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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
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[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act
of 1934 for the fiscal year ended January 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act
of 1934 for the transition period from to
.
Commission File Number: 000-22651
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3DFX INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
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CALIFORNIA 77-0390421
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
4435 FORTRAN DRIVE, SAN JOSE, CA 95134
(Address of principal executive office) (Zip code)
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Registrant's telephone number, including area code: (408) 935-4400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on March
27, 2000 of $13.44 per share, as reported on the Nasdaq National Market, was
approximately $291,159,080. Shares of common stock held by each officer and
director and by each person known to 3dfx Interactive, Inc. who owns 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of April 25, 2000, the registrant had outstanding 25,141,083 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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FORWARD-LOOKING STATEMENTS
Unless the context otherwise requires, the term "3dfx" when used in this
Form 10-K ("Report") and in the Annual Report to the Stockholders refers to 3dfx
Interactive, Inc., a California corporation, and its consolidated subsidiaries
and predecessors. This Report and the Annual Report to Stockholders contain some
forward-looking statements within the meaning of the federal securities laws.
When used therein, the words "expects," "plans," "believes," "anticipating,"
"estimates," and similar expressions are intended to identify forward-looking
statements. Actual results and the timing of some events could differ materially
from those projected in or contemplated by the forward-looking statements due to
a number of factors, including without limitation those set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors" below.
PART I
ITEM 1. BUSINESS
3dfx Interactive, Inc. develops high performance, cost-effective graphics
chips, graphics boards, software and related technology that enables a highly
immersive, interactive and realistic 3D experience across multiple hardware
platforms. 3dfx develops products with 2D and 3D functionality that optimize
both entertainment and general PC graphics applications and that are well suited
to both the retail/distributor and PC-OEM add-in graphics board markets. 3dfx's
graphic chips and graphics boards are comprised of hardware and embedded
software designed around a common architecture.
3dfx's technology is optimized to alleviate the traditional consumer
trade-off between visual quality and gaming performance by providing a 3D
solution with both high fill rates and high frame rates. To promote the rapid
adoption of its products, 3dfx's architecture supports all industry standard 3D
application programming interfaces, or APIs, including Microsoft Corporation's
("Microsoft") Direct3D ("D3D") and Silicon Graphics, Inc.'s ("SGI") OpenGL.
Additionally, 3dfx has developed Glide, a low-level 3D API, which facilitates
the virtually seamless portability of software content across multiple
entertainment platforms utilizing 3dfx's 3D and 3D/2D graphics chips. This
enhanced portability allows the content developer to leverage the significant
development and marketing expenses associated with a given software title.
Recently, 3dfx released Glide into the Open Source community for further
evolution of the API.
3dfx's current products, the Voodoo2 and Voodoo3 product families, as well
as its recently announced VSA 100 product family, are all designed around a
common architecture that can function as the 3D graphics engine for both PCs and
coin-operated ("coin-op") arcade systems. The Voodoo3 product family, which
began shipping in the first quarter of fiscal year 2000, is a high performance,
fully featured single chip, 3D/2D graphics chip for the PC. The recently
announced Voodoo 4 and Voodoo 5 products are based on the VSA-100 3D
accelerator, and provide the PC industry's first implementation of high quality
hardware anti-aliasing, which substantially improves the image quality of 3D
rendering. Current customers include Ingram MicroD, Inc. ("Ingram MicroD"), Dell
Computer Corporation ("Dell"), Gateway, Inc. ("Gateway"), D&H Distributing, Best
Buy Co., Inc. ("Best Buy") and Compaq Computer Corporation ("Compaq"). 3dfx's
graphics chips are primarily manufactured, tested, packaged, and distributed by
third parties, while its graphics boards are primarily manufactured, tested,
packaged and distributed by 3dfx's ISO 9002 certified graphics board production
facility in Juarez, Mexico.
STB MERGER
In May 1999, 3dfx completed its merger with STB Systems, Inc. ("STB"). Upon
consummation of the merger, each outstanding share of STB common stock was
automatically converted into 0.65 shares of 3dfx Common Stock. An aggregate of
8,266,754 shares of 3dfx Common Stock were issued in connection with the merger.
This amount represented approximately 34.3% of the total number of shares of
3dfx Common Stock outstanding after giving effect to such issuance (excluding
shares issuable upon the exercise of options or warrants).
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Following the consummation of the 3dfx/STB merger, certain operating
functions of each company were combined to achieve operating efficiency. For
example, the various engineering functions were merged wherein the graphics chip
design and the graphics board design could be performed as a coordinated
process. The sales and marketing operations were unified to address customer
needs, particularly in the retail/distribution channel. Various other operating
functions such as operations and various administrative functions have been
integrated in the combined companies.
The purpose of the 3dfx/STB merger was to allow 3dfx an avenue to deliver
the 3dfx graphics chip directly to the retail/distributor market on a graphics
board designed and built by 3dfx rather than on graphics cards designed by
various third party companies. The merger has successfully allowed this
objective to be achieved. Beginning with the launch of the Voodoo3, the 3dfx
brand name has been successfully placed on retail shelves with one of the most
successful product launches in the history of what was previously STB. Customers
have welcomed the merger with support of the Voodoo3 product family, as well as
the upcoming Voodoo4 and Voodoo5 based upon prelaunch product orders received to
date.
PROPOSED GIGAPIXEL MERGER
General. On March 27, 2000, 3dfx entered into an Agreement and Plan of
Reorganization (the "Merger Agreement") with GigaPixel Corporation, a Delaware
corporation ("GigaPixel"). The Merger Agreement provides for the merger of a
newly formed, wholly owned subsidiary of 3dfx with and into GigaPixel (the
"Merger"). GigaPixel will be the surviving corporation of the Merger and will
become a wholly owned subsidiary of 3dfx. The Merger will be accounted for under
purchase accounting. In the event that the Merger is consummated, the
combination of 3dfx's and GigaPixel's operations will result in some significant
changes in 3dfx's business.
About GigaPixel. GigaPixel designs and develops advanced 3D graphics
technology to enable video devices to display images with a realistic 3D
appearance. GigaPixel is engaged primarily in the design of high performance,
scalable, low cost 3D cores, which constitute the "blueprint" for use in the
manufacture of graphics chips. GigaPixel has fabricated a prototype chip
incorporating its technology that has proved its architecture. It has licensing
agreements with two customers under which it has received up-front development
fees to license 3D cores to the customers for use in their graphic chip products
and will receive royalties on any chips incorporating its technology that are
shipped by the customers. To date, no products made with GigaPixel's 3D cores
have been shipped and there is no assurance that the two customers with whom
GigaPixel has licensing agreements will ship any such products. Graphics chips
made with GigaPixel's 3D cores would be used in a wide variety of devices
featuring high-quality video graphics display, such as desktop PCs, laptops,
video game consoles and television set-top boxes. GigaPixel intends to license
current and future generations of graphics technology to leading manufacturers
and developers of computer graphics hardware and graphics boards for PCs.
Effective Time of the Merger. The Merger will become effective upon the
filing of the executed Certificate of Merger with the Secretary of State of
Delaware (the "Effective Time"). The Merger Agreement provides that the parties
thereto will cause the Certificate of Merger to be filed as soon as practicable
after the occurrence of the following events:
- The 3dfx shareholders have approved the Merger, the Merger Agreement and
issuance of 3dfx common stock pursuant to the Merger Agreement;
- The GigaPixel shareholders have approved and adopted the Merger
Agreement and approved the Merger; and
- The parties have obtained all required regulatory approvals, taken all
required actions and satisfied or waived all other conditions to the
consummation of the Merger.
These conditions precedent to the Merger may not be satisfied. Moreover,
either 3dfx or GigaPixel may terminate the Merger Agreement under various
conditions specified in the Merger Agreement. Therefore, there can be no
assurance as to whether or when the Merger will become effective.
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Conversion of Securities. Upon the closing of the Merger, and based upon
the share exchange formula set forth in the Merger Agreement and the number of
outstanding GigaPixel securities at March 27, 2000, the holders of outstanding
shares of GigaPixel common and preferred stock will be entitled to receive, on a
pro rata basis, an aggregate of approximately 15.7 million shares of 3dfx common
stock, to constitute approximately 38% of the outstanding 3dfx common stock
after the Merger (or approximately 0.77 share of 3dfx common stock for each
outstanding share of GigaPixel common stock or preferred stock held by GigaPixel
shareholders, the "Exchange Ratio"). The foregoing Exchange Ratio will change
proportionately (i) in the event that the number of outstanding securities of
GigaPixel changes, (ii) to the extent that GigaPixel does not have the required
cash balance described in the Merger Agreement at the closing or (iii) GigaPixel
incurs merger expenses in excess of $2.5 million. No fractional shares of 3dfx
common stock will be issued in the Merger. The Exchange Ratio will not increase
or decrease due to fluctuations in the market price of 3dfx common stock.
Each outstanding option to acquire shares of GigaPixel common stock granted
under GigaPixel's 1997 Employee Incentive Plan shall be assumed by 3dfx in the
Merger. As a result of the Merger, each GigaPixel stock option shall be treated
as an option to acquire shares of 3dfx common stock upon the same terms and
conditions, except that the number of shares shall be adjusted in a manner
determined by multiplying the number of shares presently subject to the
GigaPixel options by the Exchange Ratio and by dividing the exercise price for
such shares of GigaPixel common stock by the Exchange Ratio to determine the new
exercise price. GigaPixel's single outstanding warrant will be converted into
approximately 160,000 shares of 3dfx common stock.
Other Agreements Executed With the Merger Agreement. In connection with
the execution of the Merger Agreement, all executive officers and directors and
certain shareholders of GigaPixel, who beneficially owned in excess of a
majority of the outstanding shares of GigaPixel common stock and in excess of a
majority of the outstanding shares of GigaPixel preferred stock as of January
31, 2000, have agreed with 3dfx that they will vote their shares of GigaPixel
common stock in favor of approval of the Merger Agreement, the Merger and any
matter that could reasonably be expected to facilitate the Merger. Also, all
3dfx executive officers and directors, and certain of their affiliates, who
beneficially owned approximately 2.5% of the outstanding shares of 3dfx common
stock (excluding shares subject to options) as of January 31, 2000, have agreed
with GigaPixel that they will vote their shares of 3dfx common stock in favor of
the Merger Agreement, the Merger, the issuance of 3dfx common stock pursuant to
the Merger and any matter that could reasonably be expected to facilitate the
Merger. 3dfx and GigaPixel have also entered into a joint development agreement
providing for collaborative research and development efforts pending completion
of the merger.
INDUSTRY BACKGROUND
The goal of interactive electronic entertainment is to create a realistic
and immersive environment in which users can actively participate. Interactive
electronic entertainment began in the 1970s with Atari's introduction of Pong, a
simplistic, 2D, black and white, coin-op arcade game resembling ping pong, and
has evolved to encompass realistic and engaging 3D action games such as NHL
2000, LEGO Racers and Unreal Tournament.
While interactive electronic entertainment started in the arcade, it was
brought to the mass market through the advent of inexpensive, dedicated home
game consoles that attached to televisions. Over the past 15 years, Nintendo
Corporation ("Nintendo"), Sega Enterprises, Ltd. ("Sega"), Sony Corporation
("Sony") and other original equipment manufacturers ("OEMs") have introduced
successive generations of these consoles that, combined with better quality
games, have provided increasing realism and enhanced game play. In the last
several years, the electronic entertainment experience has also successfully
migrated to the PC platform. The overall entertainment experience on all of
these platforms has been consistently improving as a result of the introduction
of technologically advanced 3D hardware and software.
The ultimate goal of the use of 3D for entertainment applications is to
create an interactive experience with video quality comparable to that of motion
pictures. Interactive electronic entertainment
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applications employing 3D graphics create plausible illusions of reality and
thus provide more engaging presentations of complex action and scenery than
traditional 2D graphics. 3dfx believes that, once consumers experience high
quality 3D technology on any entertainment platform, they will demand it from
all interactive entertainment experiences.
