UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIE
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITI
EXCHANGE ACT OF 1934
for the transition period from _______ to _______
COMMISSION FILE NUMBER: 0-22651
3DFX INTERACTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0390421
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4435 FORTRAN DRIVE
SAN JOSE, CALIFORNIA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (408) 935-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all re
required to be filed by Section 13 or 15(d) of the Securities Exchange
1934 during the preceding 12 months (or for such shorter period that th
registrant was required to file such reports), and (2) has been subject
filing requirements for the past 90 days. Yes [X] No [ ]
As of July 31, 1998 there were 15,550,629 shares of the Registrant
Common Stock outstanding.
=======================================================================
<PAGE>
3DFX INTERACTIVE, INC.
FORM 10-Q
INDEX
Cover Page.......................................................
Index............................................................
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed Consolidated Balance Sheets -- June 30, 1998 and
December 31, 1997..............................................
Condensed Statements of Operations -- Three Months and Six Months
Ended June 30, 1998 and June 30, 1997...........................
Condensed Consolidated Statements of Cash Flows -- Six Months
Ended June 30, 1998 and June 30, 1997..........................
Notes to Condensed Consolidated Financial Statements.............
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.........................................
Item 6. Exhibits and Reports on Form 8-K..........................
Signatures........................................................
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, Dece
1998 1997
----------- ----
<S> <C> <C>
Assets:
Cash and cash equivalents......................... $85,243 $
Short-term investments............................ 8,001
Accounts receivable, net.......................... 39,914
Inventory......................................... 27,901
Other current assets.............................. 1,992
----------- ----
Total current assets...................... 163,051
Property and equipment, net....................... 10,674
Other assets...................................... 438
----------- ----
$174,163 $
=========== ====
Liabilities and Shareholders' Equity:
Line of credit.................................... $195
Accounts payable.................................. 45,736
Accrued liabilities............................... 10,545
Current portion of capitalized lease obligations.. 599
----------- ----
Total current liabilities................. 57,075
----------- ----
Capitalized lease obligations, less current portion. 183
----------- ----
Shareholders' equity:
Common Stock...................................... 122,611
Warrants.......................................... 242
Deferred compensation............................. (939)
Accumulated deficit............................... (5,009) (
----------- ----
Total shareholders' equity................ 116,905
----------- ----
$174,163 $
=========== ====
</TABLE>
See accompanying notes to condensed consolidated financial stateme
<PAGE>
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Month
------------------- ----------
June 30, June 30, June 30,
1998 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues................................ $58,643 $6,507 $108,651
Cost of revenues........................ 30,443 3,278 56,173
--------- --------- ---------
Gross profit............................ 28,200 3,229 52,478
--------- --------- ---------
Operating expenses:
Research and development.............. 8,308 2,397 14,134
Selling, general and administrative... 8,041 2,521 17,679
--------- --------- ---------
Total operating expenses...... 16,349 4,918 31,813
--------- --------- ---------
Income (loss) from operations........... 11,851 (1,689) 20,665
Interest and other income
(expense), net....................... 1,052 (64) 1,566
--------- --------- ---------
Income (loss) before income taxes....... 12,903 (1,753) 22,231
Provision for income taxes.............. 3,871 -- 5,737
--------- --------- ---------
Net income (loss)....................... $9,032 ($1,753) $16,494
========= ========= =========
Net income (loss) per share
Basic................................. $0.59 ($0.19) $1.16
========= ========= =========
Diluted............................... $0.54 ($0.19) $1.04
========= ========= =========
Shares used in net income (loss) per
share calculations:
Basic................................. 15,238 9,261 14,212
--------- --------- ---------
Diluted............................... 16,763 9,261 15,909
--------- --------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statement
<PAGE>
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months
June 30
-------------
1998 1
---------- -
<S> <C> <
Cash flows from operating activities:
Net income (loss)....................................... $16,495
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 2,201
Stock compensation................................... 242
Increase in allowance for doubtful accounts.......... 1,333
Changes in assets and liabilities:
Accounts receivable................................ (27,860)
Inventory.......................................... (24,056)
Other assets....................................... 300
Accounts payable................................... 33,163
Accrued liabilities................................ 7,576
---------- -
Net cash provided by (used in) operating activities.. 9,394
---------- -
Cash flows from investing activities:
Purchases of short-term investments..................... (2,017)
Purchases of property and equipment..................... (5,841)
---------- -
Net cash used in investing activities................ (7,858)
---------- -
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock,
net.................................................. --
Proceeds from secondary public offering, net............ 54,752
Proceeds from issuance of Common Stock, net............. 1,142
Proceeds from exercise of warrants, net................. --
Principal payments of capitalized lease obligations,
net.................................................. (542)
(Payments) proceeds on drawdown on line of credit, net.. (582)
---------- -
Net cash provided by financing activities............ 54,770
---------- -
Net increase (decrease) in cash and cash equivalents...... 56,306
Cash and cash equivalents at beginning of period.......... 28,937
---------- -
Cash and cash equivalents at end of period................ $85,243
========== =
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest................ $96
========== =
</TABLE>
See accompanying notes to condensed consolidated financial stateme
<PAGE>
3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company and Its Significant Accounting Policies:
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the design,
development, marketing and support of 3D media processors, subsystems a
API software for the interactive electronic entertainment market.
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information or footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial information included therein. While the Company
believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the audited financial statements and accompanying note
included in the Company's Prospectus dated March 6, 1998 filed as part
a Registration Statement on Form S-1 (Reg. No. 333-25365), as amended,
and the Company's Annual Report on Form 10-K, as amended, for the fisca
year ended December 31, 1997 as filed with the Securities and Exchange
Commission. The results of operations for the quarter ended June 30, 19
are not necessarily indicative of the results to be expected for the fu
year.
Two customers represented 42% and 22% and three customers represented
43%, 18% and 13% of the Company's revenue during the second quarter an
first half of 1998, respectively. Four customers represented 38%, 16%,
14% and 13% and three customers represented 47%, 10% and 10% of the
Company's revenue during the second quarter and first half of 1997,
respectively.
Note 2 - Public Offerings:
In March 1998, the Company completed a public offering of 2,900,000
shares of common stock at a price of $23.75 per share. Of the 2,900,00
shares offered, 2,028,140 were sold by the Company and 871,860 were sol
by selling shareholders. The Company received cash of approximately $45
million, net of underwriting discounts and commissions and other offeri
costs. The Company did not receive any of the proceeds from the sale of
shares by the selling shareholders. On March 23, 1998, the Company's
underwriters exercised an option to purchase an additional 435,000 shar
of common stock at a price of $23.75 per share to cover over-allotments
The Company received cash of approximately $9.3 million, net of
underwriting discounts and commissions and other offering costs.
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 $30.4
million, net of underwriting discounts and commissions. Upon the closi
of initial public offering, all outstanding shares of the Company's the
outstanding Convertible Preferred Stock were automatically converted in
shares of common stock. On July 25, 1997, the Company's underwriters
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 $3.9 million, net of underwritin
discounts and commissions.
Note 3 - Development Contract:
In February 1997, the Company entered into a development and license
agreement with Sega Enterprises, Ltd. ("Sega"), under which the Company
is entitled to receive development contract revenues and royalties base
upon a cumulative volume of units sold by Sega which include the
Company's product. The Company recognized development contract revenues
of $1.8 million in the year ended December 31, 1997. The Company has n
further obligations to Sega with regard to the $1.8 million of
development contract revenue recognized. The Company has an outstanding
receivable for $267,000 related to the Sega agreement which, in light o
the litigation noted below, is classified as a long-term asset as of
December 31, 1997 and June 30, 1998. The Company did not earn any royal
revenue in the year ended December 31, 1997. Costs incurred during the
relating to this contract are included in research and development expe
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 o
trade secrets. In July 1998, the parties to the litigation participated
in a court-ordered mediation and reached an agreement in principle to
settle the lawsuit. The settlement is expected to be finalized in the
third quarter of fiscal 1998. No future revenues will be recognized
under the Sega agreement.
Note 4 - Earnings (Loss) per Share:
During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Shar
(SFAS 128). 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 averag
number of common and potentially dilutive common shares during the
periods, except those that are antidilutive. SFAS 128 requires a
reconciliation of the numerators and denominators of the basic and
diluted per share computations as follows (in thousands, except per sha
data):
<TABLE>
<CAPTION>
Three Months Ended Six Month
------------------- ----------
June 30, June 30, June 30,
1998 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) available to common
shareholders (numerator).............. $9,032 ($1,753) $16,494
Weighted average common shares
outstanding (denominator for basic
computation).......................... 15,238 9,261 14,212
Effect of dilutive securities --
common stock equivalents.............. 1,525 -- 1,697
--------- --------- ---------
Weighted average shares outstanding
(denominator for diluted computation). 16,763 9,261 15,909
========= ========= =========
Basic earnings (loss) per share......... $0.59 ($0.19) $1.16
========= ========= =========
Diluted earnings (loss) per share....... $0.54 ($0.19) $1.04
========= ========= =========
</TABLE>
During the three and six months ended June 30, 1998, options to purchas
approximately 762,750 and 672,750 shares, respectively were outstanding
but not included in the computation because they were antidilutive.
Note 5 - Income Taxes:
The Company recorded for the three months and the six months ended
June 30, 1998 an effective tax rate of 30% and 26%, respectively. The
effective tax rate is different from the statutory rate due to the
utilization of federal and state net operating loss carryforwards and t
credits. No provision for income taxes was recorded in the three month
and the six months ended June 30, 1997 as the Company incurred losses
during such period.
Note 6 - Comprehensive Income:
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which
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 investin
and hedging activities, and other transactions. Comprehensive income fo
each of the three and six months ended June 30, 1998 and 1997 was equal
to net income.
<PAGE>
3DFX INTERACTIVE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition a
Results of Operations
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements
include the sentence in the first paragraph under "Overview" regarding
anticipated revenue growth; the sentence in the second paragraph under
"Overview" regarding expected customer concentration; the sentence in t
third paragraph under "Overview" regarding the Sega Agreement; the
sentence in the fourth paragraph under "Overview" regarding availabilit
of raw materials; the sentences in the third and eleventh paragraphs
under "Results of Operations" regarding factors affecting gross margin;
the sentences in the fourth, fifth twelfth and thirteenth paragraphs
under "Results of Operations" regarding future research and development
and selling, general and administrative costs, respectively the sentenc
in the third paragraph under "Liquidity and Capital Resources" regardin
capital expenditures; the statements in the sixth paragraph under
"Liquidity and Capital Resources" regarding future liquidity and capita
requirements and the statements below under "Factors Affecting Future
Operating Results". These forward-looking statements are based on curre
expectations and entail various risks and uncertainties that could caus
actual results to differ materially from those projected in the forward
looking statements. Such risks and uncertainties are set forth below
under "Factors Affecting Future Operating Results".
