum monthly rent for the extended term during that
period, they shall immediately execute an amendment to this Lease stating
the minimum monthly rent for the extended term. If the parties are unable
to agree on the minimum monthly rent for the extended term within that
period, then within ten days after the expiration of that period, each
party, at its cost and by giving notice to the other party, shall appoint a
real estate appraiser with at least five years' full-time commercial
appraisal experience in the area in which the premises are located, to
appraise and set the minimum monthly rent for the extended term. If a party
does not appoint an appraiser within ten days after the other party has
given notice of the name of its appraiser, the single appraiser appointed
shall be the sole appraiser and shall set the minimum monthly rent for the
extended term. If the two appraisers are appointed by the parties as stated
in this paragraph they shall meet promptly and attempt to set the minimum
monthly rent for the extended term. If they are unable to agree within ten
days after the second appraiser has been appointed, they shall attempt to
elect a third appraiser meeting the qualifications stated in this paragraph
within ten days after the last day the two appraisers are given to set the
minimum monthly rent. Each of the parties shall bear one half of the cost
of appointing the third appraiser and of paying the third appraiser's fee.
The third appraiser, however selected, shall be a person who has not
previously acted in any capacity for either party.
Within thirty days after the selection of the third appraiser, a majority
of the appraisers shall set the minimum monthly rent for the extended term.
If a majority of the appraisers are unable to set the minimum monthly rent
within the stipulated period of time, the three appraisers shall be added
together and their total divided by three; the resulting quotient shall be
the minimum monthly rent for the premises during the extended term. In no
event, however, shall the minimum monthly rent for the first year of the
extended term be less than the minimum monthly rent for the last year of
the initial term, unless otherwise agreed to in writing by Landlord and
Tenant.
During the extended term, the rent shall be adjusted annually on each
anniversary of the extended term (the Base Period) if the Consumer Price
Index - All Urban Consumers - San Francisco/Oakland/San Jose metropolitan
area (1982-84 = 100), as published by the Bureau of Labor Statistics (the
Index) increases over the Base Period Index. The base period Index shall be
the index for the calendar month which is four months prior to the month in
which the extended term begins. The base period index shall be compared
with the Index for the same calendar month for each subsequent year
(comparison month). If the Index for any comparison month is higher than
the base period Index, then the monthly rent for the next year shall be
increased by the identical percentage. In no event, however, should each
annual adjustment be less than four percent (4%) or more than eight percent
(8%) of the previous years rent.
<PAGE> 27
47. SIGNAGE: Tenant shall be allowed to install a sign at Tenant's sole cost
and liability in accordance with the City of San Jose's sign ordinance.
48. ESTIMATED 1998 NNN EXPENSES: Attached is Landlord's estimated 1998 NNN
expenses (see Exhibit F).
49. EARLY ACCESS: Tenant will have the right to access the premises upon
delivery of the possession of the Premises prior to the scheduled
commencement date to install Tenant Improvements referenced in Exhibit C.
Tenant's early access will be subject to all the terms and provisions of
the Lease except that Tenant will not be required to pay any base rent and
operating expenses until the commencement date.
50. TENANT IMPROVEMENTS. Tenant improvements are to be constructed within the
Premises. Tenant shall construct such Tenant Improvements pursuant to the
terms of the attached work letter agreement (see Exhibit C).
51. CAPITAL RESERVE ACCOUNT: The provisions of Section 9 of the Lease to the
contrary notwithstanding, as Additional Rent, Tenant shall pay:
A. into a capital reserve account Tenant's Share of reasonable reserves
for the replacement of the HVAC, roof, and exterior paint of the Building
(the "Capital Reserve Account"). The monthly installment into the Capital
Reserve Account may be adjusted annually based on any CPI increases as set
forth in section 46 above. Tenant shall have no further obligation to pay
any additional expenses associated with the replacement of such capital
expense items notwithstanding any deficiencies in the Capital Reserve
Account at the time of such replacement, unless the replacement is required
as a result of the negligence of Tenant in which event Tenant shall pay all
costs not covered by insurance which are incurred in connection with such
replacement; and
B. not more than (i) Ten Thousand Dollars ($10,000) per year for the
maintenance and repair of the roof and its components (other than
structural repairs which are Landlord's sole cost), and (ii) Five Thousand
Dollars ($5,000) per year for the repair of the HVAC system servicing the
Building. In the event the repair costs exceed the applicable caps set
forth in the preceding sentence, then Landlord shall be required to replace
the capital expense item(s) which have had a continuing repair need, rather
than continue to repair such item(s).