Interactive electronic entertainment products today are generally played on
three hardware platforms -- the PC, the coin-op arcade system and the home game
console. Coin-op arcade games have traditionally offered the most compelling and
immersive experience for game players and, as a result, 3D gaming was first
introduced in this high-end market. However, coin-op arcade games are based on
high cost, proprietary hardware and, consequently, the coin-op arcade market has
remained a relatively small segment of the overall 3D market. Like coin-op
arcade systems, home game console hardware is typically proprietary. However,
the platform's generally attractive price, which is typically $300 or less,
technological improvements and convenience have fueled its substantial consumer
adoption.
3D interactive electronic entertainment has traditionally enjoyed success
on the coin-op arcade and home game console platforms, both of which are
optimized for game play. Recent developments now also enable the PC to serve as
a successful platform for interactive electronic entertainment. First, the
emergence of more powerful graphics chips and dedicated graphics processors have
provided the necessary computing power to handle the computationally intensive
processing of 3D graphics at acceptable costs. Second, the PC industry has
adopted wider data buses in the PC architecture that are capable of transmitting
the vast streams of data needed for high quality 3D graphics. Third, cost
reductions in memory and other components have allowed PC OEMs to offer lower
cost, general purpose computing platforms that are ideal for 3D interactive
electronic entertainment. Finally, the industry has developed and adopted
industry standard 3D APIs, such as Microsoft's D3D and SGI's OpenGL, that serve
as software bridges between applications and the 3D graphics processor.
THE 3D DILEMMA
The implementation of 3D graphics is extremely complex and mathematically
intensive and requires significant computing power. Consequently, despite the
desirability of 3D graphics, high quality 3D is not fully incorporated into the
majority of PCs. To date, attempts to bring high quality, affordable 3D
solutions to the entertainment market have required consumers to accept a
trade-off between visual realism, or fill rate, and gaming performance, or frame
rate. Today, the interactive electronic entertainment industry demands a
no-compromise 3D solution that will deliver both visual realism and performance
at a cost-effective price. The solution must also drive content development by
enabling developers to create a new generation of high quality 3D software that
delivers a realistic and immersive entertainment experience.
THE 3dfx SOLUTION
3dfx has developed hardware and software technology designed to deliver
high quality 3D performance across multiple interactive electronic entertainment
platforms in a cost-effective manner. 3dfx's technology is optimized to
alleviate the traditional consumer trade-off between visual quality and gaming
performance by providing a 3D solution with both high fill rates and high frame
rates. 3dfx's technology enables a highly immersive, interactive 3D experience
with compelling visual quality, realistic motion and complex character and scene
interaction at real time frame rates. 3dfx's most recently announced products,
the Voodoo4 and Voodoo5 family of products, offer the industry's first high
quality hardware anti-aliasing solution, a technology which substantially
improves the overall quality of the 3D rendering process.
To promote the rapid adoption of its products, 3dfx's architecture supports
most industry standard APIs, including Microsoft's D3D and SGI's OpenGL. 3dfx
believes that game titles using any of these APIs in conjunction with its 3D/2D
graphics chip products offer compelling performance when compared to performance
achieved by competing hardware solutions. By focusing on ensuring that the
future evolution of the industry standard APIs are in sync with future 3dfx
products, consistency throughout the software development community is
maintained.
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STRATEGY
3dfx's objective is to establish its products as the standard 3D/2D
graphics chips and graphics boards in the interactive electronic entertainment
market. Key elements of 3dfx's business strategy include:
Pursue Branding Strategy. 3dfx continues to devote substantial marketing
resources towards establishing 3dfx and Voodoo as a recognizable brands. Thus,
3dfx is continuing its efforts with both software developers and publishers in
the PC market to promote these brands, to enhance the compatibility of software
with 3dfx's products and to increase its presence in retail outlets featuring
the 3dfx and Voodoo brands. In recent periods, 3dfx has also increased branding
efforts designed to support and otherwise capitalize on the sales of 3dfx's
products in the retail market. For example, 3dfx has partnered with several high
profile marketing and advertising agencies to execute an innovative global
branding campaign that includes widespread print and media advertising as well
as various internet-based marketing initiatives.
Focus on Interactive Electronic Entertainment Market. The interactive
electronic entertainment market is currently a multi-billion dollar industry
that is growing rapidly. 3dfx believes that the compelling visual quality and
high performance graphics enabled by graphics boards incorporating its 3D/2D
graphics chips make its 3D solution ideal for use in today's market where users
demand a high quality 3D experience. 3dfx's strategy is to develop and introduce
products that deliver 3D performance levels that meet the demanding requirements
of the major interactive electronic entertainment platforms in a cost-effective
manner. Given the technical challenge of offering a high quality 3D solution,
3dfx believes that this market offers significant potential for continued
innovation of cost-effective, high performance 3D/2D graphics chips and graphics
boards.
Promote Content Development. 3dfx believes that the availability of a
sufficient number of high quality, commercially successful software game titles
and applications drives hardware sales. Therefore, to become the standard in the
3D interactive electronic entertainment arena, 3dfx is collaborating with
content developers to create software entertainment titles designed to work with
3dfx's hardware. Currently, over 700 software entertainment titles are
commercially available. 3dfx attracts content developers by providing them with
the opportunity to differentiate their software products through high quality 3D
graphics that feature rich special effects and real time frame rates. With a
solution that enables game content to be easily ported across the major
interactive entertainment platforms, 3dfx offers its software partners easy
access to multiple outlets for their products. To encourage developers and
publishers to develop content based on 3dfx's technology, 3dfx has devoted
significant resources to its developer relations program, which currently
includes over 1,000 content developers, game publishers and ISVs.
Extend Technical Leadership. 3dfx offers leading performance 3D and
integrated 2D/3D graphics chips and graphics boards primarily targeted toward
the upper end of the interactive electronic entertainment market. 3dfx intends
to continue to seek ways in which it can adapt the technology it has developed
for the upper end of the 3D interactive electronic entertainment market to more
mainstream applications in the volume market. For example, the technology and
existing business relationships that will be acquired by 3dfx as part of the
proposed GigaPixel merger will enable 3dfx to provide 3D cores and intellectual
property to participants in the 3D capable consumer devices market. 3dfx
believes this strategy will create an effective barrier to entry to some
potential competitors.
Leverage Success in Retail Distribution Channel into OEM Channel. 3dfx's
efforts to date have largely been focused on the add-in graphics board market.
With the introduction of Voodoo Banshee and the Voodoo3 product families and now
the VSA-100 3D graphics chip-based Voodoo4 and Voodoo5 product family, each of
which provide integrated 2D/3D solutions, 3dfx has extended its focus to include
the more mainstream PC OEM market. The recently announced VSA-100 3D graphics
chip design is also focused on this same PC OEM market. 3dfx believes that its
success in branding both 3dfx and its Voodoo technology at the consumer level
through its efforts in the retail channel, as well as its success in working
with the software content community, provide an incentive for PC OEMs to design
3dfx products into their future product lines. 3dfx believes that its brand
equity will provide PC OEMs with a differentiating feature that consumers will
recognize.
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Leverage Core Technology to Address New Market Opportunities. 3dfx is
investigating opportunities to apply its 3D technology to other product
applications, such as set-top boxes, mobile computers, personal data assistants
("PDAs"), Internet/intranet exploration, including virtual reality mark-up
language ("VRML") browsers, 3D graphical user interface ("GUI"), visual
simulation, education and training applications and other 3D visualization
applications. For example, upon completion of its proposed merger with
Gigapixel, 3dfx will acquire 3D core technology that dramatically reduces the
memory bandwith and high gate count designs traditionally required for 3D
acceleration, thereby enabling high quality 3D display capabilities in low
power, cost sensitive environments. This technology may also allow 3dfx to
augment its existing business by implementing a 3D core licensing program
targeted at the emerging market for consumer electronic devices that require
advanced 3D acceleration.
PRODUCTS
3dfx's product strategy is to offer an integrated 2D/3D graphics chip
solution comprised of hardware and embedded software designed around a common
architecture that will become the standard graphics engine or graphics board for
the interactive electronic entertainment market. Voodoo Graphics, 3dfx's first
product, began commercial shipment in September 1996. Voodoo Rush, 3dfx's second
product commenced commercial shipment in April 1997. 3dfx has also developed
Voodoo2, which was released in the first quarter of 1998, and Voodoo Banshee, a
high performance, fully featured single chip 3D/2D graphics chip that was
released commercially in the third quarter of 1998. The Voodoo3 product was
announced in late 1998 and began commercial shipments in the second quarter of
1999. 3dfx has recently announced its newest family of products, the Voodoo4 and
Voodoo5, both of which utilize the VSA-100 3D graphics chip. Production of
VSA-100 3D graphics chip based products is scheduled to commence in the
beginning of 3dfx's second quarter of fiscal 2001.
Voodoo3. The Voodoo3 product family, introduced in November 1998, is a
generation of integrated single chip, 3D/2D graphics chips and graphics boards
targeted for the PC market. Voodoo3's target customer base is both the retail
and broader PC-OEM markets. The first Voodoo3 products began commercial shipment
in the second quarter of 1999 and are compatible with applications for earlier
Voodoo family products. Voodoo3 has enjoyed success particularly in the retail
market, spending a substantial amount of time as the number one selling retail
graphics board in the United States.
Voodoo4. The Voodoo4 family of products consists of single chip solutions
based on the VSA-100 3D graphics chip, 3dfx's new generation integrated 2D/3D
graphics chip. New features in the VSA-100 3D graphics chip include 32-bit color
rendering, stencil support, compressed texture support, substantially higher
rendering performance, and AGP 4x and 64 Mbytes of memory support. Voodoo4
graphics boards are scheduled to enter production in 3dfx's second fiscal
quarter.
Voodoo5. The Voodoo5 family of products consists of multi-chip
implementations utilizing the VSA-100 3D graphics chip. Use of multiple VSA-100
3D graphics chips on a single graphics board allows for substantial performance
and visual quality enhancements. The Voodoo5 family of products is the
industry's first design to support high quality hardware anti-aliasing, a
technology which substantially improves the overall image quality of 3D
rendering. The Voodoo5 anti-aliasing technology smooths the triangle "jagged
edges" and addresses the "pixel popping" problems prevalent in existing 3D
graphics chips. Additionally, the Voodoo5 products support 3dfx's proprietary
T-Buffer(TM) technology, which allows cinematic effects such as motion blur,
depth of field, and soft reflectance to be accelerated. The Voodoo5 5500 product
includes two VSA-100 3D graphics chips, while the Voodoo5 6000 includes four
VSA-100 3D graphics chips, which results in high performance and rendering
quality.
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3DFX PRODUCTS
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COMMERCIAL
PRODUCT AVAILABILITY TARGET MARKET KEY FEATURES
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Voodoo2 March 1998 PCs Add-on 3D solution; systems
scalability; consistent sustained
performance will all features
enabled; fully-featured triangle
rate of up to 3.0M/sec; texture
streaming; on-chip triangle set
up; fully-featured architecture
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Voodoo Banshee September 1998 PCs Single chip 3D/2D solution; large
feature set; fully integrated
architecture; high sustained fill
rate and triangle rate with all
features enabled; compatible 3D
architecture with Voodoo Graphics
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Voodoo3 April 1999 PCs Single chip 3D/2D solution; large
and enhanced feature set; fully
integrated architecture; AGP2X;
high sustained fill rate and
triangle rate with all features
enabled; compatible 3D
architecture with Voodoo Graphics,
Voodoo2, and Voodoo Banshee
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Voodoo4 May 2000 PCs Based on a single chip
implementation of the VSA-100 3D
graphics chip. The VSA-100 3D
graphics chip is an integrated
2D/3D solution offering 32-bit
color rendering, 2k x 2k texture
map sizes, stencil buffers,
texture compression and
substantially higher fill rates.
The Voodoo4 is backwards
compatible with Voodoo, Graphics,
Voodoo2, Voodoo Banshee and
Voodoo3.
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Voodoo5 May 2000 PCs Based on a multi-chip
implementation of the VSA-100 3D
graphics chip. Includes all the
features of the Voodoo4, but also
includes support for hardware
full-scene anti-aliasing and the
T-Buffer digital cinematic effects
engine. Hardware anti-aliasing
substantially improves overall 3D
rendering quality, while the
T-Buffer engine allows
acceleration of cinematic effects
such as motion blur, depth of
field and soft reflectance.