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 quart
of 1996. The Company has incurred net losses in every quarter since
inception until the fourth quarter of fiscal 1997, the first quarter of
fiscal 1998, and the second quarter of fiscal 1998. The Company incurre
net losses of approximately $5.0 million, $14.8 million and $1.7 millio
in 1995, 1996 and 1997, respectively. The Company generated net income
$16.5 million in the six months ended June 30,1998 and incurred a net
loss of $2.9 million in the six months ended June 30, 1997. The Compa
had an accumulated deficit of $5.0 million at June 30, 1998. These net
losses incurred were attributable to the lack of substantial revenue an
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 and coin-op arcade systems. The Company began
commercial shipments of its first 3D graphics product, the Voodoo
Graphics chipset, in September 1996. The Company's second product, the
Voodoo Rush chipset began commercial shipments in April 1997. The
Company's third product, Voodoo2, became commercially available in the
first quarter of 1998. In June 1998, the Company introduced Voodoo
Banshee, which is a high performance, full-featured single chip 3D/2D
media processor for the PC and coin-op arcade markets. As a result of t
Company's limited operating history and early stage of development, it
has only a limited number of customers. Revenues derived from sales to
Diamond Multimedia Systems, Inc. ("Diamond"), and Creative Technology,
Ltd. ("Creative") accounted for approximately 42% and 22% of revenues f
the quarter ended June 30, 1998. Revenues derived for Diamond, Creative
and Elitetron Electronic Co., Ltd ("Elitetron") accounted for
approximately 43%, 18% and 13%, respectively, of revenues for the first
half of fiscal 1998. Revenues derived from sales to Diamond, Hercules
Computer Technology, Inc., Orchid Technology and Elitetron accounted fo
approximately 38%, 16%, 14% and 13%, respectively of revenues for the
quarter ended June 30, 1997. Revenues derived from sales to Diamond,
Elitetron, Orchid Technology and WMS Industries, Inc. ("Williams")
accounted for approximately 47%, 10%, 10% and 10%, respectively of
revenues for the first half of fiscal 1997. The Company expects that a
small number of customers will continue to account for a substantial
portion of its total revenues for the foreseeable future. The loss of
any one of these customers could have a material impact on the Company'
results of operations, cash flows, or financial position.
In February 1997, the Company and Sega entered into a Technology
Development and License Agreement ("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 15% and 4% of total revenues during the six
months ended June 30, 1997 and the year ended December 31,1997,
respectively. Of the $1.8 million, approximately $1.1 million was
recognized in the quarter ended June 30, 1997, representing 16% of tota
revenues for the second quarter in 1997. In July 1997, Sega terminated
the Sega Agreement. In August 1997, the Company filed a lawsuit against
Sega, and in October 1997, filed an amended complaint naming as
additional defendants NEC Corporation ("NEC") and VideoLogic Group Plc
("VideoLogic"). The complaint alleges breach of contract, interference
with contract, misrepresentation, unfair competition, and threatened
misappropriation of trade secrets. In July 1998, the parties to the
litigation participated in a court-ordered mediation and reached an
agreement in principle to settle the lawsuit. The Company expects that
the settlement will be finalized in September 1998.
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 wafe
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 wafer
are currently manufactured by Taiwan Semiconductor Manufacturing
Corporation ("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 t
the Company's orders. 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 f
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, Advanced Semiconductor Engineering Group ("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) through the effective date of the Company's IPO
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 pri
at the date of grant. This amount is presented as a reduction of
shareholders' equity and is amortized ratably over the vesting period o
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 administrati
expenses, respectively), $196,000 (of which $50,000 and $146,000 were
recorded in research and development expenses and selling, general and
administrative expenses, respectively) and $242,000 (of which $96,000 a
$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 and the six months ended June 30, 1998,
respectively, and will result in charges over the next 8 quarters
aggregating approximately $121,000 per quarter (of which $48,000 and
$73,000 will be recorded in research and development expenses and
selling, general and administrative expenses, respectively).
Results of Operations
Three Months Ended June 30, 1998 and 1997
Revenues. Revenues are recognized upon product shipment. The
Company's total revenues were $58.6 million in the three months ended
June 30, 1998, and $6.5 million in the three months ended June 30, 1997
Revenues in the three months ended June 30,1997 included $1.1 million o
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 in the three months ended June 30, 1998 were principally
attributable to sales of the Company's Voodoo2 and Voodoo Graphics
chipsets. Substantially all of the revenues in the three months ended
June 30, 1997 were derived from sale of the Company's Voodoo Graphics a
Voodoo Rush chipsets.
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 and the procurement of semiconductors from t
Company's contract manufacturers, labor and overhead associated with su
procurement and warehousing, shipping and warranty costs. Cost of
revenues does not include expenses related to development contract
revenues. Cost of revenues increased 829% from $3.3 million in the seco
quarter of fiscal 1997 to $30.4 million in the second quarter of fiscal
1998. Gross profit as a percentage of revenues was 50% and 48% in the
second quarters of 1997 and 1998, respectively. The increase in cost of
revenues resulted from the significant increase in revenues in the thre
months ended June 30, 1998 as compared with the same period in 1997.
Given the Company's limited operating history and limited history of
product shipments, the Company believes that an analysis of gross profi
as a percentage of total revenues is not meaningful. The Company's futu
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 developme
and engineering costs paid to the Company's foundries in connection wit
manufacturing start-up of new products. In addition, costs associated
with development contracts are included in research and development.
Research and development expenses increased 247% from $2.4 million in t
three months ended June 30, 1997 to $8.3 million in the three months
ended June 30, 1998. The increase reflects an increase in personnel
costs, common cost allocations and non-recurring engineering costs
resulting from the development of Voodoo Banshee. The Company expects t
continue to make substantial investments in research and development an
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 219% from $2.5 million in the three
months ended June 30, 1997 to $8.0 million in the three months ended Ju
30, 1998. The increase resulted from the addition of personnel in sales
marketing, finance and administration as the Company expanded operation
increased commission expenses associated with increased commercial sale
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
a percentage of total revenues will fluctuate.
Interest and Other Income(Expense), Net. Interest and other income,
net increased from net interest and other expense of $64,000 in the thr
months ended June 30, 1997 to net interest and other income of $1.1
million in the three months ended June 30, 1998. The increase is relate
to increased earnings from higher cash balances resulting from the
completion of the Company's initial public offering in June 1997 and a
public offering in March 1998, partially offset by interest expense on
the outstanding equipment line of credit and capital lease balances.
Provision For Income Taxes. The Company recorded a provision for
income taxes of $3.9 million for the three months ended June 30, 1998,
effective tax rate of 30%. The Company's effective tax rate differs fro
the federal statutory rate due to utilization of net operating loss
carryforwards and other tax credits.The Company recorded no provision f
income taxes in the three months ended June 30, 1997 as it incurred
losses during such period.
At December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $18.5 millio
and $17.5 million, respectively, which expire beginning in 2010 and 200
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 th
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 result
in an annual limitation of the Company's ability to utilize net operati
losses incurred prior to that date. The annual limitation is
approximately $5.4 million, all of which will be utilized in fiscal 199
Six Months Ended June 30, 1998 and 1997
Revenues. The Company's total revenues increased 824% to $108.7
million in the six months ended June 30, 1998 from $11.8 million in the
six months ended June 30, 1997. Revenues in the six months ended June
30,1997 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 in the six months ended June 30, 1998 were principally
attributable to sales of the Company's Voodoo2 and Voodoo Graphics
chipsets. Substantially all of the revenues in the six months ended Ju
30, 1997 were derived from sale of the Company's Voodoo Graphics and
Voodoo Rush chipsets.
Gross Profit. Cost of revenues increased 859% from $5.9 million in the
six months ended June 30, 1997 to $56.2 million in the six months ended
June 30, 1998. Gross profit as a percentage of revenues was 50% and 48%
in the six months ended June 30, 1997 and 1998, respectively. The
increase in cost of revenues resulted from the significant increase in
revenues in the six months ended June 30, 1998 as compared with the sam
period in 1997. Given the Company's limited operating history and limit
history of product shipments, the Company believes that an 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 increased
225% from $4.4 million in the six months ended June 30, 1997 to $14.1
million in the six months ended June 30, 1998. The increase reflects an
increase in personnel costs, common cost allocations and non-recurring
engineering costs resulting from the commencement of commercial sales o
the Voodoo2 chipset and the development of Voodoo Banshee. The Company
expects to continue to make substantial investments in research and
development and anticipates that research and development expenses will
increase in absolute dollars in future periods, although such expenses
a percentage of total revenues will fluctuate.
Selling, General and Administrative. Selling, general and
administrative expenses increased 305% from $4.4 million in the six
months ended June 30, 1997 to $17.7 million in the six months ended Jun
30, 1998. The increase resulted from the addition of personnel in sales
marketing, finance and administration as the Company expanded operation
increased commission expenses associated with increased commercial sale
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
a percentage of total revenues will fluctuate.
Interest and Other Income(Expense), Net. Interest and other income,
net increased from net interest and other expense of $91,000 in the six
months ended June 30, 1997 to net interest and other income of $1.6
million in the six months ended June 30, 1998. The increase is related
increased earnings from higher cash balances resulting from the
completion of the Company's initial public offering in June 1997 and a
public offering in March 1998, partially offset by interest expense on
outstanding equipment line of credit and capital lease balances.
Provision For Income Taxes. The Company recorded a provision for
income taxes of $5.7 million for the six months ended June 30, 1998, an
effective tax rate of 26%. The Company's effective tax rate differs fro
the federal statutory rate due to utilization of net operating loss
carryforwards and other tax credits.The Company recorded no provision f
income taxes in the six months ended June 30, 1997 as it incurred losse
during such period.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through
private placements of equity securities yielding approximately $29.4
million, through an initial public offering in June 1997 yielding
approximately $34.3 million, net of underwriting fees and offering
expenses and most recently through a public offering in March 1998
yielding approximately $54.8 million, net of underwriting fees and
offering expenses. As of June 30, 1998, the Company had approximately
$3.0 million of equipment line financing available. As of June 30, 1998
the Company had approximately $93.2 million in cash, cash equivalents a
short-term investments.
Net cash provided by operating activities in the first half of fiscal
1998 was due primarily to net income of $16.5 million, and increases of
$33.2 million and $7.6 million in accounts payable and accrued
liabilities, respectively, partially offset by a $24.0 million and $27
million increase in inventory and accounts receivable, respectively, du
to the increase in manufacturing to meet customer demand associated wit
the generation of revenues. Net cash used in operating activities in th
first half of fiscal 1997 was due primarily to the net loss of $2.9
million, and a $3.8 million increase in accounts receivable offset by a
$2.9 million decrease in inventory.
Net cash used in investing activities was approximately $7.9 million
and $1.5 million in the six months ended June 30, 1998 and June 30, 199
respectively, and was due to the purchase of investments in 1998 and, i
each period, to the purchase of property and equipment. The Company doe
not have any significant capital spending or purchase commitments other
than normal purchase commitments and commitments under leases. As of Ju
30, 1998, the Company had capital equipment of $16.1 million less
accumulated depreciation of $5.5 million to support its research and
development, operations and administrative activities. The Company has
financed approximately $2.4 million of its capital equipment from capit
lease obligations through June 30, 1998. The Company has two equipment
lines of credit, which provide for the purchase of up to $2.0 million a
$3.0 million of property and equipment, respectively. Approximately $3.
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 (10.0% and 9.25%, respectively, as of June 30, 1998). The
agreement requires that the Company maintain certain financial ratios a
levels of tangible net worth profitability and liquidity. The Company w
in compliance with its covenants as of June 30, 1998. The lease lines o
credit expire in August 1998 and December 2001, respectively. The Compa
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 $55
million and $31 million in the first half of fiscal 1998 and fiscal 199
respectively, due primarily to proceeds from the public offering in
March 1998 and to proceeds from the initial public offering in June
1997 and the issuance of preferred stock in the six months ended June 3
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 a
of the Company's owned assets and bear interest at the bank's prime rat
plus 0.25% per annum. The agreement requires that the Company maintain
certain financial ratios and levels of tangible net worth, profitabilit
and liquidity. The line of credit was renewed in December 1997. The
Company is in compliance with its covenants as of June 30, 1998. At Jun
30, 1998, there were no borrowings outstanding under this line of credi
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 ne
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 believ
that the proceeds, if any, from its March 1998 public offering, 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 adequa
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 Compa
may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements. There can be
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, i
available, may involve restrictive covenants. Strategic arrangements, i
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 materi
adverse effect on the Company's business, financial condition and resul
of operations.