52. At Tenant's option, Landlord shall restore the parking to approximately 196
spaces as originally designed (see attached Exhibit B) by removing the
playground, equipment and re-paving and striping, as necessary, the play
yard area located on the south side of the Building. Upon completion of
parking lot restoration, eighty percent (80%) of the cost of such
restoration shall be paid by Landlord and twenty percent (20%) of it shall
be paid for by Tenant.
53. Subject to the approval of City of San Jose and Tenant's current premises
owner (which shall be obtained by Tenant, Landlord hereby approves of the
installation, at Tenant's expense, of a pedestrian walkway and gate to be
situated between the Complex and Tenant's current premises located at 4435
Fortran Drive, San Jose, CA. Such pedestrian walkway shall be removed by
Tenant and returned to its original condition upon termination of this
Lease.
54. Insert at the end of Section 9 of the Lease: "This paragraph shall not be
interpreted as requiring Tenant to make (i) any structural changes or
structural improvements to the Complex, except to the extent such changes
or improvements are required as a result of Tenant's use or alteration of
the Premises, or (ii) any repairs to or replacement of major portions of
the parking facilities, except routine sealing, stripping, and pothole
repairs."
55. Insert in Section 10 of the Lease: "The provisions of this Section 10 the
contrary notwithstanding, provided Landlord has approved the plans and
specifications of the Tenant Improvements prior to installation, Tenant
shall not be required to remove such improvements at the expiration or
earlier termination of the Lease Term."
<PAGE> 28
56. Insert at end of Section 11: "The provision of section 11 to the contrary
notwithstanding, Tenant shall have the right to install up to Twenty
Thousand Dollars ($20,000) per year in alterations, modifications and
improvements to the Premises without Landlord's prior written consent,
provided such alterations, modifications and/or improvements do not
adversely affect the structural integrity of, or the electrical, plumbing
or HVAC systems servicing the Building."
57. Insert at the end of Section 14: "The foregoing notwithstanding, Tenant
shall have no obligation to pay any increase in real property taxes
resulting from a change in ownership of the Complex during the first five
(5) years of the Lease Term, provided, however, after the initial five
years of the Lease Term, any increase in real property taxes resulting
from a change in ownership shall be paid by Tenant."
58. Insert at the end of Section 28: "Tenant shall have the right to
terminate this Lease if the Premises are destroyed in whole or in part
during the last twelve (12) months of the Lease Term."
59. Insert at end of Section 38: "The foregoing notwithstanding, in the event
of an emergency Landlord shall be required to perform such obligations as
required under the terms of this Lease, as soon as reasonably possible
under the circumstances."
60. Insert at the end of Section 43C: "Landlord shall have the right to
appoint a consultant to conduct an investigation to determine whether any
Hazardous Material is being used, stored and disposed of by Tenant in
accordance with all applicble laws. In the event the consultant discovers
any violations of applicable laws by Tenant, then Tenant shall pay the
consultant's fees and all costs of compliance required in connection with
such violations.
<PAGE> 29
61. In the event of any inconsistencies between the Lease and this Rider One,
the terms of Rider One shall prevail and supersede.