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CUSTOMERS
3dfx markets its products primarily to PC retailers and distributors, PC
systems integrators and PC OEMs. 3dfx works closely with software developers
during the design process of entertainment platforms and the development phase
of software titles and applications. 3dfx believes that this close technical
collaboration facilitates the integration of 3dfx's products into the market.
There can be no assurance, however, that this collaboration will ultimately
result in customer orders or that 3dfx will retain such customers through the
ongoing and recurring design-in process.
For the fiscal year ended January 31, 2000, 3dfx's largest customer, Ingram
MicroD, accounted for approximately 13.0% of its net revenues, while 3dfx's 6
largest customers collectively accounted for approximately 40.5% of its net
revenues.
SALES AND MARKETING
3dfx sells its products primarily to PC retailers and distributors, PC
systems integrators and PC OEMs throughout the world. In the United States and
Canada, 3dfx sells its products to its customers primarily through its internal
sales force. Outside the United States and Canada, primarily in the Far East and
Europe, 3dfx sells its products to its customers through internal sales
personnel and independent sales representatives.
To meet customer requirements and achieve design wins, 3dfx's sales and
marketing personnel work closely with leading industry software and hardware
developers to define product features, performance, price and market timing of
new products. 3dfx provides customers with early access to technical design
information and specifications, documentation, in-house engineering support,
first chip product samples and product development plans. This effort is
coordinated by 3dfx's product marketing organization and is supported by
in-house applications engineers. 3dfx believes that these efforts contribute to
3dfx's understanding of customer needs and assist 3dfx in developing products
that meet customer requirements.
To encourage software title developers and publishers to develop games
optimized for platforms utilizing 3dfx's products, 3dfx seeks to establish and
maintain strong relationships in the software development community. 3dfx has
branded a marketing effort named the "Buddy Program" that employs 3dfx's
expertise in software development to assist developers through an on-site
assistance program, sample source code and electronic communication. As part of
the Buddy Program, 3dfx has assigned a software engineer to each strategic
developer to assist with product development. Generally 3dfx's assigned software
engineer interacts with the developer both remotely and through on-site visits
and, by working closely with the development team, attempts to ensure that the
developer fully exploits the 3D graphics capabilities of 3dfx's products.
Another key element of 3dfx's sales and marketing strategy has been the
development of manufacturing qualified reference design kits for 3dfx's 3D/2D
graphics chips and graphics boards. 3dfx uses the reference design kits to seed
important developers before the commercial introduction of 3dfx's products to
ensure early software availability and, after commercial introduction, to
encourage on-going support of 3dfx's products. 3dfx believes that its close
relationships with and attention to content developers encourages the
development of software for 3dfx's hardware, provides 3dfx with information
regarding the needs and concerns of the development community and enables 3dfx
to continually assess opportunities for future software projects.
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As of January 31, 2000 there were more than 700 game titles for the PC and
more than 20 arcade titles utilizing 3dfx's products that were commercially
available. The PC game titles utilize different APIs, including Glide, D3D and
OpenGL, or some combination thereof. The following table is a representative
list of game titles for use with platforms utilizing 3dfx's products that were
commercially available as of January 31, 2000:
<TABLE>
<CAPTION>
TITLE PUBLISHER DEVELOPER API PLATFORM API
- ---------------------------------- ------------------ ------------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C>
High Heat Baseball 2000........... 3DO 3DO D3D PC D3D
Everquest......................... 989 Studios Verrant Interactive D3D/Glide PC D3D/Glide
Quake III Arena................... Activision Id Software Open GL PC Open GL
Battlezone II..................... Activision Pandemic Studios D3D PC D3D
Tarzan............................ Disney Interactive Disney Interactive D3D PC D3D
Tomb Raider: The Last
Revelation....................... Eidos Core Design D3D PC D3D
NFL Madden 2000................... Electronic Arts Electronic Arts D3D/Glide PC D3D/Glide
Need for Speed: High Stakes....... Electronic Arts Electronic Arts D3D/Glide PC D3D/Glide
Alien vs. Predator................ Fox Interactive Rebellion D3D PC D3D
Darkstone......................... Gathering of Delphine D3D PC D3D
Developers
Unreal Tournament................. GT Interactive Epic Games D3D/Glide/Open GL PC D3D/Glide/Open GL
Total Annihilation: Kingdoms...... GT Interactive Cavedog D3D PC D3D
Falcon 4.0........................ Hasbro Interactive Microprose D3D/Glide PC D3D/Glide
Descent 3......................... Interplay Outrage D3D/Glide PC D3D/Glide
Lego Racers....................... Lego Media High Voltage D3D/Glide PC D3D/Glide
Software
Star Wars Episode I: Phantom
Menace........................... Lucas Arts Lucas Arts D3D PC D3D
Prince of Persia 3D............... Mattel Interactive Red Orb D3D/Glide PC D3D/Glide
Entertainment
Asheron's Call.................... Microsoft Turbine D3D PC D3D
Entertainment
Homeworld......................... Sierra Relic Entertainment D3d/Open GL PC D3d/Open GL
Hidden and Dangerous.............. Talonsoft Illusion Softworks D3D PC D3D
NBA Showtime on NBC............... Midway Midway Glide Coin-op Arcade Glide
Hydro Thunder..................... Midway Midway Glide Coin-op Arcade Glide
Blitz 2000 Gold................... Midway Midway Glide Coin-op Arcade Glide
Savage Quest...................... Interactive Light Angel Studios Glide Coin-op Arcade Glide
</TABLE>
To enhance awareness of 3dfx's 3D graphics solutions, 3dfx has created
several proprietary demonstrations that showcase the performance and features
made possible by 3dfx's products. These demonstrations, which are sometimes
bundled with an OEM's product, are shown to software developers, OEMs, VARs and
tradeshow audiences. 3dfx believes that these demonstrations effectively
demonstrate the immediate potential for high quality 3D graphics in interactive
electronic entertainment and effectively differentiate 3dfx's product offerings
from competing products.
3dfx continues to devote substantial marketing resources towards
establishing 3dfx and Voodoo as a recognizable brands. 3dfx has been working
with both software developers and publishers in the PC market to prominently
display the 3dfx logo on their software product boxes in order to indicate that
the software is compatible with 3dfx's products. To further identify 3dfx in the
marketplace, several software products display a spinning version of the 3dfx
logo on the screen while loading. 3dfx believes that this strategy creates brand
awareness. 3dfx further believes that consumer awareness of its products will
speed adoption of 3dfx's architecture in the mass market, lead to increasing
availability of 3dfx enabled software content and help establish 3dfx as the
standard 3D solution for the interactive electronic entertainment market.
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3dfx's marketing activities also consist of participation in industry
tradeshows, marketing communications and market development activities designed
to generate awareness of 3dfx and its products. Such activities include ongoing
contact with industry press and analysts and selective advertising in
entertainment and game industry publications. In March 1998, Dimension
Publishing introduced a quarterly magazine dedicated exclusively to 3dfx
products. This magazine includes software title and hardware release schedules,
product reviews, gaming tips and other information that enhance the return on
the consumer's investment in 3dfx-based products. 3dfx believes that this
magazine helps build 3dfx's brand image while concurrently increasing awareness
in the marketplace about 3dfx's products. 3dfx is also active in the promotion
of its products through 3D graphics news groups on the Internet. 3dfx intends to
continue to promote the 3dfx and Voodoo brands and trademarks to create a
recognizable industry standard for high quality 3D entertainment.
3dfx also provides financial incentives for commercial customers to include
the 3dfx brand name in advertisements and various promotional activities of the
customer. As an incentive, 3dfx may reimburse a commercial customer for a
portion of such advertisements calculated as a percentage of recent product
purchases, referred to in the industry as "cooperative advertising" or other
isolated events with market development funds or "MDF".
3dfx generally allows returns in the form of stock rotations only of
products sold to commercial customers, such as distributors and retailers.
3dfx's current stock rotation policies typically permit a commercial customer to
return a portion of the products purchased from 3dfx within specified time
periods, if that customer concurrently places an order with 3dfx for additional
products of equal or greater value. 3dfx usually resells returned products. In
addition, 3dfx typically provides price protection to commercial customers in
the form of credits for price reductions on products remaining in customer
inventories at the time the price reduction is implemented. 3dfx believes in
providing adequate reserves for these related contingencies.
TECHNOLOGY
3D Technology
The technology necessary to create interactive, realistic and visually
engaging 3D at high frame rates is extremely compute intensive, complex and
technically challenging. Today, 3D graphics companies face the challenge of
designing affordable products that offer realistic 3D graphics with full screen
resolution in real time for the mainstream PC market. The substantial complexity
and technical demands of achieving this level of 3D graphic performance requires
compute and pixel processing power and memory bandwidths well beyond what is
available in typical general purpose central processing units ("CPUs"), such as
those made by Intel Corporation ("Intel"). Specialized 3D graphics processors
address this limitation by implementing all or part of what is referred to as
the "3D Pipeline" by providing dedicated 3D graphics processing capability.
The 3D Pipeline is a sequence of operations, which, starting with three
dimensional model data, position and desired lighting models, results in 2D
pixels displayed on a computer monitor or television display. The creation of a
single 3D image from the numerical mode is comprised of three primary steps:
tessellation, geometry and rendering.
- Tessellation. Tessellation is the creation of a numerical description
(the "three dimensional model data") of an object and the conversion of
this model into a set of polygons. Polygons are often defined to be
triangles because triangles are simple geometric shapes which can be
easily defined by only a few data points and can be quickly modified by
mathematical operations. Each triangle requires a separate set of
calculations, which means that the more complex an object is, the more
compute intensive it is. As a result, triangles-per-second is one of the
essential performance metrics of 3D graphics.
- Geometry. The geometry phase of the 3D Pipeline includes three stages:
transformation, lighting and triangle setup, although triangle setup is
often considered a separate stage. The transformation
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stage converts the native three dimensional model data from its native
numerical representation into a viewer-dependent model space by using 4x4
matrix operations. The triangle setup operation takes in the transformed,
lighted triangles and calculates the edge and slope information required
to paint each individual triangle on the screen.
- Rendering or Rasterization. The third primary phase of the 3D Pipeline,
called triangle rendering or triangle rasterization, is the most
important phase for creating a quality 3D image. During this phase, a
two-dimensional image, capable of being displayed on a PC monitor or
television set, is created from the discrete, three-dimensional model
that emerges from the geometry phase. Within each particular triangle,
pixels are computed, rendered and displayed according to a complex set
of rules. Final image quality depends on the number and types of
techniques applied to each particular pixel. Various techniques are
applied in the rendering phase to achieve photo-realistic images,
including scan conversion, shading, texture-mapping and various
perspective enhancements. More advanced techniques in rendering include
MIP mapping, texture filtering, anti-aliasing, subpixel correction,
fogging, alpha-blending, and depth cueing.
The rasterization stage of the 3D Pipeline permits a significant level of
quality improvements, which can be achieved by the application of many
techniques. While these techniques can make a qualitative difference in the
realism that a 3D image conveys to the viewer, many of these techniques are
highly compute intensive. As a result, if performance is not sufficient given
the number and type of techniques used, the overall experience of the user will
diminish. In order for a 3D image to achieve realistic animation on a monitor
screen in real-time and with excellent visual quality, as many as twenty billion
operations per second might be necessary. Most PC systems that are equipped with
3D hardware accelerators perform the tessellation, transformation, lighting, and
clipping operations on the CPU and pass the results to the 3D acceleration
hardware for triangle setup and rendering to complete the 3D pipeline. As a
result, the rasterization stages of the 3D Pipeline is almost always handled by
a graphics processor, which has a focused range of operation.
3dfx Architecture and Technology
The primary goal of all of 3dfx's products is to provide
workstation-quality 3D performance at affordable price points. Furthermore, the
scaleable nature of the 3dfx solution is applicable across different markets and
different price targets without re-engineering the core logic.