Factors Affecting Operating Results
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, gro
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 indire
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 acceleratio
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 t
perform favorably relative to competitive benchmarks; changes in the
timing of product orders due to unexpected delays in the introduction o
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 manufacturi
capacity; competitive pressures resulting in lower average selling
prices; the volume of orders that are received and can be fulfilled in
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; seasona
fluctuations associated with the tendency of PC sales to increase in th
second half of each calendar year; the level of expenditures for resear
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, t
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 since inception except the
quarters ended December 31, 1997, March 31 and June 30, 1998. The Compa
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 operating results difficult. The
Company incurred net losses of approximately $5.0 million, $14.8 millio
and $1.7 million in 1995, 1996 and 1997, respectively. The Company
generated net income of $16.5 million in the six months ended June 30,
1998 and incurred a net loss of $2.9 million in the six months ended Ju
30, 1997. At June 30, 1998, the Company had an accumulated deficit of
$5.0 million. 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 t
Company has experienced revenue growth in recent quarterly periods,
historical growth rates will not be sustained and are not indicative of
future operating results. In addition, approximately 4% of the Company'
revenues for 1997 were attributable to development contract revenues
recognized under the Sega Agreement between the Company and Sega. No
future revenues will be recognized under the Sega Agreement. There can
no assurance that significant revenues or profitability will be sustain
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 playe
on PCs, coin-op arcade systems and home game consoles as well as locati
based entertainment ("LBE").
Within the entertainment segment of the PC market, the Company
competes primarily against companies that typically have operated in th
PC 2D graphics market and that now offer 3D capability as an enhancemen
to their 2D solutions, such as ATI Technologies, Inc., Cirrus Logic,
Inc., S3 Incorporated and Trident Microsystems, Inc. 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., nVidia Corporation and
Micron Technology, Inc. In addition, the Company competes with
NEC/Videologic which have partnered to focus exclusively on developing
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, Intergraph Corporation, Real 3D, Inc., which is
owned by Lockheed Martin Corp. and Intel Corporation ("Intel"), and
Silicon Graphics, Inc. These companies are developing lower cost versio
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, have
released or announced plans to release 3D graphics chips in 1998 that
promise to provide low cost 3D functionality for PCs and workstations.
Intel recently announced a single chip 2D/3D graphics accelerator. Inte
has been very active in the graphics market, having previously invested
in 3Dlabs and having recently signed a development agreement with 3Dlab
in late 1997 targeting the high end workstation market. In early 1998,
Intel acquired Chips and Technologies, Inc. ("CHIPS") a leading graphic
semiconductor supplier. To the extent that Intel's initiatives in the
graphics sector are successful, it could materially adversely affect th
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, the Company 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 futur
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 competiti
advantages that the Company's products may have. In connection with th
Company's March 1998 public offering, Intel sold all of its shares of t
Company's Common Stock which it held.
The market for interactive electronic arcade entertainment is
comprised of a small number of companies, including Acclaim
Entertainment, Inc., Namco, Ltd., Sega, Taito Corporation, Ltd.,
Williams, and its subsidiaries Atari Corporation and Midway Games, Inc.
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 compani
which currently compete in the 3D PC markets, will not enter the coin-o
arcade market, or if they do, that the Company will be able to compete
against them successfully. The home game console segment is dominated b
three companies, Nintendo Company, Ltd., Sega and Sony Corporation. As
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 ma
be less costly than the Company's 3D media processors or provide better
performance or additional features not currently provided by the Compan
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 us
strategic relationships to augment its capabilities, but there can be n
assurance that the benefits of these relationships will be realized or
sufficient to overcome the entrenched positions of the Company's larges
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 compet
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 competito
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 electron
entertainment will depend upon certain factors, many of which are beyon
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 t
Company to protect its intellectual property; market acceptance of the
Company's 3D solution and API; success of the competitors' products; an
industry and general economic conditions. There can be no assurance tha
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 t
emerge. The Company's ability to achieve sustained revenue growth and
profitability in the future will depend to a large extent upon the dema
for 3D multimedia functionality in PCs, coin-op arcade systems and home
game consoles. There can be no assurance that the market for 3D
interactive electronic entertainment will continue to develop or grow a
a rate sufficient to support the Company's business. If the market for
interactive electronic entertainment fails to develop, or develops more
slowly than expected, or if the Company's products do not achieve marke
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 e
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 and the six months
ended June 30, 1998, 82%, 93% and 100%, respectively, of the Company's
revenues were derived from products sold for use in PCs. The Company
expects to primarily derive its 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 ov
the life of a specific product. Although the PC market has grown
substantially in recent years, there can be no assurance that such grow
will continue. A reduction in sales of PCs, or a reduction in the growt
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 dema
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 hardwa
manufacturers and software developers, including Intel and Microsoft
Corporation. 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 ar
not in compliance with prevailing industry standards for a significant
period of time, the Company could miss opportunities to have its produc
specified as standard 3D media processors for new hardware components o
subassemblies designed by PC manufacturers and OEMs (a "design win"). T
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 advantag
the 3D media processor manufacturer that achieves such design win, eith
of which could have a material adverse effect on the Company's business
financial condition and results of operations. To the extent that futur
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 cou
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 offerin
and will have the effect of increasing the Company's dependency on the
market. See "- Pending Litigation."
Dependence on Retail Distribution Channel. The Company's products are
distributed primarily in the retail distribution channel through graphi
board manufacturers which in turn sell to consumers. Accordingly, the
Company is dependent upon these graphics board manufacturers to assist
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 f
newly introduced products, regardless of any such manufacturers' level
inventory for the Company's products. Such manufacturers have in the pa
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 cou
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 manufacture
in integrating the latest accelerator product for potential future sale
to consumers. As a result, initial orders for a new product, such as
Voodoo2 or Voodoo Banshee, 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 boar
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 produc
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
result, the majority of entertainment titles currently available for pl
on PCs are written for 2D acceleration technology. Because of the
substantial installed base of 2D acceleration technology and related ga
content, the Company believes that for its 3D media processor products
gain wide market acceptance, such products must also offer 2D performan
comparable or superior to existing 2D technology. The Company's 3D med
processors for use in PC applications are currently designed as a two o
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 semiconduct
chip. The Company expects that such integration onto a single chip will
occur with respect to the functionality provided by the Company's curre
products used in PC applications. Therefore, the Company's success will
be largely dependent on its ability to develop products on a timely bas
that integrate the Company's 3D technology along with superior
performance 2D technology. In June 1998, the Company introduced Voodoo
Banshee, a proprietary 3D/2D single chip solution. There can be no
assurance that Voodoo Banshee will perform the desired functions, offer
sufficient price/performance benefits or meet the technical or other
requirements of potential buyers to realize market acceptance. The mark
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 Voodoo Banshee
for PC applications would have a material adverse effect on the Company
business, financial condition and results of operations. Even if Voodoo
Banshee does gain initial market acceptance, competitors are likely to
introduce products with comparable price and performance characteristic
This competition may reduce future market acceptance for the Company's
product and result in decreasing sales and lower gross margins. The
failure of Voodoo Banshee 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 an
financial resources. As of June 30, 1998, the Company had grown to 209
employees from 35 employees as of December 31, 1995. If the Company's
newer 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 control
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 operation
Further, the Company will be required to manage multiple relationships
with various customers and other third parties. There can be no assuran
that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that the Company's management will
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 resul
of operations.
Dependence on Third Party Developers and Publishers. The Company
believes that the availability of a sufficient number of high quality,
commercially successful software entertainment titles and applications
will be a significant competitive factor in the sales of multimedia
hardware for the interactive electronic entertainment market. The Compa
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 develope
are capable of creating high quality entertainment software. Competitio
for these resources is intense and is expected to increase. There can b
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 publis
a substantial number of software entertainment titles or, if software
entertainment titles are available, that they will be of high quality o
that they will achieve market acceptance. In addition, the development
and marketing of game titles that do not fully demonstrate the technica
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. Becau
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.
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 n
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, coi
op arcade system and home game console markets for which the Company's
products are designed are intensely competitive and are characterized b
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 an
functionality into products that meet the exacting design requirements
the PC, coin-op arcade system and home game console manufacturers, pric
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 produ
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 expec
to introduce will incorporate the features and functionality demanded b
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 introduc
new products and achieve market acceptance for such products would have
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 manufacturi
yields may be better than those experienced by the Company.
As the markets for the Company's products continue to develop and
competition increases, the Company anticipates that product life cycles
will shorten and average selling prices will decline. In particular,
average selling prices and, in some cases, gross margin for each of the
Company's products will decline as such products mature. Thus, the
Company will need to introduce new products to maintain average selling
prices and gross margins. There can be no assurance that the Company wi
successfully identify new product opportunities or develop and bring ne
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
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, Creative and Elitetron accounted for
approximately 43%, 18% and 13%, respectively, of revenues in the six
months ended June 30, 1998 and revenues derived from sales to Diamond,
Elitetron, Orchid and Williams accounted for 47%, 10%, 10% and 10%,
respectively, of revenues for the six months ended June 30, 1997.
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 f
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
of revenues during 1997; no further revenues are expected under the Seg
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 board
or coin-op arcade systems sold by a single customer or by a small numbe
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 coi
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 companie
having significantly greater financial resources, marketing power, name
recognition and experience than the Company. For example, certain
industry standard APIs, such as D3D developed by Microsoft and OpenGL
developed by SGI, have a much larger installed customer base and a much
larger base of existing software titles. Developers may face additional
costs to port games developed on other standard APIs to Glide for play
the Company's architecture. There can be no assurance that Glide will b
adopted by a sufficient number of software developers or that developer
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 doe
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
TSMC in Taiwan. The Company obtains manufacturing services from TSMC on
purchase order basis. Because the lead time needed to establish a
strategic relationship with a new manufacturing partner could be severa
months, there is no readily available alternative source of supply for
any product. A manufacturing disruption experienced by TSMC would impac
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 wi
depend on reliable relationships between the Company and TSMC (and any
other independent foundries qualified by the Company) to ensure adequat
product supply responsive to customer demand. The Company's relationshi
with TSMC has only recently been established, and there can be no
assurance that this relationship will meet the business objectives of t
Company. In addition, TSMC fabricates wafers for other companies and
could choose to prioritize capacity for other uses or reduce or elimina
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 deliver
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 manufacturi
yields, to deliver those wafers to the Company and its independent
assembly and testing subcontractors on a timely basis and to allocate t
the Company a portion of their manufacturing capacity sufficient to mee
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 n
assurance that TSMC will be able to achieve or maintain acceptable yiel
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 product
or continue to advance the process design technologies on which the
manufacturing of the Company's products are based. Any such difficultie
would have a material adverse effect on the Company's business, financi
condition and results of operations.
The Company's products are packaged and tested by a third party
subcontractor, ASE. Such assembly and testing is conducted on a purchas
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 produc
shortages or quality assurance problems that could increase the costs o
manufacturing or assembly of the Company's products. Due to the amount
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 wi
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.
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 produc
stabilizes, however, the Company must pay an agreed price for wafers
regardless of yield. Accordingly, in this circumstance, the Company bea
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 Voodo
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 l
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 proce
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 i
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 wi
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
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, t
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 an
key employees, most of whom have worked together for only a short perio
of time. In particular, the Company's Chief Financial Officer and Vice
President, Administration, David Zacarias, joined the Company in Februa
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 abilit
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 servic
of any of its executive officers, technical personnel or other key
employees would have a material adverse effect on the business, financi
condition and results of operations of the Company. The Company's succe
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 wi
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 wou
have a material adverse effect on the Company's business, financial
condition and results of operations.