Landlord: GEOMAX, a California Tenant: 3DFX Interactive, Inc., a
general partnership California corporation
By: /s/ GEORGE L. QUINN JR. By: /s/ GARY MARTIN
------------------------------ --------------------------------
Title: Partner Title: V.P. Finance
--------------------------- -----------------------------
By: /s/ MAHMOUD GAHRAHMAT Date: 1-22-98
------------------------------- ------------------------------
Title: Partner
---------------------------
Date: 1-22-98
----------------------------
CONSULT YOUR PROFESSIONAL ADVISORS: THIS DOCUMENT HAS BEEN PREPARED FOR
SUBMISSION TO YOUR ATTORNEY, TAX ACCOUNTANT, GEOLOGIST OR OTHER PROFESSIONAL
ADVISOR FOR APPROVAL FROM THE STANDPOINT OF PROTECTION OF YOUR INTERESTS AND
RIGHTS. NO REPRESENTATION OR RECOMMENDATIONS IS MADE BY CPS THE COMMERCIAL
PROPERTY SERVICES COMPANY, ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS DOCUMENT OR THE TRANSACTION RELATING
THERETO. ADDRESS THESE QUESTIONS TO YOUR ATTORNEY AND/OR OTHER PROFESSIONAL
ADVISORS.
Page 3 of 3
<PAGE> 1
EXHIBIT 10.17
October 12, 1997
Gary Martin
Re: Separation Agreement
Dear Gary:
This letter, upon your signature, will constitute the entire agreement
(the "Separation Agreement") between you and 3Dfx Interactive, Inc. ("3Dfx" or
the "Company") on the terms of your separation from employment with 3Dfx and
will supersede any prior agreements or understandings, written or oral. This
Separation Agreement may be modified only by a written document signed by you
and an authorized 3Dfx officer.
1. Your period of active employment will end the sooner of (i) December
31, 1997 or (ii) until you are replaced by the Company's new Chief Financial
Officer.
2. As new consideration, and in exchange for the mutual promises made in
this agreement, you will receive the following:
(a) You will remain on regular employee status and be paid at the
compensation rate of $8,126 per bi-weekly pay period for a four month period
starting from the sooner of (i) January 1, 1998. (ii) your replacement by the
Company's new Chief Financial Officer or (iii) such date you commence other
full time employment by another entity.
(b) Following termination of your period of active employment on active
employee status, you will be placed on temporary employee status through August
1, 2000 (the "Continuation Period"). You will continue to receive regular 3Dfx
provided medical insurance from January 1, 1998 through December 31, 1998. On
your final date of employment termination, you will be paid all wages and
accrued Personal Time Off ("P.T.O"). You will not accrue P.T.O. during the
Continuation Period.
(c) All stock options granted to you pursuant to the Company Employee
Stock Plan will continue to vest during the Continuation Period. As
<PAGE> 2
Gary Martin
September 12, 1997
Page 2
of January 1, 1998, our records indicate that you will be fully vested with
respect to options to purchase 83,810 shares of Common Stock with an additional
57,240 shares subject to vesting.
(d) In the event of a Change in Control and notwithstanding anything in
the Agreements or any stock option agreements to the contrary, the Company
hereby agrees (i) to waive its right to repurchase any unvested shares which
you may have purchased and to release such shares from the repurchase option
and (ii) accelerate the vesting of all stock options granted to you pursuant to
the Company's Employee Stock Plan. For the purposes of this Section 2(d)
"Change in Control" means the occurrence of any of the following events:
(A) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended), excluding existing
beneficial owners as of the date of this Separation Agreement, is or becomes
the "beneficial owner" (as defined in Section 13d-3 of said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities;
(B) The shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 50% of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the shareholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets;
(C) Any other provision of this subsection notwithstanding, the
term Change in Control shall not include either of the following events
undertaken at the election of the Company:
<PAGE> 3
Gary Martin
September 12, 1997
Page 3
(i) Any transaction, the sole purpose of which is to change the
state of the Company's incorporation; or
(ii) A transaction, the result of which is to sell all or
substantially all of the assets of the Company to another corporation (the
"surviving corporation") provided that the surviving corporation is owned
directly or indirectly by the shareholders of the company immediately following
such transaction in substantially the same proportions as their ownership of
the Company's common stock immediately preceding such transaction.