In a 3dfx Voodoo product, the pixelfx chip is responsible for managing the
frame buffer, while the texelfx chip accesses dedicated texture memory. The
pixelfx chip performs triangle setup, Gouraud shading, texture, fogging,
alpha-blending and Z-buffering. The pixelfx chip is also responsible for sending
information to a low-cost external digital to analog converter ("DAC") for
display on a computer monitor or television set. The texelfx chip is responsible
for triangle setup of the texture coordinates, texture address calculations,
perspective-correction of the texture coordinates, MIP Mapping calculations to
properly select the appropriate texture map and texture lookup. Subsequent to
texture lookup, the texelfx chip formats the incoming texture and decompresses
the texture element if the texture map is stored in a proprietary compressed
format and performs bilinear blending. Finally, the processed texel is sent to
the pixelfx chip for final storage into the frame buffer.
The performance benefits of having separate, dedicated frame buffer memory
distinct from texture memory is dramatic. While traditional consumer-oriented 3D
and 3D/2D graphics chips have utilized a common pool of memory for both frame
buffer and texture storage, the 3dfx solution allows for Z-buffering and
alpha-blending operations, performed in the frame buffer memory, to operate
independently from texture map lookup, performed in the dedicated texture
memory. The result is an architecture which maintains full performance when all
of the advanced 3D rendering features are enabled.
Due to the design's scalability, multiple texelfx chips may be chained
together to form a "texture streaming" architecture, where multiple texture maps
may be accessed independently and blended together, a technique known as
"texture compositing" with no degradation in quality. In addition, multiple
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complete pixelfx/texelfx subsystems may be chained together to double the raw
rendering capability for the high performance solutions.
To further reduce the solution cost of its products and to specifically
address PC motherboard designs, 3dfx has developed Voodoo Banshee and Voodoo3,
as well as the recently announced VSA-100 3D graphics chip based product
families, which are designed to be high performance, fully-featured single chip,
3D/2D graphics chips for the PC and coin-op arcade markets. In addition, 3dfx
offers Glide, its proprietary API, as a development tool to enable the optimal
performance and easy, low cost cross platform portability of software content
developed for 3dfx's 3D and 3D/2D graphics chips products.
Research and development expenses were $12.4 million, $34.0 million and
$66.1 million in fiscal 1997, 1998 and 2000, respectively.
MANUFACTURING
3dfx has adopted a "fabless" manufacturing strategy for its graphics chips
whereby 3dfx employs world class suppliers for all phases of the manufacturing
process, including, manufacturing, assembly, testing and packaging. This
strategy leverages the expertise of its industry leading, ISO certified
suppliers in such areas as fabrication, packaging, quality control and
assurance, reliability and testing and allows 3dfx to avoid the significant
costs and risks associated with owning and operating such operations. Third
party suppliers manufacture 3dfx's graphics chips. These suppliers are
responsible for procurement of raw materials used in the production of these
products. 3dfx believes that raw materials required are readily available.
Wafers for 3dfx's Voodoo family of products are currently fabricated for
3dfx by Taiwan Semiconductor Manufacturing Corporation ("TSMC"), which is the
largest independent foundry in the world. TSMC currently produces the
semiconductor die for 3dfx using standard 0.25 micron, Application Specific
Integrated Circuit ("ASIC") Complimentary-symmetry Metal-Oxide Semiconductor
("CMOS") process technology. After the wafer production process is completed,
the semiconductor die is shipped to Advanced Semiconductor Engineering Group
("ASE"), Caesar Technology, Inc. ("Caesar") and Siliconware. ASE, Caesar and
Siliconware then package the semiconductor die. Additionally, ASE tests the
semiconductor die, tests the finished product and ships the finished
semiconductor to 3dfx. 3dfx receives its semiconductor products from its
subcontractors and performs incoming quality assurance on them at its
facilities. All of 3dfx's suppliers have their manufacturing operations located
in Taiwan, R.O.C.
The fabrication of semiconductors is a complex and precise process. Minute
levels of contaminants in the manufacturing environment, defects in masks used
to print circuits on a wafer, difficulties in the fabrication process or other
factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy. As
a result, semiconductor companies often experience problems in achieving
acceptable wafer manufacturing yields, which are represented by the number of
good die as a proportion of the total number of die on any particular wafer.
Once production yield for a particular product stabilizes, 3dfx pays an agreed
price for wafers meeting some acceptance criteria pursuant to a "good die" only
pricing structure for that particular product. Until production yield for a
particular product stabilizes, 3dfx must pay an agreed price for wafers
regardless of yield. Accordingly, in this circumstance, 3dfx bears the risk of
final yield of good die. Poor yields would materially adversely affect 3dfx's
revenues, gross margin and results of operations. As 3dfx's relationships with
TSMC and any additional manufacturing partners develop, yields could be
adversely affected due to difficulties associated with adapting 3dfx's
technology and product design to the proprietary process technology and design
rules of each manufacturer. Because of 3dfx's potentially limited access to
wafer fabrication capacity from its manufacturers, any decrease in manufacturing
yields could result in an increase in 3dfx's per unit costs and force 3dfx to
allocate its available product supply among its customers, thus potentially
adversely impacting customer relationships as well as revenues and gross profit.
All of 3dfx's semiconductor commerce is performed through purchase orders
without additional or supplementary agreements. As a result, there can be no
assurance that 3dfx will be able to secure
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sufficient manufacturing capacity to meet product demand in the future, which
could have a material adverse effect on 3dfx's business. 3dfx believes that it
has developed strong relationships with its suppliers, and it has experienced no
material manufacturing concerns to date. Although 3dfx is confident in its
suppliers' abilities to fulfill product requirements, other semiconductor
fabrication foundries are available if 3dfx were to elect to diversify its
supplier manufacturing base.
Since the completion of its merger with STB, 3dfx has also been engaged in
the production of its own graphics boards. Substantially all of 3dfx's graphics
boards are manufactured at its ISO 9002 certified board manufacturing facility
in Juarez, Mexico, which utilizes high-volume automated SMT equipment capable of
manufacturing double-sided products. The current manufacturing capacity of
3dfx's Mexican manufacturing facility approximates 500,000 graphics board per
month, depending on product mix and complexity. In the event production
capacities in its Mexican facility may not be sufficient to meet demand, 3dfx
has begun using a subcontractor in mainland China to supplement its current
in-house capacity.
In the event of production difficulties, shortages or delays experienced by
3dfx or any one of its suppliers, 3dfx's business, financial condition, or
results of operation may be adversely impacted. Furthermore, although quality
assurance measures have been taken, there can be no guarantee against defects
affecting the quality, performance or reliability of 3dfx's products. Any such
defects could require costly product recalls or cessation of shipments,
adversely affecting 3dfx's business, financial condition and results of
operations, and resulting in a decline of revenues, increased costs (associated
with return, repair, replacement and shrinkage associated with such defects),
cancellations or reschedulings of customer orders and shipments.
COMPETITION
The markets in which 3dfx compete are intensely competitive and are likely
to become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than 3dfx's products. 3dfx does not compete on the basis
of price alone. 3dfx believes that the principal competitive factors for 3D
graphics products are:
- Product performance and quality
- Conformity to industry standard application programming interfaces, or
APIs
- Access to customers and distribution channels
- Price
- Product support
- Ability to bring new products to the market in a timely way
- Brand Awareness
Many of 3dfx's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than 3dfx. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than 3dfx. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. In
addition, some of 3dfx's principal competitors offer a single vendor solution,
because they maintain their own semiconductor foundries and may therefore
benefit from some capacity, cost and technical advantages.
3dfx seeks to use strategic relationships to augment their capabilities.
However, the benefits of these relationships may not be realized or sufficient
to overcome the established positions of 3dfx's largest competitors as suppliers
to the PC OEM and retail markets. Regardless of the relative qualities of 3dfx's
products, the market power, product breadth and customer relationships of its
larger competitors can be expected to provide such competitors with substantial
competitive advantages.
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3dfx competes primarily against companies that offer a board or chip
solution to the 3D/2D PC graphics market. These companies typically have
operated in the PC 2D graphics market and now offer 3D capability as an
enhancement to their 2D solutions. These competitors include ATI Technologies,
Inc., S3 Incorporated, Creative Technology Ltd. and nVidia Corporation. 3dfx
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, including 3Dlabs, Inc., Integraph Corporation
and SGI. These companies are developing lower cost versions of their 3D
technology to bring workstation-like 3D graphics to mainstream applications.
Intel also competes in the 3D graphics market by offering an integrated core
logic/3D/2D solution aimed at the mainstream PC market. These companies may
enter the interactive electronics entertainment market, and, if they do, then
3dfx may not be able to compete successfully against them.
3dfx now also competes with graphics board manufacturers, with suppliers
who sell graphics chips directly to OEMs, with OEMs who internally produce
graphics chips or integrate graphics chips on the main computer processing board
of their personal computers, commonly known as the motherboard, and with the
makers of other personal computer components and software that are increasingly
providing graphics processing capabilities.
PATENTS AND PROPRIETARY RIGHTS
3dfx relies primarily on a combination of patent, mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. 3dfx has eight patent applications pending in the United States Patent
and Trademark Office ("PTO") and seven foreign patent applications pending. In
addition, seven United States patents and three foreign patents have been issued
to 3dfx. There can be no assurance that 3dfx's pending patent application or any
future applications will be approved, that any issued patents will provide 3dfx
with competitive advantages or will not be challenged by third parties, or that
the patents of others will not have an adverse effect on 3dfx's ability to do
business. In addition, there can be no assurance that others will not
independently develop substantially equivalent intellectual property or
otherwise gain access to 3dfx's trade secrets or intellectual property, or
disclose such intellectual property or trade secrets, or that 3dfx can
meaningfully protect its intellectual property. A failure by 3dfx to
meaningfully protect its intellectual property could have a material adverse
effect on 3dfx's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is currently no
pending intellectual property litigation against 3dfx. However, 3dfx may from
time to time receive notice of claims that 3dfx has infringed patents or other
intellectual property rights owned by others. 3dfx may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to 3dfx. The failure to obtain a license from a
third party for technology used by 3dfx could cause 3dfx to incur substantial
liabilities and to suspend the manufacture of products. Furthermore, 3dfx may
initiate claims or litigation against third parties for infringement of 3dfx's
proprietary rights or to establish the validity of 3dfx's proprietary rights.
Litigation by or against 3dfx could result in significant expense to 3dfx and
divert the efforts of 3dfx's technical and management personnel, whether or not
such litigation results in a favorable determination for 3dfx. In the event of
an adverse result in any such litigation, 3dfx 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 some processes or obtain licenses for the infringing technology.
There can be no assurance that 3dfx would be successful in such development or
that such licenses would be available on reasonable terms, or at all, and any
such development or license could require expenditures by 3dfx of substantial
time and other resources. Although patent disputes in the semiconductor industry
have often been settled through cross-licensing arrangements, there can be no
assurance that, in the event that any third party makes a successful claim
against 3dfx or its customers, a cross-licensing arrangement could be reached.
If a license is not made
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available to 3dfx on commercially reasonable terms, then 3dfx's business,
financial condition and results of operations could be materially adversely
affected.
There can be no assurance that infringement claims by third parties or
claims for indemnification by other customers or end users of 3dfx's products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect
3dfx's business, financial condition and results of operations. Any limitations
on 3dfx's ability to market its products, or delays and costs associated with
redesigning its products or payments of license fees to third parties, or any
failure by 3dfx to develop or license a substitute technology on commercially
reasonable terms, could have a material adverse effect on 3dfx's business,
financial condition and results of operations.
EMPLOYEES
As of January 31, 2000, 3dfx had approximately 650 employees, approximately
265 of whom were engaged in engineering, and approximately 385 of whom were
engaged in marketing, sales, operations and administrative positions. As of
January 31, 2000, approximately 566 of 3dfx's employees were located in the
United States, 80 employees were located in 3dfx's European offices, and four
employees were employed by its Japanese subsidiary. In addition to these
employees, approximately 1,200 employees were employed by its Mexican subsidiary
and work in its Juarez, Mexico board manufacturing facility. No employee of 3dfx
is covered by collective bargaining agreements, and 3dfx believes that its
relationship with its employees is good.