Cyclical Nature of the Semiconductor Industry. The semiconductor
industry has historically been characterized by rapid technological
change, cyclical market patterns, significant price erosion, fluctuatin
inventory levels, alternating periods of over-capacity and capacity
constraints, variations in manufacturing costs and yields and significa
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 erosi
of product prices. The Company may experience substantial period-to-
period fluctuations in results of operations due to general semiconduct
industry conditions.
Future Capital Needs; Uncertainty of Additional Funding. As the
Company continues to increase the volume of commercial production of it
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 effor
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 maintainin
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 believ
that the proceeds from its March 1998 public offering of common stock,
well as the Company's current cash balances and cash generated from
operations and from available or future debt financing will be sufficie
to meet the Company's operating and capital requirements through Decemb
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 wi
be adequate to support its operations is a forward-looking statement th
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. Th
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, a
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.
Risks Relating to Intellectual Property. The Company relies primarily
on a combination of patent, mask work protection, trademarks, copyright
trade secret laws, employee and third-party nondisclosure agreements an
licensing arrangements to protect its intellectual property. The Compan
has two patents issued from and eight patent applications pending in th
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 independent
develop substantially equivalent intellectual property or otherwise gai
access to the Company's trade secrets or intellectual property, or
disclose such intellectual property or trade secrets, or that the Compa
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 result
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 produc
resulting from infringement claims will not be asserted in the future o
that such assertions, if proven to be true, will not materially adverse
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
payments of license fees to third parties, or any failure by the Compan
to develop or license a substitute technology on commercially reasonabl
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 dive
the efforts of the Company's technical and management personnel, whethe
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 o
entity access to the Company's confidential information and trade secre
that were provided to them in connection with the Sega Agreement. Sega
was ordered by the court to return to the Company all of the Company's
confidential documents and/or information now possessed by Sega. In
connection with the court-ordered mediation and the agreement in
principle to settle the litigation, the Company has stipulated to an
extension of time for response to Sega's appeal of the preliminary
injunction.
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 Asi
there can be no assurance that the recent volatility in the Asian econo
will not adversely affect the Company's business, financial condition o
results of operations. These risks include unexpected changes in, or
impositions of, legislative or regulatory requirements, delays resultin
from difficulty in obtaining export licenses for certain technology,
tariffs, quotas and other trade barriers and restrictions, longer payme
cycles, greater difficulty in accounts receivable collection, potential
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 a
material adverse effect on its business, financial condition or results
of operations as a result of such regulatory, political and other
factors, there can be no assurance that such factors will not have a
material adverse effect on the Company's business, financial condition
and results of operations in the future or require the Company to modif
its current business practices. In addition, the laws of certain foreig
countries in which the Company's products are or may be manufactured or
sold, including various countries in Asia, may not protect the Company'
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 th
Company's technology and products more likely. Currently, all of the
Company's product sales and its arrangements with its foundry and
assembly and test vendors provide for pricing and payment in U.S.
dollars. There can be no assurance that fluctuations in currency exchan
rates will not have a material adverse effect on the Company's business
financial condition and results of operations in the future. In additio
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.
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 an
VideoLogic and includes claims for breach of contract, interference wit
contract, misrepresentation, unfair competition, and threatened
misappropriation of trade secrets. In July 1998, the parties to the
litigation participated in a court-ordered mediation and reached an
agreement in principle to settle the lawsuit. The Company anticipates
that the settlement will be finalized in September 1998. If the
settlement is not finalized, the Company could face prolonged litigatio
which could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 significan
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 ha
particularly affected the market prices for high technology companies a
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
the Company's Common Stock. In the past, following periods of volatilit
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 respec
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 Company's business, financi
condition and results of operations. Any adverse determination in such
litigation could also subject the Company to significant liabilities.
<PAGE>
PART II - Other Information
ITEM 1: Legal Proceedings
On July 22, 1997, Sega Enterprises, Ltd. ("Sega") terminated the
Technology Development and License Agreement entered into by the Compan
and Sega on February 28, 1997. The Company filed suit in Superior Cour
for the County of Santa Clara on August 29, 1997; an amended complaint
was filed on October 8, 1997. The amended complaint names Sega and its
U.S. subsidiary, Sega of America, Inc., NEC Corporation, and VideoLogic
Group, Plc. as defendants, and includes counts alleging breach of
contract, interference with contract, misrepresentation, unfair
competition, and threatened misappropriation of trade secrets. In July
1998, the parties to the litigation participated in a court-ordered
mediation and reached an agreement in principle ot settle the lawsuit.
The Company anticipates that the settlement will be finalized in
September 1998. Pending finalization of the settlement, the parties ha
stipulated to an extension of time for response to Sega's appeal of the
preliminary injunction granted by the court in connection with the
lawsuit.
ITEM 4: Submission of Matters to a Vote of Securities Holders
The Company's 1998 Annual Meeting of Shareholders was held on M
1, 1998. The following is a brief description of the each matter voted
upon at the meeting and a statement of the number of votes cast for,
against or withheld and the number of abstentions and broker non-votes
with respect to each matter.
a) The shareholders elected the following directors to serve for the
ensuing year and until their successors are elected:
Director Votes for Votes Withheld
- ------------------- ---------- ----------------
L. Gregory Ballard 7,938,116 0
Gordon A. Campbell 7,938,415 0
Scott D. Sellers 7,938,416 0
George J. Still, Jr. 7,938,416 0
Anthony Sun 7,875,874 0
James Whims 7,938,291 0
Philip M. Young 7,938,416 0
b) The shareholders approved an amendment of the Company's 1995
Employee Stock Plan to increase the number of shares of Common Stock
reserved for issuance thereunder by 1,700,000 shares.
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------ -------- -------- -----------------
4,611,908 180,574 69,120 3,082,903
c) The shareholders approved an amendment of the Company's 1997
Employee Stock Purchase Plan to provide for annual increases to the
number of shares reserved for issuance thereunder commencing in 1999.
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------ -------- -------- -----------------
4,725,942 67,435 68,225 3,082,903
d) The shareholders ratified the appointment of Price Waterhouse LLP
independent public accountants of the Company for the fiscal year
ending December 31, 1998.
FOR AGAINST ABSTAIN BROKER NON-VOTES
------------ -------- -------- -----------------
7,930,656 7,026 6,823 0
ITEM 6: Exhibits
(a) Exhibits
10.2 1995 Employee Stock Plan and forms or agreement thereunder
27.1 Financial Data Schedule
(b) Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts
Reports on Form 8-K
The Company did not file any reports on Form 8-K during th
quarter ended June 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, th
registrant has duly caused this report to be signed on its behalf by th
undersigned thereunto duly authorized.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 193
registrant has duly caused this report to be signed on its behalf by th
undersigned thereunto duly authorized.
3DFX INTERACTIVE, INC.
(Registrant)
/s/ L. GREGORY BALLARD
-----------------------------
L. Gregory Ballard
Chief Executive Officer
(Principal Executive Officer)
/s/ DAVID ZACARIAS
-----------------------------
David Zacarias
Vice President, Administratio
and Chief Financial Officer
(Principal Financial and Acco
Officer)
Dated: August 13, 1998
<PAGE>
FINANCIAL STATEMENTS SCHEDULE
3DFX INTERACTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
---------------------
Charged to Charged
Allowance For Beginning Costs and to Other
Doubtful Accounts Balance Expenses Accounts Deductions
- -------------------------- --------- ---------- ---------- ---------- -
<S> <C> <C> <C> <C> <
For the six months
ended June 30, 1998.... $1,763 $77 $ -- $200
For the six months
ended June 30, 1997.... $128 $ -- $ -- $18
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- ---------
<C> <S>
10.2 1995 Employee Stock Plan and forms or agreement thereunder
27.1 Financial Data Schedule
</TABLE>
3DFX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
(As Amended May 1997 and February 1998)
1. Purposes of the Plan. The purposes of this Stock Plan are to
attract and retain the best available personnel for positions of substa
responsibility, to provide additional incentive to Employees and Consul
of the Company and its Subsidiaries and to promote the success of the
Company's business. Options granted under the Plan may be Incentive St
Options or Nonstatutory Stock Options, as determined by the Administrat
at the time of grant of an option and subject to the applicable provisi
of Section 422 of the Code, as amended, and the regulations promulgated
thereunder. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions
apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating
administration of stock option plans under U. S. state corporate laws,
federal and state securities laws, the Code, any stock exchange or quot
system on which the Common Stock is listed or quoted and the applicable
of any foreign country or jurisdiction where Options are, or will be,
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the committee appointed by the Board of
Directors in accordance with paragraph (a) of Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means 3Dfx Interactive, Inc., a California
corporation.
(h) "Consultant" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services a
is compensated for such services.
(i) "Continuous Status as an Employee" means the absence of any
interruption or termination of the employment relationship by the Compa
or any Subsidiary. Continuous Status as an Employee shall not be consi
interrupted in the case of: (i) sick leave, military leave or any othe
leave of absence approved by the Board, provided that such leave is for
period of not more than ninety (90) days, unless reemployment upon the
expiration of such leave is guaranteed by contract or statute, or unles
provided otherwise pursuant to Company policy adopted from time to time
(ii) in the case of transfers between locations of the Company or betwe
the Company, its Subsidiaries or its successor.
(j) "Director" means a member of the Board.
(k) "Employee" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the
Company. The payment of a director's fee by the Company shall not be
sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stoc
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other sou
as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the F
Market Value of a Share of Common Stock shall be the mean between the h
bid and low asked prices for the Common Stock on the last market tradin
prior to the day of determination, as reported in The Wall Street Journ
or such other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422
the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Optioned Stock" means the Common Stock subject to an
Option.
(r) "Optionee" means an Employee or Consultant who receives an
Option.
(s) "Parent" means a "parent corporation", whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(t) "Plan" means this Employee Stock Plan, as amended from time
to time.
(u) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(v) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section
11 of the Plan, the maximum aggregate number of shares which may be opt
and sold under the Plan is 4,375,000 shares of Common Stock. The share
be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option repricing or
Option exchange, the unpurchased Shares which were subject thereto shal
become available for future grant or sale under the Plan (unless the Pl
has terminated); provided, however, that Shares that have actually been
issued under the Plan upon exercise of an Option shall not be returned
the Plan and shall not become available for future distribution under t
Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become avai
for future grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups o
Employees and Consultants.
(ii) Section 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) o
Code, the Plan shall be administered by a Committee of two or more "out
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements
exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided
the Plan shall be administered by (A) the Board or (B) a Committee, whi
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated
the Board to such Committee, the Administrator shall have the authority
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Employees and Consultants to whom
Options may be granted hereunder;
(iii) to determine the number of shares of Common Stock to
be covered by each Option granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option granted hereunde
Such terms and conditions include, but are not limited to, the exercis
price, the time or times when Options may be exercised (which may be ba
on performance criteria), any vesting acceleration or waiver of forfeit
restrictions, and any restriction or limitation regarding any Option of
shares of Common Stock relating thereto, based in each case on such fac
as the Administrator, in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option wa
granted;
(vii) to institute an Option repricing or Option exchange
program;
(viii) to construe and interpret the terms of the
Plan and awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-p
established for the purpose of qualifying for preferred tax treatment u
foreign tax laws;
(x) to modify or amend each Option (subject to Section
15(c) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherw
provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to
issued upon exercise of an Option that number of Shares having a Fair M
Value equal to the amount required to be withheld. The Fair Market Val
of the Shares to be withheld shall be determined on the date that the a
of tax to be withheld is to be determined. All elections by an Optione
have Shares withheld for this purpose shall be made in such form and un
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previo
granted by the Administrator;
(xiii) to make all other determinations deemed
necessary or advisable for administering the Plan.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final
binding on all Optionees and any other holders of any Options.