3. You will promptly return to 3Dfx on or before December 31, 1997 any
information in tangible form you have about 3Dfx's practices, procedures, trade
secrets, customer lists, product marketing, or any 3Dfx property in your
possession or control.
4. In exchange for the various items of new consideration described
above, to which you are not otherwise entitled, you waive and release and
promise never to assert any and all claims that you have or might have against
3Dfx and its predecessors, subsidiaries, related entities, officers,
directors, shareholders, agents, attorneys, employees, successors, or assigns,
arising from or related to your employment with 3Dfx and/or the termination of
your employment with 3Dfx.
These claims include, but are not limited to, claims arising under
federal, state and local statutory or common law, such as the Age
Discrimination in Employment Act, Title VII of the Civil Rights Act of 1964,
the California Fair Employment and Housing Act, the California Labor Code, and
the law of contract and tort.
You also waive and release and promise never to assert any such claims,
even if you do not believe that you have such claims. You therefore waive your
rights under section 1542 of the Civil Code of California which states:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the
<PAGE> 4
Gary Martin
September 12, 1997
Page 4
time of executing the release, which if known to him must have
materially affected his settlement with the debtor.
6. You will not, unless required or otherwise permitted by law,
disclose to others any information regarding the terms of this Separation
Agreement, the benefit being paid under it or the fact of its payment, except
that you may disclose this information to your immediate family with a need to
know, or to your attorney, accountant or other professional advisor to whom you
must make the disclosure in order for them to render professional services to
you. You will instruct them, however, to maintain the confidentiality of this
information just as you must.
7. You have up to 21 days from the date of this letter to accept the
terms of this Separation Agreement, although you may accept it at any time
within those 21 days. You are advised to consult an attorney about the
agreement.
8. You acknowledge and reaffirm that all of your duties under the 3Dfx
Employee Confidential Information and Inventions Agreement, which you signed on
[Date] continue as stated therein.
9. In the event of a breach of any obligations under this Separation
Agreement or as otherwise imposed by law, the aggrieved party shall be entitled
to all relief provided by law or equity.
To accept the agreement, please date and sign this letter and return it
to me within one week of the date of this letter; otherwise, this offer will
expire. (An extra copy for your files is enclosed.) Once you do so, you will
still have an additional seven days in which to revoke your acceptance. To
revoke, you must send me a written statement of revocation. If you do not
<PAGE> 5
Gary Martin
September 12, 1987
Page 5
revoke, the eighth day after the date of your acceptance will be the "effective
date" of the agreement.
I am pleased that we were able to reach agreement on these amicable terms.
Sincerely,
[SIG]
Greg Ballard
President, 3Dfx Interactive, Inc.
Enc.
By signing this letter, I acknowledge that I have reviewed this Separation
Agreement carefully with an attorney of my choice, that I understand the terms
of the agreement, and that I voluntarily agree to them.
Dated: 10-14-97
------------------------------
/s/GARY MARTIN
------------------------------
Gary Martin
<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 January 27, 1998,
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
February 10, 1998
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<ARTICLE> 5
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 34,921
<SECURITIES> 0
<RECEIVABLES> 13,695
<ALLOWANCES> 308
<INVENTORY> 3,845
<CURRENT-ASSETS> 54,553
<PP&E> 10,298
<DEPRECIATION> 3,482
<TOTAL-ASSETS> 61,917
<CURRENT-LIABILITIES> 17,097
<BONDS> 0
0
0
<COMMON> 66,717
<OTHER-SE> (22,443)
<TOTAL-LIABILITY-AND-EQUITY> 61,917
<SALES> 44,069
<TOTAL-REVENUES> 44,069
<CGS> 22,611
<TOTAL-COSTS> 22,611
<OTHER-EXPENSES> 23,802
<LOSS-PROVISION> 308
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,714)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,714)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