3dfx's ability to operate successfully depends in significant part upon the
continued service of some key technical and managerial personnel, and its
continuing ability to attract and retain additional highly qualified technical
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that 3dfx can retain such personnel or that it can attract
or retain other highly qualified technical and managerial personnel in the
future, including key sales and marketing personnel. The loss of key personnel
or the inability to hire and retain qualified personnel could have a material
adverse effect upon 3dfx's business, financial condition and results of
operations.
3dfx's relationship with its employees at its Mexican manufacturing
facility is regulated by the Mexican Federal Labor Law. The Mexican Federal
Labor Law contains detailed provisions regarding minimum employment conditions
and specifies rights that must be provided to all employees in Mexico. Other
Mexican federal laws require employers to make contributions to the Mexican
Social Security System and to establish and make specified contributions to
individual retirement savings and housing accounts at a commercial bank for all
employees. In addition, Mexican federal law requires the payment of substantial
severance amounts relative to the employees' wages in the event of the
termination of a Mexican employee. Although Mexican laws heavily regulate
employment relationships, aggregate labor costs at 3dfx's Mexican facility are
less than labor costs would be at a similar facility in the United States. There
can be no assurance, however, that these laws will not be amended or
supplemented in the future to increase the compensation required to be paid to
Mexican employees or the costs of compliance with such laws. Any such change
could have a material adverse effect on 3dfx's business, financial condition and
results of operations.
ITEM 2. PROPERTIES
3dfx leases approximately 77,805 square feet for its headquarters in one
building in San Jose, California pursuant to a lease the expires on April 30,
2007, with an option to extend the lease for an additional five-year term. In
addition, 3dfx leases approximately 52,040 square feet in a building adjacent to
its San Jose headquarters pursuant to a lease that expires in 2007, with an
option to extend the lease for an additional three-year term. Additionally, 3dfx
leases a 210,000 square foot facility in Richardson, Texas which is used in part
for sales, engineering, accounting and technical support functions of 3dfx, such
lease expires in November, 2003. Approximately 80,000 square feet of the
Richardson facility is leased to third parties under long term leases. Under the
terms of a lease agreement expiring in November, 2007, 3dfx
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leases a 136,800 square foot manufacturing facility in Juarez, Mexico. 3dfx also
leases a 20,800 square foot space in El Paso, Texas used as a product return
facility.
3dfx also has engineering offices located in Bellevue, Washington (2,134
square feet expiring in August 2001), Austin, Texas (27,179 square feet expiring
in August, 2004), Eugene, Oregon (2,675 square feet expiring in January 2002),
Belfast, Northern Ireland (13,000 square feet expiring in April, 2006) and Fort
Collins, Colorado (1,217 square feet expiring in November, 2000) and European
offices located in London and Paris. 3dfx also maintains product inventories in
various locations under warehouse arrangements in order to permit timely
delivery of some products to nearby customers. 3dfx believes that its current
facilities are well maintained and adequate for its current needs and will be
adequate to meet its needs for the foreseeable future. 3dfx also believes that
additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
On September 21, 1998, 3dfx filed suit against nVidia in Northern
California District Federal Court. The complaint alleges patent infringement
relating to nVidia's use of multi-texturing technology in its RIVA TNT product.
Discovery in the case is presently under way.
A securities class action lawsuit was filed October 9, 1998 in Dallas
County, Texas against STB, which 3dfx acquired by merger in May, 1999. The suit
was brought against STB and some of its officers and directors and the
underwriters who participated in the STB secondary offering on March 20, 1998.
The petition alleges that the registration statement for the secondary public
offering contained false and misleading statements of material facts and omitted
to state material facts. The petition asserts claims under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933, as amended, and Sections 581-33A of the
Texas Securities Act on behalf of a purported class of persons who purchased or
otherwise acquired STB common stock in the public offering. The petition seeks
recission and/or unspecified damages. STB denies the allegations in the petition
and intends to defend the lawsuit vigorously.
On December 17, 1999, a similar securities class action lawsuit was also
filed in the United States District Court for the Northern District of Texas,
Dallas Division, against STB and three of its officers and directors. The action
asserts claims under Sections 10 and 20 of the Securities Exchange Act of 1934
and Rule 10b-5 of the Securities and Exchange Commission. STB denies the
allegations in the petition and intends to defend the lawsuit vigorously. On
February 8, 2000 another similar securities class action lawsuit was filed in
the United States District Court for the Northern District of Texas, Dallas
Division against STB and three of its officers and directors. STB denies
allegations in the action and intends to vigorously defend the lawsuit. These
two actions have now been consolidated.
3dfx is a party from time to time to some other legal proceedings arising
in the ordinary course of business. Although the amount of any liability that
could arise with respect to these proceedings cannot be predicted accurately,
3dfx believes that any liability that might result from such claims will not
have a material adverse effect on its financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
3dfx Interactive's common stock has been quoted on the Nasdaq National
Market under the symbol "TDFX" since 3dfx's initial public offering on June 25,
1997. Prior to that time, there was no public market for 3dfx's common stock.
The following table sets forth for the periods indicated the high and low sale
prices per share for 3dfx's common stock as reported on the Nasdaq National
Market. Effective as of February 1, 1999, 3dfx changed its fiscal year from a
fiscal year beginning January 1 and ending December 31, to a fiscal year
beginning February 1 and ending January 31.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR ENDED JANUARY 31, 2001
First quarter (through April 25, 2000)...................... $13.44 $ 8.13
FISCAL YEAR ENDED JANUARY 31, 2000
Fourth quarter.............................................. 10.56 8.50
Third quarter............................................... 15.19 7.53
Second quarter.............................................. 21.25 13.13
First quarter............................................... 21.88 10.81
ONE MONTH PERIOD ENDED JANUARY 31, 1999..................... 15.00 12.25
FISCAL YEAR ENDED DECEMBER 31, 1998
Fourth quarter.............................................. 17.38 8.75
Third quarter............................................... 22.50 8.00
Second quarter.............................................. 35.25 15.06
First quarter............................................... 29.94 20.75
</TABLE>
On April 25, 2000, the reported last sale price of 3dfx's common stock on
the Nasdaq National Market was $10.50 per share. As of April 25, 2000, there
were approximately 358 holders of record of 3dfx's common stock.
DIVIDEND POLICY
3dfx has never declared or paid cash dividends on its capital stock. 3dfx
currently expects to retain future earnings, if any, for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future. The declaration and payment by 3dfx of any future
dividends and the amount thereof will depend upon 3dfx's results of operations,
financial condition, cash requirements, future prospects and other factors
deemed relevant by the 3dfx board of directors. Further, at present, 3dfx's
revolving credit facility generally prohibits 3dfx from paying cash dividends.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements and the Notes thereto included
elsewhere in this Report.
Effective as of February 1, 1999, 3dfx changed its fiscal year from a
fiscal year beginning January 1 and ending December 31, to a fiscal year
beginning February 1 and ending January 31. References in this document to
"fiscal 2000" means the year ended January 31, 2000, to "fiscal 1998" means the
year ended December 31, 1998, and to "fiscal 1997" means the year ended December
31, 1997. The statement of operations data below reflects 3dfx's operations,
including the following:
- 3dfx's merger with STB Systems, Inc., which was consummated on May 13,
1999 and was treated as a purchase for financial reporting and
accounting purposes. 3dfx's results of operations for the year ended
January 31, 2000 reflect the impact of the STB merger. See Note 2 to
Notes to Financial Statements for further discussion of the STB merger.
- In July 1998, 3dfx reached a settlement with Sega in conjunction with a
lawsuit which 3dfx filed against Sega in August 1997. Fiscal 1998
includes a one-time recognition of income based on the settlement.
- Fiscal 1997 includes $1.8 million of development contract revenues
recognized under the Technology License and Development Agreement with
Sega Enterprises, Ltd. No amounts were recognized in any other period.
19
<PAGE> 20
<TABLE>
<CAPTION>
YEAR
ENDED MONTH ENDED YEAR ENDED DECEMBER 31,
JANUARY 31, JANUARY 31, ------------------------------------------
2000 1999 1998 1997 1996 1995
----------- ----------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................... $360,523 $ 17,048 $202,601 $ 44,069 $ 6,390 $ --
Cost of revenues............... 287,872 14,527 119,618 22,611 5,123 --
-------- -------- -------- -------- --------- --------
Gross profit................... 72,651 2,521 82,983 21,458 1,267 --
-------- -------- -------- -------- --------- --------
Operating expenses:
Research and development..... 66,062 3,340 34,045 12,412 9,435 2,940
Selling, general and
administrative............ 63,468 4,614 35,441 11,390 6,642 2,166
In process research and
development.................. 4,302 -- -- -- -- --
Restructuring expense.......... 4,382 -- -- -- -- --
Amortization of goodwill and
intangibles.................. 10,228 -- -- -- -- --
-------- -------- -------- -------- --------- --------
Total operating
expenses................ 148,442 7,954 69,486 23,802 16,077 5,106
-------- -------- -------- -------- --------- --------
Income (loss) from
operations................... (75,791) (5,433) 13,497 (2,344) (14,810) (5,106)
Interests and other income,
net.......................... 2,180 322 15,869 630 59 67
-------- -------- -------- -------- --------- --------
Income (loss) before income
taxes........................ (73,611) (5,111) 29,366 (1,714) (14,751) (5,039)
Provision (benefit) for income
taxes........................ (10,324) (1,636) 7,663 -- -- --
Net income (loss).............. $(63,287) $ (3,475) $ 21,703 $ (1,714) $ (14,751) $ (5,039)
======== ======== ======== ======== ========= ========
Basic net income (loss) per
share........................ $ (2.81) $ (0.22) $ 1.45 $ (0.16) $ (1.74) $ (0.82)
======== ======== ======== ======== ========= ========
Diluted net income (loss) per
share........................ $ (2.81) $ (0.22) $ 1.33 $ (0.16) $ (1.74) $ (0.82)
======== ======== ======== ======== ========= ========
Shares used in basic net income
(loss) Calculation........... 22,536 15,641 14,917 10,767 8,467 6,173
======== ======== ======== ======== ========= ========
Shares used in diluted net
income (loss) Calculation.... 22,536 15,641 16,353 10,767 8,467 6,173
======== ======== ======== ======== ========= ========
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments....... $ 65,830 $ 94,957 $ 95,980 $ 34,921 $ 5,291 $ 865
Working capital (deficit)...... 98,466 106,924 110,871 37,456 6,637 (307)
Total assets................... 296,111 168,870 184,121 61,917 15,581 2,440
Capitalized lease obligations,
less current portion......... 1,881 416 284 546 632 544
Retained earnings (accumulated
deficit)..................... (66,563) (3,276) 199 (21,504) (19,790) (5,039)
Total shareholders' equity..... 187,234 123,018 126,313 44,274 9,621 552
</TABLE>
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. 3dfx's actual results could differ materially from
those discussed in the forward-looking statements as a result of some factors
including those set forth under "-- Risk Factors" and elsewhere in this Report.
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Report.
OVERVIEW
General
3dfx was founded in August 1994 to design, develop, market and support 3D
graphics chips, graphics boards and API software for the interactive electronic
entertainment market. 3dfx derives revenue from the sale of 3D and 3D/2D
graphics chips and graphics boards designed primarily for use in PCs. 3dfx began
commercial shipments of its first 3D graphics product, the Voodoo Graphics
chipset, in September 1996 and introduced subsequent graphics chipsets in fiscal
1997 and fiscal 1998. In March 1999, 3dfx began shipment of its Voodoo3 product
family of enhanced and more fully-featured, single chip 3D/2D media processors.
3dfx's Voodoo3 product family was broadened in fiscal 1999 to include
board-level products.
3dfx's sales have historically been concentrated among a limited number of
customers. Revenues derived from sales to Ingram Micro accounted for
approximately 13% of revenues for the fiscal year ended January 31, 2000.