5. Eligibility.
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees.
Employee or Consultant who has been granted an Option may, if he or she
otherwise eligible, be granted an additional Option or Options.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designations, to the extent that
aggregate Fair Market Value of the Shares with respect to which Options
designated as Incentive Stock Options are exercisable for the first tim
any Optionee during any calendar year (under all plans of the Company o
Parent or Subsidiary) exceeds $100,000, such excess Options shall be tr
as Nonstatutory Stock Options.
(c) For purposes of Section 5(b), Incentive Stock Options shall
be taken into account in the order in which they were granted, and the
Market Value of the Shares shall be determined as of the time the Optio
with respect to such Shares is granted.
(d) The Plan shall not confer upon any Optionee any right with
respect to continuation of the Optionee's employment or consulting
relationship with the Company, nor shall it interfere in any way with h
right or the Company's right to terminate the Optionee's employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier
to occur of its adoption by the Board of Directors or its approval by t
shareholders of the Company as described in Section 18 of the Plan. It
shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated
in the Option Agreement; provided, however, that in the case of an Ince
Stock Option, the term shall be no more than ten (10) years from the da
of grant thereof or such shorter term as may be provided in the Option
Agreement. However, in the case of an Option granted to an Optionee wh
at the time the Option is granted, owns stock representing more than te
percent (10%) of the voting power of all classes of stock of the Compan
any Parent or Subsidiary, the term of the Option shall be five (5) year
from the date of grant thereof or such shorter term as may be provided
the Option Agreement.
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined
the Board, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of
the grant of such Incentive Stock Option, owns stock
representing more than ten percent (10%) of the voting power of
all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per
Share exercise price shall be no less than 100% of the Fair
Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option,
the per Share exercise price shall be determined by the Administrator.
the case of a Nonstatutory Stock Option intended to qualify as "perform
based compensation" within the meaning of Section 162(m) of the Code, t
per Share exercise price shall be no less than 100% of the Fair Market
per Share on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Va
per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive Stock
Option, shall be determined at the time of grant) and may consist entir
of (i) cash, (ii) check, (iii) other Shares which (x) in the case of Sh
acquired upon exercise of an Option either have been owned by the Optio
for more than six months on the date of surrender or were not acquired,
directly or indirectly, from the Company, and (y) have a Fair Market Va
on the date of surrender equal to the aggregate exercise price of the S
as to which said Option shall be exercised, (iv) authorization from the
Company to retain from the total number of Shares as to which the Optio
exercised that number of Shares having a Fair Market Value on the date
exercise equal to the exercise price for the total number of Shares as
which the Option is exercised, (v) delivery of a properly executed exer
notice together with irrevocable instructions to a broker to promptly
deliver to the Company the amount of sale or loan proceeds required to
the exercise price, (vi) any combination of the foregoing methods of
payment, (viii) or such other consideration and method of payment for t
issuance of Shares to the extent permitted under Applicable Laws.
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such
conditions as determined by the Administrator, including performance
criteria with respect to the Company and/or the Optionee, and as shall
permissible under the terms of the Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the term
the Option by the person entitled to exercise the Option and full payme
for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Board,
consist of any consideration and method of payment allowable under
Section 8(b) of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such
Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstan
the exercise of the Option. The Company shall issue (or cause to be is
such stock certificate promptly upon exercise of the Option. No adjust
will be made for a dividend or other right for which the record date is
prior to the date the stock certificate is issued, except as provided i
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes o
Plan and for sale under the Option, by the number of Shares as to which
Option is exercised.
(b) Termination of Employment. In the event of termination of
an Optionee's consulting relationship or Continuous Status as an Employ
with the Company (but not upon a change of status from an Employee to
Consultant or Consultant to Employee), such Optionee may, but only with
the period stated in the Option Agreement (which, in the case of an
Incentive Stock Option, shall be no more than ninety (90) days after th
date of such termination and, in the case of any Option, shall be no la
than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent that Optionee was
entitled to exercise it at the date of such termination. To the extent
Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. Notwithstanding the provisions of
Section 9(b) above, in the event of termination of an Optionee's Consul
relationship or Continuous Status as an Employee as a result of his or
total and permanent disability (as defined in Section 22(e)(3) of the C
Optionee may, but only within twelve (12) months from the date of such
termination (but in no event later than the expiration date of the term
such Option as set forth in the Option Agreement), exercise the Option
the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee is not entitled to exercise t
Option at the date of termination, or if Optionee does not exercise suc
Option to the extent so entitled within the time specified herein, the
Option shall terminate.
(d) Death of Optionee. In the event of the death of an
Optionee, the Option may be exercised, at any time within twelve (12) m
following the date of death (but in no event later than the expiration
of the term of such Option as set forth in the Option Agreement), by th
Optionee's estate or by a person who acquired the right to exercise the
Option by bequest or inheritance, but only to the extent the Optionee i
entitled to exercise the Option on the date of death. To the extent th
Optionee is not entitled to exercise the Option on the date of death, o
the Option is not exercised to the extent so exercisable within the tim
specified herein, the Option shall terminate.
10. Non-Transferability of Options. Unless determined otherwise by
the Administrator, an Option may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by w
or by the laws of descent or distribution and may be exercised, during
lifetime of the Optionee, only by the Optionee. If the Administrator m
an Option transferable, such Option shall contain such additional terms
conditions as the Administrator deems appropriate.
11. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stoc
covered by each outstanding Option, and the number of shares of Common
which have been authorized for issuance under the Plan but as to which
Options have yet been granted or which have been returned to the Plan u
cancellation or expiration of an Option, as well as the price per share
Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse sto
split, stock dividend, combination or reclassification of the Common St
or any other increase or decrease in the number of issued shares of Com
Stock effected without receipt of consideration by the Company; provide
however, that conversion of any convertible securities of the Company s
not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any c
or securities convertible into shares of stock of any class, shall affe
and no adjustment by reason thereof shall be made with respect to, the
number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall noti
each Optionee as soon as practicable prior to the effective date of suc
proposed transaction. The Administrator in its discretion may provide
an Optionee to have the right to exercise his or her Option until ten (
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Compa
repurchase option applicable to any Shares purchased upon exercise of a
Option shall lapse as to all such Shares, provided the proposed dissolu
or liquidation takes place at the time and in the manner contemplated.
the extent it has not been previously exercised, an Option will termina
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially
of the assets of the Company, each outstanding Option shall be assumed
an equivalent option or right substituted by the successor corporation
a Parent or Subsidiary of the successor corporation. In the event that
successor corporation refuses to assume or substitute for the Option, t
Optionee shall fully vest in and have the right to exercise the Option
to all of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. If an Option becomes fully vested
exercisable in lieu of assumption or substitution in the event of a mer
or sale of assets, the Administrator shall notify the Optionee in writi
or electronically that the Option shall be fully vested and exercisable
a period of fifteen (15) days from the date of such notice, and the Opt
shall terminate upon the expiration of such period. For the purposes o
this paragraph, the Option shall be considered assumed if, following th
merger or sale of assets, the option or right confers the right to purc
or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration
(whether stock, cash, or other securities or property) received in the
merger or sale of assets by holders of Common Stock for each Share held
the effective date of the transaction (and if holders were offered a ch
of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely co
stock of the successor corporation or its Parent, the Administrator may
with the consent of the successor corporation, provide for the consider
to be received upon the exercise of the Option, for each Share of Optio
Stock subject to the Option, to be solely common stock of the successor
corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale
assets.
12. Time of Granting Options. The date of grant of an Option shall,
for all purposes, be the date on which the Administrator makes the
determination granting such Option, or such other date as is determined
the Board. Notice of the determination shall be given to each Employee
Consultant to whom an Option is so granted within a reasonable time aft
the date of such grant.
13. Limitations.
(a) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock
Option. However, notwithstanding such designation, to the extent that
aggregate Fair Market Value of the Shares with respect to which Incenti
Stock Options are exercisable for the first time by the Optionee during
calendar year (under all plans of the Company and any Parent or Subsidi
exceeds $100,000, such Options shall be treated as Nonstatutory Stock
Options. For purposes of this Section 6(a), Incentive Stock Options sh
be taken into account in the order in which they were granted. The Fai
Market Value of the Shares shall be determined as of the time the Optio
with respect to such Shares is granted.
(b) Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's employment
consulting relationship with the Company, nor shall they interfere in a
way with the Optionee's right or the Company's right to terminate such
employment or consulting relationship at any time, with or without caus
(c) The following limitations shall apply to grants of Options
to Employees:
(i) No Employee shall be granted, in any fiscal year of
the Company, Options to purchase more than 150,000 (post-split) Shares.
(ii) In connection with his or her initial employment, an
Employee may be granted Options to purchase up to an additional 250,000
(post-split) Shares which shall not count against the limit set forth i
subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's
capitalization as described in Section 11.
(iv) If an Option is cancelled in the same fiscal year of
the Company in which it was granted (other than in connection with a
transaction described in Section 11), the cancelled Option will be coun
against the limits set forth in subsections (i) and (ii) above. For th
purpose, if the exercise price of an Option is reduced, the transaction
be treated as a cancellation of the Option and the grant of a new Optio
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time
amend, alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the righ
of any Optionee, unless mutually agreed otherwise between the Optionee
the Administrator, which agreement must be in writing and signed by the
Optionee and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder
respect to Options granted under the Plan prior to the date of such
termination.
15. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Optio
the issuance and delivery of such Shares pursuant thereto shall comply
all Applicable Laws, and shall be further subject to the approval of co
for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at t
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representa
is required.
16. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Share
shall be sufficient to satisfy the requirements of the Plan.
17. The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of an
Shares hereunder, shall relieve the Company of any liability in respect
the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Shareholder Approval. Continuance of the Plan shall be subject
to approval by the shareholders of the Company within twelve (12) month
before or after the date the Plan is adopted. Such shareholder approva
shall be obtained in the degree and manner required under applicable st
and federal law.
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
_________________________________
_________________________________
You have been granted an option, consisting of the Stock Option
Agreement attached hereto as Exhibit A and this Notice of Stock Option
(together, the "Option") to purchase Common Stock of 3D/FX INTERACTIVE,
(the "Company") as follows:
Date of Grant ________________________
Vesting Date ________________________
Option Price Per Share $_______________________
Total Number of Shares Granted ________________________
Total Price of Shares Granted ________________________
Type of Option Incentive Stock Option
Nonqualified Stock
Option
Term/Expiration Date 10 years/_________________
Exercise Schedule:
This Option may be exercised, in whole or in part, in accordance with
the Vesting Schedule set out below;
Vesting Schedule:
Date of Vesting Number of Shares
First Annual Anniversary
of Vesting Date 25%
Each Monthly Anniversary of
Vesting Date After First Annual
Anniversary of Vesting Date 1/48th of the total
Shares until fully vested
Termination Period:
Option may be exercised for 90 days after termination of employment
or consulting relationship except as set out in Sections 7 and 8 of the
Stock Option Agreement (but in no event later than the Expiration Date)
Additional Forms of Consideration:
In addition to the forms of consideration set out in Section 3 of the
Stock Option Agreement, this Option may be exercised using the followin
forms of consideration:
No Additional Forms
Additional Forms as
noted: Promissory Note at
the discretion of the Company.
Exercise of this Option shall be on a form of Exercise Notice provided
the Company.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT
TO THIS OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT A
WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES A
AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S EMPLOYEE ST
PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIO
ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY
COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPAN
RIGHT TO TERMINATE HIS EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain
information related to it and represents that he or she is familiar wit
terms and provisions of the Plan and this Option. Optionee accepts th
Option subject to all such terms and provisions. Optionee has reviewed
Plan and this Option in their entirety, has had an opportunity to obtai
advice of counsel prior to executing this Option and fully understands
provisions of the Option.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and
governed by the terms and conditions of the Employee Stock Plan and the
[Incentive/Nonstatutory] Stock Option Agreement, all of which are attac
and made a part of this document.
OPTIONEE: 3D/FX INTERACTIVE, INC.,
a California corporation
_____________________________ By __________________________
Signature
_____________________________ Title _______________________
Print Name
CONSENT OF SPOUSE
The undersigned spouse of Optionee has read and hereby approves the
terms and conditions of the Plan and this Stock Option. In considerati
of the Company's granting his or her spouse the right to purchase Share
set forth in the Plan and this Stock Option, the undersigned hereby agr
to be irrevocably bound by the terms and conditions of the Plan and thi
Stock Option and further agrees that any community property interest sh
be similarly bound. The undersigned hereby appoints the undersigned's
spouse as attorney-in-fact for the undersigned with respect to any amen
or exercise of rights under the Plan or this Stock Option.
Spouse of Purchaser
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
EXHIBIT A TO NOTICE OF GRANT
STOCK OPTION AGREEMENT
1. Grant of Option. 3D/FX INTERACTIVE, INC., a California
corporation (the "Company"), hereby grants to the Optionee (the "Option
named in the Notice of Grant, an option (the "Option") to purchase a nu
of Shares, as set forth in the Notice of Grant, at the exercise price p
share set forth in the Notice of Grant (the "Exercise Price"), subject
the terms, conditions and definitions of the Employee Stock Plan (the
"Plan") adopted by the Company, which is incorporated herein by referen
In the event of a conflict between the terms and conditions of the Pla
the terms and conditions of this Option Agreement, the terms and condit
of the Plan shall prevail. Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings in this Option
Agreement.
If designated in the Notice of Grant as an Incentive Stock Option,
this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of G
and the applicable provisions of the Plan and this Option Agreement. I
event of Optionee's death, Disability or other termination of Optionee'
employment or consulting relationship, the exercisability of the Option
governed by the applicable provisions of the Plan and this Option Agree
(b) Method of Exercise. This Option is exercisable by delivery
of an exercise notice, in the form provided by the Company (the "Exerci
Notice"), which shall state the election to exercise the Option, the nu
of Shares in respect of which the Option is being exercised (the "Exerc
Shares"), and such other representations and agreements as to the holde
investment intent with respect to the Exercised Shares as may be requir
by the Company pursuant to the provisions of the Plan. The Exercise No
shall be signed by the Optionee and, if the Optionee is married, by the
Optionee's spouse, and shall be delivered in person or by certified mai
the Secretary of the Company. The Exercise Notice shall be accompanied
payment of the aggregate Exercise Price as to all Exercised Shares. Th
Option shall be deemed to be exercised upon receipt by the Company of s
fully executed Exercise Notice accompanied by such aggregate Exercise P
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with all relevant
provisions of law and the requirements of any stock exchange upon which
Shares are then listed. Assuming such compliance, for income tax purpo
the Exercised Shares shall be considered transferred to the Optionee on
date the Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price sha
be by any of the following, or a combination thereof, at the election o
Optionee:
(a) cash;
(b) check; or
(c) such other consideration as is indicated on the Notice of
Grant.
4. Restrictions on Exercise. This Option may not be exercised until
such time as the Plan has been approved by the shareholders of the Comp
or if the issuance of such Shares upon such exercise or the method of
payment of consideration for such shares would constitute a violation o
applicable federal or state securities or other law or regulation, incl
any rule under Part 207 of Title 12 of the Code of Federal Regulations
("Regulation G") as promulgated by the Federal Reserve Board. As a
condition to the exercise of this Option, the Company may require Optio
to make any representation and warranty to the Company as may be requir
by any applicable law or regulation.
5. Termination of Relationship. In the event of termination of
Optionee's consulting relationship or Continuous Status as an Employee,
Optionee may, to the extent otherwise so entitled at the date of such
termination (the "Termination Date"), exercise this Option during the T
nation Period set out in the Notice of Grant. To the extent that Optio
is not entitled to exercise this Option at the date of such termination
if Optionee does not exercise this Option within the time specified her
the Option shall terminate.
6. Disability of Optionee. Notwithstanding the provisions of
Section 5 above, in the event of termination of Optionee's Continuous S
as an Employee as a result of his or her total and permanent disability
defined in Section 22(e)(3) of the Code), Optionee may, but only within
twelve (12) months from the date of termination of employment (but in n
event later than the date of expiration of the term of this Option as s
forth in Section 10 below), exercise the Option to the extent otherwise
entitled at the date of such termination. To the extent that Optionee
not entitled to exercise the Option at the date of termination, or if
Optionee does not exercise such Option (to the extent otherwise so enti
within the time specified herein, the Option shall terminate.
7. Death of Optionee. In the event of the death of Optionee, the
Option may be exercised at any time within twelve (12) months following
date of death (but in no event later than the date of expiration of the
of this Option as set forth in Section 10 below), by Optionee's estate
by a person who acquired the right to exercise the Option by bequest or
inheritance, but only to the extent the Optionee could exercise the Opt
at the date of death.
8. Non-Transferability of Option. This Option may not be
transferred in any manner otherwise than by will or by the laws of desc
or distribution and may be exercised during the lifetime of Optionee on
by him. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
9. Term of Option. This Option may be exercised only within the
term set out in the Notice of Grant, and may be exercised during such t
only in accordance with the Plan and the terms of this Option. The
limitations set out in Section 7 of the Plan regarding Option terms and
Options granted to more than ten percent (10%) shareholders shall apply
this Option.
10. Tax Consequences. Some of the federal and state tax
consequences relating to this Option, as of the date of this Option, ar
forth below. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS
REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option.
(i) Nonqualified Stock Option ("NSO"). If this Option does
not qualify as an ISO, the Optionee may incur regular federal income ta
state income tax liability upon exercise. The Optionee will be treated
having received compensation income (taxable at ordinary income tax rat
equal to the excess, if any, of the fair market value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price. If
Optionee is an employee, the Company will be required to withhold from
or her compensation or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation
income at the time of exercise.
(ii) Incentive Stock Option ("ISO"). If this Option
qualifies as an ISO, the Optionee will have no regular federal income t
or state income tax liability upon its exercise, although the excess, i
any, of the fair market value of the Exercised Shares on the date of
exercise over their aggregate Exercise Price will be treated as an adju
ment to the alternative minimum tax for federal tax purposes and may su
the Optionee to alternative minimum tax in the year of exercise.
(b) Disposition of Shares.
(i) NSO. If the Optionee holds NSO Shares for at least one
year, any gain realized on disposition of the Shares will be treated as
long-term capital gain for federal income tax purposes.
(ii) ISO. If the Optionee holds ISO Shares for at least
one year after exercise and two years after the grant date, any gain
realized on disposition of the Shares will be treated as long-term capi
gain for federal income tax purposes. If the Optionee disposes of ISO
Shares within one year after exercise or two years after the grant date
gain realized on such disposition will be treated as compensation incom
(taxable at ordinary income rates) to the extent of the excess, if any,
the lesser of (A) the difference between the fair market value of the S
acquired on the date of exercise and the aggregate Exercise Price, or
(B) the difference between the sale price of such Shares and the aggreg
Exercise Price.
(c) Notice of Disqualifying Disposition of ISO Shares. If the
Optionee sells or otherwise disposes of any of the Shares acquired purs
to an ISO on or before the later of (iii) the date two years after the
date, or (iv) the date one year after the exercise date, the Optionee s
immediately notify the Company in writing of such disposition. The Opt
agrees that he or she may be subject to income tax withholding by the
Company on the compensation income recognized from such early dispositi
of ISO Shares by payment in cash or out of the current earnings paid to
Optionee.
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
EXERCISE NOTICE FOR VESTED SHARES
3D/fx Interactive, Inc.
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__,
the undersigned ("Optionee") hereby elects to exercise Optionee's optio
purchase _________ shares of the Common Stock (the "Shares") of 3D/FX
INTERACTIVE, INC. (the "Company") under and pursuant to the Company's
Employee Stock Plan, as amended (the "Plan"), and the Notice of Grant a
[ ] Incentive [ ] Nonqualified Stock Option Agreement dated ________
(together, the "Option").
2. Representations of Optionee. Optionee acknowledges that Option
has received, read and understood the Plan and the Option Agreement and
agrees to abide by and be bound by their terms and conditions. Optione
represents that Optionee is purchasing the Shares for Optionee's own ac
for investment and not with a view to, or for sale in connection with,
distribution of any of such Shares.
3. Rights as Shareholder. Subject to the terms and condit
this Agreement, Optionee shall have all of the rights of a shareholder
the Company with respect to the Shares from and after the date that Opt
delivers full payment of the Exercise Price until such time as Optionee
disposes of the Shares. Upon such disposition, Purchaser shall have no
further rights as a holder of the Shares.
4. Tax Consultation. Optionee understands that Optionee may suffe
adverse tax consequences as a result of Optionee's purchase or disposit
of the Shares. Optionee represents that Optionee has consulted with an
consultants Optionee deems advisable in connection with the purchase or
position of the Shares and that Optionee is not relying on the Company
any tax advice.
5. Market Standoff Agreement. Optionee hereby agrees that if so
requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any securities of t
Company under the 1933 Act, Optionee shall not sell or otherwise transf
any Shares or other securities of the Company during the 180-day period
following the effective date of a registration statement of the Company
filed under the 1933 Act; provided, however, that such restriction shal
only apply to the first two registration statements of the Company to b
effective under the 1933 Act which include securities to be sold on beh
of the Company to the public in an underwritten public offering under t
1933 Act. The Company may impose stop-transfer instructions with respe
to securities subject to the foregoing restrictions until the end of su
180-day period.
6. Successors and Assigns. The Company may assign any of its righ
under this Agreement to single or multiple assignees, and this Agreemen
shall inure to the benefit of the successors and assigns of the Company
Subject to the restrictions on transfer herein set forth, this Agreeme
shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
7. Interpretation. Any dispute regarding the interpretation of th
Agreement shall be submitted by Optionee or by the Company forthwith to
Company's Board of Directors or the committee thereof that administers
Plan, which shall review such dispute at its next regular meeting. The
resolution of such a dispute by the Board or committee shall be final a
binding on the Company and on Optionee.
8. Governing Law; Severability. This Agreement shall be governed
by and construed in accordance with the laws of the State of California
excluding that body of law pertaining to conflicts of law. Should any
provision of this Agreement be determined by a court of law to be illeg
or unenforceable, the other provisions shall nevertheless remain effect
and shall remain enforceable.
9. Notices. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal
delivery or upon deposit in the United States mail by certified mail, w
postage and fees prepaid, addressed to the other party at its address a
shown below beneath its signature, or to such other address as such par
may designate in writing from time to time to the other party.
10. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necess
to carry out the purposes and intent of this Agreement.
11. Delivery of Payment. Optionee herewith delivers to the Company
the full Exercise Price for the Shares.
12. Entire Agreement. The Plan and Notice of Grant/Option Agreemen
are incorporated herein by reference. This Agreement, the Plan and the
Notice of Grant/Option Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matt
hereof, and is governed by California law.