Revenues derived from sales by 3dfx to STB prior to the May 13, 1999 effective
date of the 3dfx/STB merger accounted for 6.5% of revenues for the fiscal year
ended January 31, 2000. The announcement and consummation of the merger between
3dfx and STB caused some of 3dfx's customers to end or curtail their
relationships with the combined company. For example, two of 3dfx's largest
customers in fiscal 1998, Creative Technology Ltd. and Diamond Multimedia
Systems, Inc., competed directly with STB. These customers (and their
subsidiaries) together accounted for approximately $117.5 million, or
approximately 58%, of 3dfx's total revenue in fiscal 1998. Sales to Diamond and
Creative Technology following the announcement of the merger decreased
significantly from prior levels and these customers are no longer customers of
the combined company. To date, the loss of business from 3dfx's historical
customer base has not been fully replaced through the sale of the combined
company's board level products, which has negatively impacted 3dfx's revenues.
If other customers of 3dfx terminate their relationship with the combined
company or sales of the combined company's graphics boards continue to be less
than the sales generated with 3dfx's historical customer base, 3dfx's business
could be materially harmed.
As part of its manufacturing strategy, 3dfx leverages the expertise of
third party suppliers in the areas of wafer fabrication, assembly, quality
control and assurance, reliability and testing. This strategy allows 3dfx to
devote its resources to research and development and sales and marketing
activities while avoiding the significant costs and risks associated with owning
and operating a wafer fabrication facility and related operations. 3dfx does not
manufacture the semiconductor wafers used for its products and does not own or
operate a wafer fabrication facility. All of 3dfx's wafers are currently
manufactured by Taiwan Semiconductor Manufacturing Corporation ("TSMC") in
Taiwan. 3dfx obtains manufacturing services from TSMC on a purchase order basis.
3dfx provides TSMC with a rolling six month forecast of its supply needs and
TSMC builds to 3dfx's orders. 3dfx purchases wafers and die from TSMC. Once
production yield for a particular product stabilizes, 3dfx pays an agreed price
for wafers meeting some acceptance criteria pursuant to a "good die" only
pricing structure for that particular product. Until production yield for a
particular product stabilizes, however, 3dfx must pay an agreed price for wafers
regardless of yield. Such wafer and die purchases constitute a substantial
portion of cost of products revenues once products are sold. TSMC is responsible
for procurement of raw materials used in the production of 3dfx's products. 3dfx
believes that raw materials required are readily available. 3dfx's products are
packaged by three third party subcontractors, Advanced Semiconductor Engineering
Group ("ASE"), Caesar Technology, Inc. and Siliconware. All of 3dfx's products
are tested by ASE. This assembly and testing is conducted on a
21
<PAGE> 22
purchase order basis rather than under a long-term agreement. All purchases of
wafers and assembly and test services are denominated in U.S. dollars.
In connection with the grant of stock options to employees since inception
(August 1994) through the effective date of 3dfx's IPO, 3dfx recorded aggregate
deferred compensation of approximately $1.9 million, representing the difference
between the deemed fair value of the common stock for accounting purposes and
the option exercise price at the date of grant. This amount is presented as a
reduction of shareholders' equity and is amortized ratably over the vesting
period of the applicable options. This amortization resulted in charges to
operations of $484,000 (of which $194,000 and $290,000 were recorded in research
and development expenses and selling, general and administrative expenses,
respectively) in each of the years ended January 31, 2000, December 31, 1998 and
1997, and will result in charges over the next two quarters of approximately
$172,000 (of which $69,000 and $103,000 will be recorded in research and
development expenses and selling, general, and administration expenses,
respectively.)
Overview of STB Merger and Treatment of IPR&D
3dfx completed the STB merger in May 1999. As a result of the merger, STB
is now a wholly owned subsidiary of 3dfx. The merger was accounted for under the
purchase method of accounting. The purchase price of $139.3 million included
$116.1 million of stock issued at fair value (fair value being determined as the
average price of the 3dfx stock for a period three days before and after the
announcement of the merger), $9.9 million in STB stock option costs (being
determined under both the Black Sholes formula and in accordance with the merger
agreement) and $13.3 million in estimated expenses of the transaction. The
purchase price was allocated as follows: $85.6 million to the estimated fair
value of STB net tangible assets purchased (as of May 13, 1999), $(7.6) million
to establish deferred tax liabilities associated with the certain intangibles
acquired, $4.3 million to purchased in-process research and development, $11.4
million to purchased existing technology, $4.4 million to trademarks, $2.3
million to workforce-in-place, $1.0 million to executive covenants and $37.9
million to goodwill. The allocation of the purchase price to intangibles was
based upon an independent, third party appraisal and management's estimates. The
intangible assets and goodwill acquired have estimated useful lives and
estimated first year amortization, as follows:
<TABLE>
<CAPTION>
ESTIMATED FISCAL 2000
AMOUNT USEFUL LIFE AMORTIZATION
----------- ----------- ------------
<S> <C> <C> <C>
Purchased existing technology:
1.5 year life....................................... $ 6,475,000 1.5 years $3,540,000
3 year life......................................... 4,966,000 3 years 1,357,000
Trademarks............................................ 4,406,000 5 years 722,000
Workforce-in-place.................................... 2,250,000 5 years 369,000
Executive covenants................................... 1,000,000 5 years 164,000
Goodwill.............................................. 37,900,000 5 years 5,190,000
</TABLE>
The value assigned to purchased in-process research and development
("IPR&D") was determined by identifying research projects in areas for which
technological feasibility had not been established. These include projects for
Voodoo3 as well as other specialized technologies totaling $4.3 million. The
value was determined by estimating the expected cash flows from the projects
once commercially viable, discounting the net cash flows back to their present
value and then applying a percentage of completion to the calculated value as
defined below.
Net Cash Flows. The net cash flows from the identified projects are based
on 3dfx's estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, royalty costs and income taxes from
those projects. These estimates are based on the assumptions mentioned below.
The research and development costs included in the model reflect costs to
sustain projects, but exclude costs to bring in-process projects to
technological feasibility. The estimated revenues are based on management
projections of each in-process project and the business projections were
compared and found to be in line with industry analysts' forecasts of growth in
substantially all of the relevant markets.
22
<PAGE> 23
Estimated total revenues from the IPR&D product areas are expected to peak in
the year ending December 31, 1999 and decline from 2000 into 2001 as other new
products are expected to become available. These projections are based on our
estimates of market size and growth, expected trends in technology and the
nature and expected timing of new project introductions by our competitors and
us.
Gross Margins. Projected gross margins associated with the identified
projects approximate STB's recent historical performance and are in line with
comparable industry margins. The estimated selling, general and administrative
costs are consistent with STB's historical cost structure, which is in line with
industry averages at approximately 10% of revenues. Research and development
costs are consistent with STB's historical cost structure.
Royalty Rate. 3dfx applied a royalty charge of 25% of operating income for
each in-process project to attribute value for dependency on predecessor core
technologies.
Discount Rate. Discounting the net cash flows back to their present value
is based on the industry weighted average cost of capital ("WACC"). The industry
WACC is approximately 14%. The discount rate used in discounting the net cash
flows from IPR&D is 20%, a 600 basis point increase from the industry WACC. This
discount rate is higher than the industry WACC due to inherent uncertainties
surrounding the successful development of the IPR&D, market acceptance of the
technology, the useful life of such technology and the uncertainty of
technological advances which could potentially impact the estimates described
above.
Percentage of Completion. The percentage of completion for each project
was determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project
technological feasibility. The percentage of completion varied by individual
project ranging from 50% to 91%. If the projects discussed above are not
successfully developed, the sales and profitability of the combined company may
be adversely affected in future periods.
RESULTS OF OPERATIONS
The following table sets forth some statement of operations data of 3dfx
expressed as a percentage of revenue for each of the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
DECEMBER 31,
JANUARY 31, ------------------
2000 1998 1997
----------- ------- -------
<S> <C> <C> <C>
REVENUES.................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 79.8% 59.0% 51.3%
------ ------- -------
Gross profit............................................ 20.2% 41.0% 48.7%
------ ------- -------
Operating expenses:
Research and development................................ 18.3% 16.8% 28.2%
Selling, general and administrative..................... 17.6% 17.5% 25.8%
In-process research and development..................... 1.2% 0.0% 0.0%
Restructuring expense................................... 1.2% 0.0% 0.0%
Goodwill and intangibles amortization................... 2.8% 0.0% 0.0%
------ ------- -------
Total operating expenses.................................. 41.2% 34.3% 54.0%
------ ------- -------
Income (loss) from operations............................. (21.0%) 6.7% (5.3%)
Interest and other income (expense), net.................. 0.6% 7.8% 1.4%
Provision for income taxes................................ (2.9%) (3.8%) 0.0%
------ ------- -------
Net income (loss)......................................... (17.6%) 10.7% (3.9%)
====== ======= =======
</TABLE>
23
<PAGE> 24
YEARS ENDED JANUARY 31, 2000 (FISCAL 2000) AND DECEMBER 31, 1998 (FISCAL 1998)
Revenues. Revenues are recognized upon product shipment. 3dfx's total
revenues were $360.5 for the fiscal year ended January 31, 2000 and $202.6
million for the fiscal year ended December 31, 1998. Fiscal 2000 revenues
includes revenues of $299.6 million generated from sales of board-level products
incorporating Voodoo3 technology by STB following the May 13, 1999, effective
date of the merger. Revenues in fiscal 2000 were principally attributable to
sales of 3dfx's Voodoo3 and Voodoo Banshee products. Substantially all of the
revenues in fiscal 1998 were derived from sale of 3dfx's Voodoo Banshee chip and
its Voodoo2 and Voodoo Graphics chipsets.
Gross Profit. Gross profit consists of total revenues less cost of sales.
Cost of sales consists primarily of costs associated with the purchase of
components and the procurement of semiconductors from 3dfx's contract
manufacturers, labor and overhead associated with procurement, assembly,
testing, packaging, warehousing and shipping, and warranty costs. Gross profit
as a percentage of revenues was 20% and 41% for the fiscal years ended January
31, 2000 and December 31, 1998, respectively. The decrease can be primarily
attributed to the gross profit generated from the sales of board-level products,
which have lower margins as compared with the margins on chip-only products. In
addition, the decrease in gross profit as a percentage of revenues resulted from
lower margins associated with the Voodoo3 and Voodoo Banshee products sold in
fiscal 2000, as compared with the margins of Voodoo2 and Voodoo Graphics
products sold in fiscal 1998. 3dfx's future gross profits will be affected by
the overall level of sales; the mix of products sold in a period; manufacturing
yields; [THE IMPACT OF PRICE PROTECTION CREDITS GRANTED TO 3DFX'S CUSTOMERS;]
and 3dfx's ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
3dfx's foundries in connection with manufacturing start-up of new products.
Research and development expenses increased 94% from $34.0 million in the fiscal
year ended December 31, 1998 to $66.1 million in the fiscal year ended January
31, 2000. Included in the fiscal 2000 amount is $7.9 million in research and
development expenses attributable to the operations of STB following the May 13,
1999 effective date of the merger. Excluding the impact of expenses related to
STB's operations, research and development expenses increased 70% in fiscal 2000
as compared to the year ended December 31, 1998. This increase reflects an
increase in personnel costs, common cost allocations and engineering costs
resulting from the development of Voodoo3 and other future products. 3dfx
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 these expenses as a percentage of total
revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 79% from $35.4 million in
fiscal year ended December 31, 1998 to $63.5 million in the fiscal year ended
January 31, 2000. The increase is primarily attributable to the inclusion of
$36.8 million in expenses relating to the operations of STB following the May
13, 1999, effective date of the merger. Excluding the impact of expenses related
to STB's operations, selling, general and administrative expenses decreased 25%
for fiscal 2000, as compared to fiscal 1998. This decrease in selling, general
and administrative expenses is primarily a result of a reduction in selling
expenses due to 3dfx's elimination of the costs of many independent sales
representatives, which were supplanted by the combined 3dfx direct sales force,
partially offset by increases in 3dfx's bad debt expense. 3dfx expects that
selling, general and administrative expenses will increase in absolute dollars
in future periods, although such expenses as a percentage of total revenues will
fluctuate.
In-Process Research and Development. 3dfx also recorded a one-time
write-off for in-process research and development in connection with the STB
merger of $4.3 million in the fiscal year ended January 31, 2000.