Submitted by: Accepted by:
PURCHASER: 3D/FX INTERACTIVE, INC..
a California corporation
_____________________________ By __________________________________
(Signature)
Its
__________________________________
Address _____________________ Address
______________________________
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
EXERCISE NOTICE FOR UNVESTED SHARES
AND RESTRICTED STOCK AGREEMENT
3D/FX INTERACTIVE, INC.
Attention: Secretary
1 Exercise of Option. Effective as of today, ___________, 19__,
the undersigned ("Optionee") hereby elects to exercise Optionee's optio
purchase _________ shares of the Common Stock (the "Shares") of 3D/FX
INTERACTIVE, INC. (the "Company") under and pursuant to the Company's
Employee Stock Plan, as amended (the "Plan") and the Notice of Grant an
[ ] Incentive [ ] Nonqualified Stock Option Agreement dated __________,
(together, the "Option"). Of these Shares, Optionee has elected to pur
__________ of those Shares which have become vested under the Vesting
Schedule set out in the Notice of Grant (the "Vested Shares") and _____
Shares which have not yet vested under such schedule (the "Unvested
Shares"). The Purchase Price for the Shares shall be $_________, as se
in the Notice of Grant, for an aggregate Purchase Price of $_________.
2 Representations of Optionee. Optionee acknowledges that Option
has received, read and understood the Plan and the Option Agreement and
agrees to abide by and be bound by their terms and conditions. Optione
represents that Optionee is purchasing the Shares for Optionee's own ac
for investment and not with a view to, or for sale in connection with,
distribution of any of such Shares.
3 Company's Repurchase Option. The Company or its assignee(s)
shall have the option to repurchase all of the Unvested Shares on the t
and conditions set forth in this section (the "Repurchase Option") if t
Optionee should cease to be employed by the Company for any reason or n
reason, including without limitation death, disability, voluntary
resignation or termination by the Company with or without cause.
(a) Right of Termination Unaffected. Nothing in this Agreement
shall be construed to limit or otherwise affect in any manner whatsoeve
right or power of the Company to terminate Optionee's employment at any
for any reason or no reason, with or without cause. Optionee shall be
sidered to be employed by the Company if Optionee is an officer, direct
or full-time employee of the Company or any Parent or Subsidiary of the
Company (as defined in the Plan) or if the Board of Directors determine
that Optionee is rendering substantial services as a part-time employee
consultant or independent contractor to the Company or any Parent or
Subsidiary of the Company (as defined in the Plan). In case of any dis
the Board of Directors of the Company shall have discretion to determin
(i) whether Optionee has ceased to be employed by the Company and (ii)
date on which the employment relationship ceases (the "Termination Date
(b) Exercise of Repurchase Option. At any time within sixty
(60) days after Optionee's Termination Date, the Company or its assigne
may elect to repurchase the Unvested Shares purchased pursuant to the O
Agreement by giving Optionee (or Optionee's personal representative as
case may be) written notice of exercise of the Repurchase Option.
(i) Repurchase Price. The Company or its
assignee(s) shall have the option to repurchase from Optionee
all of the Unvested Shares (or from Optionee's personal repre-
sentative as the case may be) at the Exercise Price (as defined
in the Option Agreement), as such price may be adjusted from
time to time to reflect any subsequent stock dividend, stock
split, reverse stock split or recapitalization of the Company
(the "Repurchase Price").
(ii) Payment of Repurchase Price. The Repurchase
Price shall be payable, at the option of the Company or its
assignee(s), by check or by cancellation of all or a portion of
any outstanding indebtedness of Optionee to the Company (or, in
the case of repurchase by an assignee, to the assignee) or any
combination thereof. The Repurchase Price shall be paid
without interest within 60 days after the Termination Date.
(iii) Lapse of Repurchase Option. All Unvested
Shares held by the Optionee shall be released from the
Company's Repurchase Option and cease to be Unvested Shares
according to the Vesting Schedule set out in the Notice of
Grant.
4 Escrow. As security for the faithful performance of this
Agreement, Optionee agrees, immediately upon receipt of the certificate
evidencing the Shares, to deliver such certificate(s), together with a
power in the form of Attachment 1 attached hereto, executed by Optionee
by Optionee's spouse, if any (with the date and number of Shares left
blank), to the Secretary of the Company or its designee ("Escrow Holder
who is hereby appointed to hold such certificate(s) and stock power in
escrow and to take all such actions and to effectuate all such transfer
and/or releases of such Shares as are in accordance with the terms of t
Agreement. Such appointment shall be evidenced by an executed form of
Escrow Instructions, attached hereto as Attachment 2. Optionee and the
Company agree that Escrow Holder shall not be liable to any party to th
Agreement (or to any other party) for any actions or omissions unless E
Holder is grossly negligent relative thereto. The Escrow Holder may re
upon any letter, notice or other document executed by any signature pur
ported to be genuine and may rely on advice of counsel and obey any ord
of any court with respect to the transactions contemplated herein. The
Shares shall be released from escrow upon termination of both the Repur
Option and the Right of First Refusal; provided, however, that such rel
shall not affect the rights of the Company with respect to any pledge o
Shares to the Company.
5 Rights as Shareholder. Subject to the terms and conditions of
this Agreement, Optionee shall have all of the rights of a shareholder
the Company with respect to the Shares from and after the date that Opt
delivers full payment of the Exercise Price until such time as Optionee
disposes of the Shares or the Company and/or its assignee(s) exercises
Repurchase Option or Right of First Refusal hereunder. Upon such exerc
Optionee shall have no further rights as a holder of the Shares so purc
except the right to receive payment for the Shares so purchased in
accordance with the provisions of this Agreement, and Optionee shall
forthwith cause the certificate(s) evidencing the Shares so purchased t
surrendered to the Company for transfer or cancellation.
6 Tax Consequences.
(a) Tax Consultation. Optionee understands that Optionee may
suffer adverse tax consequences as a result of Optionee's purchase or
disposition of the Shares. Optionee represents that Optionee has consu
with any tax consultants Optionee deems advisable in connection with th
purchase or disposition of the Shares and that Optionee is not relying
the Company for any tax advice.
(b) Section 83(b) Election For Nonqualified Stock Options.
Optionee hereby acknowledges that Optionee has been informed that, with
respect to the exercise of any nonqualified stock option, unless an ele
is filed by the Optionee with the Internal Revenue Service and, if
necessary, the proper state taxing authorities, within thirty (30) days
the purchase of the Shares, electing pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended (and similar state tax provis
if applicable) to be taxed currently on any difference between the purc
price of the Shares and their fair market value on the date of purchase
there will be a recognition of taxable income to the Optionee, measured
the excess, if any, of the fair market value of the Shares, at the time
Company's Repurchase Option lapses over the purchase price for such Sha
Optionee represents that Optionee has consulted any tax consultant(s)
Optionee deems advisable in connection with the purchase of the Shares
the filing of the Election under Section 83(b) and similar tax provisio
A form of Election Under Section 83(b) is attached hereto as Attachmen
for reference. OPTIONEE HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING S
ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH ELECTION OR THE LAPSE
THE REPURCHASE RESTRICTIONS ON THE SHARES.
(c) Section 83(b) Election For Alternative Minimum Tax for
Incentive Stock Options. Optionee hereby acknowledges that Optionee ha
been informed that, with respect to the exercise of any incentive stock
option, unless an election is filed by the Optionee with the Internal
Revenue Service within thirty (30) days of the purchase of the Shares,
electing pursuant to Section 83(b) of the Internal Revenue Code of 1986
amended (and similar state tax provisions if applicable) to be taxed
currently for alternative minimum tax purposes on any difference betwee
purchase price of the Shares and their fair market value on the date of
purchase, the Optionee will be required to include (for alternative min
tax purposes only) an amount equal to the excess, if any, of the fair m
value of the Shares, at the time the Company's Repurchase Option lapses
the purchase price for such Shares. Optionee represents that Optionee h
consulted any tax consultant(s) Optionee deems advisable in connection
the purchase of the Shares or the filing of the Election for alternativ
minimum tax purposes under Section 83(b) and similar tax provisions. A
of Election Under Section 83(b) is attached hereto as Attachment 3A for
reference. OPTIONEE HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH
ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH ELECTION OR THE LAPSE
THE REPURCHASE RESTRICTIONS ON THE SHARES.
7 Restrictive Legends and Stop-Transfer Orders.
(a) Legends. Optionee understands and agrees that the Company
shall cause the legends set forth below or legends substantially equiva
thereto, to be placed upon any certificate(s) evidencing ownership of t
Shares together with any other legends that may be required by state or
federal securities laws:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN RIGHTS OF REPURCHASE HELD BY THE ISSUER OR ITS
ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE AND RESTRICTED
STOCK AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF
THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL
OFFICE OF THE ISSUER. SUCH RIGHTS OF REPURCHASE ARE BINDING ON
TRANSFEREES OF THESE SHARES.
8 Market Standoff Agreement. Optionee hereby agrees that if so
requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any securities of t
Company under the 1933 Act, Optionee shall not sell or otherwise transf
any Shares or other securities of the Company during the one hundred ei
(180) day period following the effective date of a registration stateme
of the Company filed under the 1933 Act; provided, however, that such
restriction shall only apply to the first two registration statements o
Company to become effective under the 1933 Act which include securities
be sold on behalf of the Company to the public in an underwritten publi
offering under the 1933 Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing
restrictions until the end of such one hundred eighty (180) day period.
9 Successors and Assigns. The Company may assign any of its righ
under this Agreement to single or multiple assignees, and this Agreemen
shall inure to the benefit of the successors and assigns of the Company
Subject to the restrictions on transfer herein set forth, this Agreeme
shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
10 Interpretation. Any dispute regarding the interpretation
of this Agreement shall be submitted by Optionee or by the Company fort
to the Company's Board of Directors or the committee thereof that
administers the Plan, which shall review such dispute at its next regul
meeting. The resolution of such a dispute by the Board or committee sh
be final and binding on the Company and on Optionee.
11 Governing Law; Severability. This Agreement shall be
governed by and construed in accordance with the laws of the State of
California, excluding that body of law pertaining to conflicts of law.
Should any provision of this Agreement be determined by a court of law
be illegal or unenforceable, the other provisions shall nevertheless re
effective and shall remain enforceable.
12 Notices. Any notice required or permitted hereunder shall
be given in writing and shall be deemed effectively given upon personal
delivery or upon deposit in the United States mail by certified mail, w
postage and fees prepaid, addressed to the other party at its address a
shown below beneath its signature, or to such other address as such par
may designate in writing from time to time to the other party.
13 Further Instruments. The parties agree to execute such
further instruments and to take such further action as may be reasonabl
necessary to carry out the purposes and intent of this Agreement.
14 Delivery of Payment. Optionee herewith delivers to the
Company the full Exercise Price for the Shares.
15 Entire Agreement. The Plan and Notice of Grant/Option
Agreement are incorporated herein by reference. This Agreement, the Pl
and the Notice of Grant/Option Agreement constitute the entire agreemen
the parties and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matt
hereof, and is governed by California law except for that body of law
pertaining to conflict of laws.
Submitted by: Accepted by:
PURCHASER: 3D/FX INTERACTIVE, INC.
By
(Signature)
Its
Address Address
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
ATTACHMENT 1 TO EXERCISE NOTICE
STOCK POWER AND ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Exercise Notice and
Restricted Stock Agreement dated as of __________, 19__, the undersigne
hereby sells, assigns and transfers unto
___________________________________________, _______________ shares of
Common Stock of 3D/FX INTERACTIVE, INC., a California corporation, stan
in the undersigned's name on the books of said corporation represented
Certificate No. __________ delivered herewith, and does hereby irrevoca
constitute the Secretary of said corporation as attorney-in-fact, with
power of substitution, to transfer said stock on the books of said
corporation.