24
<PAGE> 25
Restructuring Expense. During the fiscal year ended January 31, 2000, 3dfx
incurred restructuring expenses totaling approximately $4.4 million.
Approximately $2.6 million of this amount related to downsizing the expense
levels of 3dfx given 3dfx's current financial losses. In August 1999, 3dfx
recorded a restructuring charge of $1.8 million, representing a one-time
reduction in workforce related to the merger with STB.
Goodwill and Other Intangibles Amortization. In connection with the STB
merger, 3dfx recorded assets representing goodwill of approximately $37.9
million and intangibles of approximately $19.1 million. These amounts will be
amortized ratably over the amortization periods of the applicable assets. For
the fiscal year ended January 31, 2000, 3dfx recorded $10.2 million in related
amortization.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net decreased from $15.9 million in the fiscal year ended December
31, 1998 to $2.2 million in the fiscal year ended January 31, 2000. The decrease
is primarily related to a one-time recognition of income in fiscal 1998 as a
result of the Sega litigation settlement, as well as decreased earnings from
lower invested cash balances. In addition, in fiscal 2000 3dfx incurred interest
expense on its revolving credit facility and its outstanding equipment line of
credit and capital lease balances.
Provision (Benefit) For Income Taxes. 3dfx recorded an income tax benefit
of $10.3 million for the fiscal year ended January 31, 2000, an effective tax
rate of 14%. As a result of the impact of non-deductible expenses including
intangible amortization and in-process research and development, 3dfx's
effective tax rate in fiscal 2000 differed from the statutory rate. 3dfx
recorded a provision for income taxes of $7.7 million for the fiscal year ended
December 31, 1998, an effective tax rate of 26%. 3dfx's effective tax rate in
fiscal 1998 differs from the federal statutory rate due to utilization of net
operating loss carryforwards and other tax credits. Events which may cause
changes in 3dfx'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
3dfx's initial public offering in June 1997 resulted in an annual limitation of
3dfx's ability to utilize net operating losses incurred prior to that date. The
annual limitation is approximately $5.4 million.
Management regularly assesses the realizability of deferred tax assets
recorded based upon the weight of available evidence, including such factors as
the recent earnings history and expected future taxable income. Management
believes that it is more likely than not that 3dfx will not realize a portion of
its deferred tax assets and, accordingly, a valuation allowance of $17,164,000
has been established for such amounts at January 31, 2000.
ONE MONTH PERIOD ENDED JANUARY 31, 1999
As a result of 3dfx's change in fiscal year to January 31 from December 31
commencing on February 1, 1999, 3dfx has reported separately the one-month
period ended January 31, 1999. During this period, revenues for 3dfx were $17.0
million and were principally attributable to the sales of 3dfx's Voodoo Banshee
and Voodoo2 chipsets. Costs of revenues were $14.5 million with gross profit as
a percent of revenues equal to approximately 15%. This is below the previous
year's gross profit percentage due primarily to 3dfx's merger with STB announced
in December 1998. This contributed to lost revenues from former customers and
price reductions to existing customers as 3dfx announced its intention to enter
the graphics board business and compete with its existing customer base.
Research and Development expenditures were $3.3 million for the period and
Sales, General, and Administrative expenses were $4.6 million for the period.
Interest and Other Income was $0.3 million, derived primarily from 3dfx's cash
balances. There was a tax benefit in the period ended January 31, 1999 in the
amount of $1.6 million. This benefit equates to a tax rate of 32% and is
consistent with 3dfx's recent tax rate percentages.
YEARS ENDED DECEMBER 31, 1998 (FISCAL 1998) AND DECEMBER 31, 1997 (FISCAL
1997)
Revenues. Revenues increased 359.7% from $44.1 million in fiscal 1997 to
$202.6 million in fiscal 1998. Revenues are recognized upon product shipment.
Revenues in fiscal 1998 were principally attributable to sales of 3dfx's
Voodoo2, Voodoo Banshee and Voodoo Graphics chipsets. Revenues in fiscal 1997
and fiscal 1998 were principally attributable to sales of 3dfx's Voodoo Graphics
and Voodoo Rush
25
<PAGE> 26
chipsets. In both years, revenue growth was a result of increased customer
demand for and market acceptance of these products.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of revenues consists primarily of costs associated with the
purchase of components, the procurement of semiconductors and printed circuit
board assemblies from 3dfx's contract manufacturers, labor and overhead
associated with such procurement and warehousing, shipping and warranty costs.
Cost of revenues does not include expenses related to development contract
revenues. Cost of revenues increased 429% from $22.6 million in fiscal 1997 to
$119.6 million in fiscal 1998. Gross profit as a percentage of revenues was 41%
and 48.7% in fiscal 1998 and fiscal 1997, respectively, due to a change in
product mix. 3dfx's future gross profit will be affected by the overall level of
sales, the mix of products sold in a period, manufacturing yields, and 3dfx's
ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
3dfx's foundries in connection with manufacturing start-up of new products. In
addition, costs associated with development contracts are included in research
and development during fiscal 1997. There was no such cost in fiscal 1998.
Research and development expenses increased 174.3% from $12.4 million in fiscal
1997 to $34 million in fiscal 1998. The increase reflects an increase in
non-recurring engineering costs and engineering personnel costs resulting from
the commencement of manufacturing of prototypes of the Voodoo Banshee chip and
Voodoo3 chipset. 3dfx expects to continue to make substantial investments in
research and development and anticipates that research and development expenses
will increase in absolute dollars in future periods, although such expenses as a
percentage of total revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 211.2% from $11.4 million
in fiscal 1997 to $35.4 million in fiscal 1998. The increase resulted from the
addition of personnel in sales, marketing, finance and administration as 3dfx
expanded operations, increased commission expenses associated with the
commencement of commercial sales and increased involvement in tradeshow and
advertising activities. 3dfx expects that selling, general and administrative
expenses will increase in absolute dollars in future periods, although such
expenses as a percentage of total revenues will fluctuate.
Interest and Other Income, Net. Interest and other income, net increased
from $630,000 in fiscal 1997 to $15.9 million in fiscal 1998. The increase is
primarily related to a one-time recognition of income as a result of the
settlement of litigation on September 9, 1998 relating to the Sega's termination
of the Technology License and Development Agreement (the "Sega Agreement") with
3dfx in July 1997. The increase also reflects earnings from higher cash balances
resulting from the completion of 3dfx'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. Provision for income taxes was $7.7 million in
fiscal 1998. 3dfx recorded no provision for income taxes in fiscal 1997 as it
incurred losses during such period. At December 31, 1998, 3dfx had net operating
loss carryforwards for federal and state income tax purposes of approximately
$10.7 million and $9.7 million, respectively, which expire beginning in 2011 and
2001, 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
some circumstances. Events which may cause changes in 3dfx'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 3dfx's initial public offering in
June 1997 resulted in an annual limitation of 3dfx's ability to utilize net
operating losses incurred prior to that date. The annual limitation is
approximately $5.4 million.
26
<PAGE> 27
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
data for each quarter during the fiscal years ended January 31, 2000 and
December 31, 1998. This unaudited information has been prepared by 3dfx on a
basis consistent with 3dfx's audited consolidated financial statements appearing
elsewhere in this Report and includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented. The unaudited quarterly information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Report. In light of 3dfx's limited operating history,
3dfx believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 1999 1999 1999 1998 1998 1998 1998
----------- ----------- -------- --------- ------------ ------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $109,388 $105,856 $104,836 $ 40,444 $ 60,743 $ 33,206 $ 58,643 $ 50,008
Cost of sales.......... 96,750 88,624 76,308 26,190 38,474 24,971 30,443 25,730
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit........... 12,638 17,232 28,528 14,254 22,269 8,235 28,200 24,278
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and
development.......... 19,689 18,040 16,577 11,756 9,873 10,038 8,308 5,826
Selling, general and
administrative....... 19,514 18,329 19,006 6,620 10,791 6,971 8,041 9,638
In-process research and
development.......... -- -- 4,302 -- -- -- -- --
Restructuring
expense.............. 2,552 1,830 -- -- -- -- -- --
Goodwill and
intangibles
amortization......... 3,627 3,627 2,974 -- -- -- -- --
Total operating
expenses............. 45,382 41,826 42,859 18,376 20,664 17,009 16,349 15,464
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations........... (32,744) (24,594) (14,331) (4,122) 1,605 (8,774) 11,851 8,814
Interest and other
income (expense),
net.................. 192 393 685 911 1,259 13,045 1,052 514
Provision for income
taxes................ (666) (6,583) (2,047) (1,027) 773 1,153 3,871 1,866
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $(31,886) $(17,618) $(11,599) $ (2,184) $ 2,091 $ 3,118 $ 9,032 $ 7,462
-------- -------- -------- -------- -------- -------- -------- --------
Basic net income (loss)
per share............ ($ 1.31) ($ 0.73) ($ 0.50) ($ 0.14) $ 0.13 $ 0.20 $ 0.59 $ 0.57
Diluted net income
(loss) per share..... ($ 1.31) ($ 0.73) ($ 0.50) ($ 0.14) $ 0.13 $ 0.20 $ 0.59 $ 0.50
</TABLE>
Revenues over the last eight quarters were derived primarily from the sale
of the Voodoo Graphics, Voodoo2, and Voodoo Banshee and Voodoo 3 chipsets. In
the third quarter of 1998, 3dfx experienced a significant reduction in demand as
compared to the two previous quarters, for its Voodoo2 chipset, primarily from
one customer, as well as a greater than expected seasonal slowdown, which
resulted in a decrease in revenues from the previous quarter. In the fourth
quarter of 1998, significant increases in demand for 3dfx's new Voodoo Banshee
product, combined with a stable demand as compared to the third quarter of 1998
for its Voodoo2 chipset, resulted in significant revenue growth in the fourth
quarter of 1998 as compared to the previous quarter. The first quarter of fiscal
2000 was less the previous quarter, as a result of decreased demand for the
Voodoo 2 and Voodoo Banshee products. Quarters two, three and four of fiscal
2000, reflect significantly higher revenue numbers as a result of the
introduction of the Voodoo 3 chipset and the STB Systems merger.
Cost of sales in the first quarter of fiscal year 2000 was less in total
dollars as compared to the previous quarter as a result of lower revenues.
However, cost of sales remained consistent with previous quarters as a
percentage of revenues. Cost of sales for quarters two, three and four of fiscal
2000 are up significantly due to increased revenues as a result of the merger.
Substantially all of the sales and cost of sales for these quarters is comprised
of 3D graphics cards, as compared to chipsets in previous quarters.
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<PAGE> 28
Cost of sales as a percentage of total sales also increased significantly, as
the margin on board level sales is traditionally less than chipset sales.
Cost of sales in 1998 increased in the first, second and fourth quarters as
a result of increased sales in each of these quarters. Additionally, in the
fourth quarter of 1998, costs of sales increased due to the product revenue mix
during the quarter which carried lower gross margins than historically
experienced. In the third quarter of 1998, cost of sales decreased when compared
to the previous quarter primarily due to lower revenues, partially offset by
increased costs associated with the initial shipments of 3dfx's Voodoo Banshee
product, additional overhead costs with respect to lower revenues as a result of
a greater than expected seasonal slowdown in the retail channel, and to an
increase in inventory reserves due to an exceptionally rapid rate of product
lifecycle obsolescence.
Research and development expenses increased quarter to quarter in fiscal
2000 and in 1998, except for the fourth quarter of 1998. The increase in
research and development expenses in each quarter through September 1998 and the
first quarter of fiscal 2000 reflects an increase in headcount, non-recurring
engineering costs resulting from the commencement of manufacturing of the
Voodoo2 chipsets and the Voodoo Banshee and Voodoo3 chips. In the fourth quarter
of 1998, research and development expenses decreased slightly from the previous
quarter primarily due to a reduction in non-recurring engineering costs. The
significant increase in quarters two, three and four are primarily result of the
STB merger, as well as increased headcount and charges associated with the
Voodoo 3 and VSA-100 family and other future products.