Dated: __________, 19__
(Signature)
(Please Print Name)
(Spouse's Signature, if any)
(Please Print Name)
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
ATTACHMENT 2 TO EXERCISE NOTICE
JOINT ESCROW INSTRUCTIONS
___________, 199__
Secretary
3D/FX INTERACTIVE, INC.
Dear Sir:
As Escrow Agent for both 3D/FX INTERACTIVE, INC., a California cor-
poration ("Corporation"), and the undersigned purchaser of stock of the
Corporation ("Purchaser"), you are hereby authorized and directed to ho
the documents delivered to you pursuant to the terms of that certain
Restricted Stock Agreement ("Agreement"), dated as of __________, 19__,
which a copy of these Joint Escrow Instructions is attached, in accorda
with the following instructions:
1 In the event the Corporation and/or any assignee of the
Corporation (referred to collectively for convenience herein as the
"Corporation") exercises the Repurchase Option set forth in the Agreeme
the Corporation shall give to Purchaser and you a written notice specif
the number of shares of stock to be purchased, the purchase price, and
time for a closing hereunder at the principal office of the Corporation
Purchaser and the Corporation hereby irrevocably authorize and direct
to close the transaction contemplated by such notice in accordance with
terms of said notice.
2 At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the
number of shares being transferred, and (c) to deliver same, together w
the certificate evidencing the shares of stock to be transferred, to th
Corporation against the simultaneous delivery to you of the purchase pr
(by check or by cancellation of any debt owed by Purchaser to the
Corporation) for the number of shares of stock being purchased pursuant
the exercise of the Repurchase Option.
3 Purchaser irrevocably authorizes the Corporation to deposit
with you any certificates evidencing shares of stock to be held by you
hereunder and any additions and substitutions to said shares as defined
the Agreement. Purchaser does hereby irrevocably constitute and appoin
as his attorney-in-fact and agent for the term of this escrow to execut
with respect to such securities all documents necessary or appropriate
make such securities negotiable and to complete any transaction herein
contemplated. Subject to the provisions of this paragraph 3, Purchaser
shall exercise all rights and privileges of a stockholder of the Corpor
while the stock is held by you.
4 Upon written request of the Purchaser after each successive
one-year period from the date of the Agreement, unless the Repurchase O
has been exercised, you will deliver to Purchaser a certificate or
certificates representing so many shares of stock as are not then subje
to the Repurchase Option. Ninety days after cessation of Purchaser's
service to the Company, you will deliver to Purchaser a certificate or
certificates representing the aggregate number of shares sold and issue
pursuant to the Agreement and not purchased by the Corporation or its
assignees pursuant to exercise of the Repurchase Option.
Notwithstanding the foregoing, none of the certificates representing
the shares of stock deposited under these escrow instructions shall be
released to the Purchaser if the Purchaser's Note given in payment for
shares has not been paid in full. So long as any Note is outstanding, t
shares shall be held by you as collateral for the obligation under the
Subject to the provisions of this paragraph 4, upon payment of the Not
full the certificates representing the shares may be released and deliv
to the Purchaser. In the event Purchaser defaults in payment of the No
when due, you shall, upon written request of the Corporation, deliver t
certificate evidencing the shares of stock and the stock assignments to
Corporation to enable the Corporation to exercise its rights as a secur
party under the Commercial Code of the State of California.
5 If at the time of termination of this escrow you should have in
your possession any documents, securities, or other property belonging
Purchaser, you shall deliver all of same to Purchaser and shall be
discharged of all further obligations hereunder.
6 Your duties hereunder may be altered, amended, modified or
revoked only by a writing signed by all of the parties hereto.
7 You shall be obligated only for the performance of such duties
as are specifically set forth herein and may rely and shall be protecte
relying or refraining from acting on any instrument reasonably believed
you to be genuine and to have been signed or presented by the proper pa
or parties. You shall not be personally liable for any act you may do
omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchas
while acting in good faith and in the exercise of your own good judgmen
and any act done or omitted by you pursuant to the advice of your own
attorneys shall be conclusive evidence of such good faith.
8 You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are
hereby expressly authorized to comply with and obey orders, judgments o
decrees of any court. In case you obey or comply with any such order,
judgment or decree, you shall not be liable to any of the parties heret
to any other person, firm or corporation by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been
entered without jurisdiction.
9 You shall not be liable in any respect on account of the
identity, authorities or rights of the parties executing or delivering
purporting to execute or deliver the Agreement or any documents or pape
deposited or called for hereunder.
10 You shall not be liable for the outlawing of any rights
under the Statute of Limitations with respect to these Joint Escrow
Instructions or any documents deposited with you.
11 You shall be entitled to employ such legal counsel and
other experts as you may deem necessary properly to advise you in conne
with your obligations hereunder, may rely upon the advice of such couns
and may pay such counsel reasonable compensation therefor.
12 Your responsibilities as Escrow Agent hereunder shall
terminate if you shall cease to be Secretary of the Corporation or if y
shall resign by written notice to each party. In the event of any such
termination, the Corporation shall appoint a successor Escrow Agent.
13 If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respe
hereto, the necessary parties hereto shall join in furnishing such
instruments.
14 It is understood and agreed that should any dispute arise
with respect to the delivery and/or ownership or right of possession of
securities held by you hereunder, you are authorized and directed to re
in your possession without liability to anyone all or any part of said
securities until such disputes shall have been settled either by mutual
written agreement of the parties concerned or by a final order, decree
judgment of a court of competent jurisdiction after the time for appeal
expired and no appeal has been perfected, but you shall be under no dut
whatsoever to institute or defend any such proceedings.
15 Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery
upon deposit in the United States Post Office, by registered or certifi
mail with postage and fees prepaid, addressed to each of the other part
thereunto entitled at the following addresses, or at such other address
as a party may designate by ten (10) days' advance written notice to ea
of the other parties hereto.
CORPORATION: 3D/FX INTERACTIVE, INC.
PURCHASER: ______________________________
______________________________
______________________________
______________________________
ESCROW AGENT: Secretary 3D/FX INTERACTIVE, INC.
16 By signing these Joint Escrow Instructions, you become
a party hereto only for the purpose of said Joint Escrow Instructions;
you do not become a party to the Agreement.
17 This instrument shall be binding upon and inure to the
benefit of the parties hereto, and their respective successors and
permitted assigns.
Very truly yours,
3D/FX INTERACTIVE, INC.,
a California corporation
By
Title
PURCHASER
ESCROW AGENT
Secretary
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
ATTACHMENT 3 TO EXERCISE NOTICE
ELECTION UNDER SECTION 83(b) OF
THE INTERNAL REVENUE CODE OF 1986
The undersigned Taxpayer hereby elects, pursuant to the provisions of
the federal income tax law noted above, to include in gross income for
Taxpayer's current taxable year, as compensation for services, the exce
if any, of the fair market value of the property described below at the
of transfer over the amount paid for such property.
1 Taxpayer's Name:
Taxpayer's Address:
_________________________________________________
Social Security Number:
2 The property with respect to which the election is made is desc
as follows: ___________ shares of Common Stock of 3D/FX INTERACTIVE,
INC., a California corporation (the "Company"), which is Taxpayer's
employer or the corporation for whom the Taxpayer has performed
services.
3 The date on which the shares were transferred was ___________,
and this election is made for calendar year 19__.
4 The shares are subject to the following restrictions:
___ The Company may repurchase all or a portion of the shares at
the Taxpayer's original purchase price under certain conditions
at the time of Taxpayer's termination of employment or
services.
___ A right of first refusal in the Company for vested shares at
fair market value upon termination of employment with the
Company.
5 The fair market value of the shares (without regard to restric
other than restrictions which by their terms will never lapse) was
$_________ per share at the time of transfer.
6 The amount paid for such shares was $________ per share.
7 The Taxpayer has submitted a copy of this statement to the Comp
the Taxpayer's employer or the corporation for whom the Taxpayer has
performed services.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS") (
THE OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS) WITHIN 3
DAYS AFTER THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED
THE TAXPAYER'S INCOME TAX RETURNS FOR THE CALENDAR YEAR ABOVE STATED.
ELECTION CANNOT BE REVOKED WITHOUT THE CONSENT OF THE IRS.
Dated: __________, 19__
_________________________________
Taxpayer's Signature
_________________________________
Spouse's Signature (if any)
3D/FX INTERACTIVE, INC.
EMPLOYEE STOCK PLAN
ATTACHMENT 3A TO EXERCISE NOTICE
ALTERNATIVE MINIMUM TAX
ELECTION UNDER SECTION 83(b) OF
THE INTERNAL REVENUE CODE OF 1986
The undersigned Taxpayer hereby elects, pursuant to the provisions of
Sections 55-56 and 83(b) of the Internal Revenue Code of 1986. as amend
to include in alternative minimum taxable income for the Taxpayer's cur
taxable year, as compensation for services, the excess, if any, of the
market value of the property described below at the time of transfer ov
the amount paid for such property.
1 Taxpayer's Name:
Taxpayer's Address:
Social Security Number:
2 The property with respect to which the election is made is desc
as follows: ___________ shares of Common Stock of 3D/FX INTERACTIVE,
INC., a California corporation (the "Company"), which is Taxpayer's
employer or the corporation for whom the Taxpayer has performed
services.
3 The date on which the shares were transferred was ___________,
and this election is made for calendar year 19__.
4 The shares are subject to the following restrictions:
___ The Company may repurchase all or a portion of the shares at
the Taxpayer's original purchase price under certain conditions
at the time of Taxpayer's termination of employment or
services.
___ A right of first refusal in the Company for vested shares at
fair market value upon termination of employment with the
Company.
5 The fair market value of the shares (without regard to restric
other than restrictions which by their terms will never lapse) was
$_________ per share at the time of transfer.
6 The amount paid for such shares was $________ per share.
7 The Taxpayer has submitted a copy of this statement to the Comp
the Taxpayer's employer or the corporation for whom the Taxpayer has
performed services.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS") (
THE OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS) WITHIN 3
DAYS AFTER THE DATE OF TRANSFER OF THE PROPERTY, AND MUST ALSO BE FILED
THE TAXPAYER'S INCOME TAX RETURNS FOR THE CALENDAR YEAR ABOVE STATED.
ELECTION CANNOT BE REVOKED WITHOUT THE CONSENT OF THE IRS.
Dated: __________, 19__
_________________________________
Taxpayer's Signature
_________________________________
Spouse's Signature (if any)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COND
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED I
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 85,243
<SECURITIES> 8,001
<RECEIVABLES> 39,914
<ALLOWANCES> 0
<INVENTORY> 27,901
<CURRENT-ASSETS> 163,051
<PP&E> 10,674
<DEPRECIATION> 0
<TOTAL-ASSETS> 174,163
<CURRENT-LIABILITIES> 57,075
<BONDS> 0
0
0
<COMMON> 122,611
<OTHER-SE> (5,706)
<TOTAL-LIABILITY-AND-EQUITY> 174,163
<SALES> 108,651
<TOTAL-REVENUES> 108,651
<CGS> 56,173
<TOTAL-COSTS> 56,173
<OTHER-EXPENSES> 31,813
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 22,231
<INCOME-TAX> 5,737
<INCOME-CONTINUING> 16,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,494
<EPS-PRIMARY> $1.16
<EPS-DILUTED> $1.04
</TABLE>