Selling, general and administrative expenses fluctuated quarter to quarter
throughout 1998 and through the first quarter of fiscal 2000. These fluctuations
are primarily a result of increased finance and administrative staffing and
related costs necessary to support higher levels of operations, commission
expenses associated with levels of revenues and varying levels of involvement in
tradeshow and advertising activities. The significant increase in cost for the
remaining quarters of fiscal 2000 is a result of the STB merger as well as
advertising and other cost associated with the retail channel business.
Interest and other income (expense), net fluctuated quarter to quarter in
1998, however remained fairly consistent, declining slightly quarter to quarter
in fiscal 2000. The increase in interest and other income in the three months
ended September 30, 1998 is primarily related to a one-time recognition of
income as a result of the recent Sega litigation settlement, as well as to
increased earnings from higher cash balances resulting from the completion of
3dfx's initial public offering in June 1997, and a public secondary offering in
March 1998, partially offset by interest expense on the outstanding equipment
line of credit and capital lease balances. Interest and other income (expense),
net for the fiscal 2000 quarters consist primarily of interest income on short
term investments, partially offset by interest expense on the revolving credit
facility and interest expense on outstanding equipment leases.
3dfx believes that, even if it does achieve significant sales of its
products, quarterly and annual results of operations will be affected by a
variety of factors that could materially adversely affect revenues, gross profit
and income from operations. Accordingly, 3dfx believes that period to period
comparisons of its results of operations should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year. In
some future quarters, 3dfx's results of operations may be below the expectations
of public market analysts or investors. In such event, the market price of
3dfx's common stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000, 3dfx had working capital of $98.5 million including
cash, cash equivalents and short-term investments of $65.8 million. Net cash
used in operating activities in the fiscal year ended January 31, 2000 was due
primarily to a net loss of $63.3 million, and increases of $5.3 million in other
assets, decreases in accrued expenses of $8.3 million, partially offset by
adjustments of depreciation of $14.9 million and amortization of $10.2 million,
and the in-process research and development write-off of $4.3 million, as well
as decreases in accounts receivable and inventory of $7.1 million and $5.3
million, respectively. Net cash provided by operating activities in fiscal 1998
was due primarily to net income of
28
<PAGE> 29
$21.7 million, and increases of $28.5 million in accounts payable and $13.3
million in accrued liabilities, partially offset by increases of $20.1 million
in inventory due to the increase in manufacturing to meet customer demand and
$24.9 million in accounts receivable associated with the generation of revenues.
Net cash used in operating activities in fiscal 1997 was due primarily to the
net loss of $1.7 million, and a $12.2 million increase in accounts receivable
partially offset by a $10.3 million increase in accounts payable.
Net cash used in investing activities was approximately $5.4 million, $10.9
million and $10.7 million in the fiscal years ended January 31, 2000, December
31, 1998 and December 31, 1997, respectively, and was due in each period to the
purchase of investments and to the purchase of property and equipment. In
addition, $8.7 million was used in the merger of STB, offset by cash acquired as
a result of the merger of $29.9 million in fiscal year 2000, 3dfx does not have
any significant capital spending or purchase commitments other than normal
purchase commitments and commitments under leases. 3dfx 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 for the fiscal year ended January 31, 2000
was $7.0 million due to the net proceeds on the drawdown from its line of
credit, partially offset by the net repurchase of common stock of $1.9 million
and payments on its capital lease obligations. Net cash provided by financing
activities was approximately $58.1 million in the fiscal year ended December 31,
1998 and approximately $34.6 million in the fiscal year ended December 31, 1997,
due primarily to proceeds from the public offering in March 1998 and the initial
public offering in June 1997.
3dfx has a $25 million revolving credit facility ("Revolving Credit
Facility"), as well as a $3.0 million term loan ("Term Loan"). At January 31,
2000, $25.0 million was outstanding under the Revolving Credit Facility and $1.9
million was outstanding under the Term Loan. Principal amounts outstanding under
the Revolving Credit Facility bear interest at LIBOR plus 100 basis points
(6.82% at January 31, 2000). Amounts outstanding under the Term Loan bear
interest at LIBOR plus 250 basis points and are payable in 60 monthly
installments of principal and interest (8.32% at January 31, 2000). Payment of
principal and interest began November 1, 1997. Formulas based on eligible
accounts receivable determine availability under the Revolving Credit Facility.
3dfx has pledged $25 million of cash and short term-term investments, as well of
3dfx's owned assets as collateral to secure the Revolving Credit Facility. All
indebtedness under the Revolving Credit Facility matures on December 19, 2000,
and indebtedness under the Term Loan matures on November 1, 2002 (subject to
renewal of the Revolving Credit Facility through such date).
3dfx is obligated under a five-year agreement to lease a facility in
Richardson, Texas which was previously the corporate headquarters of STB
Systems. Construction of the 210,000 square foot facility was completed in
December 1998. The total cost of the land and building was approximately $22.8
million. 3dfx made lease payments of approximately $187,000 per month in fiscal
2000, although the lease agreement provides that the amount of the lease
payments is subject to adjustment based upon prevailing interest rates.
Consequently, an increase in prevailing interest rates will increase the expense
of the facility. 3dfx previously entered into an interest rate swap agreement
that fixes the interest rate on a majority of the lease obligation at 7.55%.
3dfx does not currently use a portion of the facility and has subleased a
portion of the unused space, constituting approximately forty percent of the
facility space, to third parties under long term leases expiring in
approximately five years. At the end of the initial five-year lease term, 3dfx
has the option to renew the lease for an additional five years, pay off the
underlying debt or cause the building to be sold. In the event of a sale, the
proceeds are to be used to retire the underlying debt. Any excess will be paid
to 3dfx. Any remaining unpaid balance owing on the underlying obligation after
the sale of the facility will be the responsibility of 3dfx.
3dfx has invested in capital equipment through equipment leases for its
manufacturing facility in Juarez, Mexico. 3dfx's aggregate obligations under all
such equipment lease financing arrangements totaled approximately $5.7 million
at January 31, 2000.
29
<PAGE> 30
3dfx's future liquidity and capital requirements will depend upon numerous
factors, including the costs and timing of the 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
3dfx's existing and new products gain market acceptance, competing technological
and market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, available borrowings under line
of credit arrangements and other factors. 3dfx believes that its current cash
balances and cash generated from operations and from available or future debt
financing will be sufficient to meet 3dfx's operating and capital requirements
through at least the end of the current fiscal year. However, there can be no
assurance that 3dfx will not require additional financing within this time
frame. 3dfx's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary.
The factors described earlier in this paragraph will impact 3dfx's future
capital requirements and the adequacy of its available funds. 3dfx 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
3dfx, or at all. Furthermore, any additional equity financing may be dilutive to
shareholders, and additional debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise additional
funds, may require 3dfx to relinquish its rights to some of its technologies or
products. The failure of 3dfx to raise capital when needed could have a material
adverse effect on 3dfx's business, financial condition and results of
operations.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging securities.
Currently, as 3dfx has no derivative instruments, the adoption of SFAS No. 133
would have no impact on 3dfx's financial condition or results of operations. To
the extent 3dfx begins to enter into such transactions in the future, 3dfx will
adopt the Statement's disclosure requirements in the quarterly and annual
financial statements for the year ending January 31, 2002.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," (SAB 101), which clarifies the SEC's views on revenue recognition.
3dfx believes its existing revenue recognition policies and procedures are in
compliance with SAB 101 and therefore, SAB 101's adoption will have no material
impact on 3dfx's financial condition, results of operations or cash flows.
RISK FACTORS
This Report contains certain forward-looking statements within the meaning
of the federal securities laws. 3dfx's actual results and the timing of certain
events could differ greatly from those anticipated in these forward-looking
statements as a result of known and unknown factors, including the risks faced
by 3dfx described below. The risks and uncertainties described below are not the
only ones facing 3dfx. Additional risks and uncertainties not presently known by
3dfx or that 3dfx does not currently believe are important may also harm 3dfx's
business operations. If any of the following risks actually occur, 3dfx's
business, financial conditions or results of operations could be seriously
harmed. The following factors and other information in this Report should be
considered carefully in evaluating 3dfx and an investment in 3dfx's common
stock.
30
<PAGE> 31
3DFX'S PROPOSED MERGER WITH GIGAPIXEL POSES A NUMBER OF SIGNIFICANT RISKS TO
3DFX'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The proposed merger of GigaPixel with and into a wholly-owned subsidiary of
3dfx, which will result in GigaPixel becoming a wholly-owned subsidiary of 3dfx,
involves some specific risks, including the following:
- 3dfx and GigaPixel may encounter substantial difficulties and costs
integrating the two companies' products, technologies, research and
development activities, administration, sales and marketing and other
aspects of operations in a timely manner. The difficulties, costs and
delays involved in this integration may increase operating costs, cause
lower than anticipated financial performance or lead to the loss of
customers and employees. The failure to successfully integrate 3dfx and
GigaPixel in a timely manner could result in a failure of the combined
company to realize any of the anticipated benefits of the merger and
could materially harm the business of the combined company.
- Uncertainty in the marketplace or customer concern regarding the impact
of the merger on the combined company's results of operations could
result in customers or potential customers of 3dfx or GigaPixel
deferring purchasing or licensing decisions until they have had an
opportunity to assess that impact, or ceasing to do business with 3dfx
and GigaPixel altogether, which could harm the business of the combined
company.
- Because some GigaPixel customers and licensees compete with 3dfx, these
customers and licensees may cease to do business, or may reduce the
amount of business that they do, with GigaPixel or the combined company,
either of which could cause a decline in the combined company's
revenues.
- The merger will dramatically increase the number of freely tradeable
3dfx shares and will result in a substantial dilution to current 3dfx
shareholders, which could drive down the price of 3dfx common stock Upon
the issuance of shares of 3dfx common stock in connection with the
merger, GigaPixel shareholders will hold approximately 38% of the then
outstanding number of shares of common stock of 3dfx, based on the
number of shares of 3dfx common stock outstanding on March 27, 2000.
Subject to certain contractual restrictions, all of the shares of 3dfx
common stock issued in the merger will be freely tradable in the public
market. Sales in the public market of a substantial number of these
shares following completion of the merger could adversely affect the
market price of 3dfx common stock.
- GigaPixel has reported net losses in most recent historical periods and
if these losses continue they would adversely affect 3dfx's financial
performance and condition. GigaPixel has incurred net losses for both of
the years ended December 31, 1998 and December 31, 1999. If the combined
company is not successful in reversing the performance of GigaPixel's
business operations, those business operations would have a negative
impact on the overall business of the combined company. This negative
impact may adversely affect the market price for 3dfx common stock in
the future.
- Because of the purchase accounting treatment of the merger, non-cash
charges associated with the amortization of goodwill and other
intangibles will reduce 3dfx's earnings in the future, which could
adversely affect 3dfx's stock price.
- The combined company's success following the merger will depend on the
retention and integration of key personnel.
- There will be substantial expenses resulting from the GigaPixel merger.
- The closing of the merger is subject to certain conditions that might
not be satisfied in a timely manner, which could prevent the merger from
being consummated.
31
<PAGE> 32
In addition, in the event of the consummation of the merger with GigaPixel,
there are a number of risks related to the business and operations of GigaPixel
that would affect the operations of the combined company, including a number of
the same or similar risks faced by 3dfx identified below, as well as a number of
risks specific to GigaPixel, including GigaPixel's limited operating history,
its dependence on a limited number of customers, GigaPixel's inability to
control or influence its licensees' manufacturing, promotion, distribution or
pricing of products incorporating its 3D core technologies and its limited
experience in the set-top box, game console and portable device markets. In the
event that the merger is not consummated, 3dfx will face other risks, including
the opportunity costs associated with the pursuit of a business combination with
GigaPixel.
3dfx'S QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH MAY INCREASE THE
VOLATILITY OF THE PRICE OF 3DFX'S COMMON STOCK.
3dfx's quarterly and annual results of operations have varied significantly
in the past and are likely to continue to vary in the future. These variations
are the result of a number of factors, many of which are beyond 3dfx's control.
These factors include:
- The ability to successfully develop, introduce and market new or enhanced
products
- The ability to introduce and market products in accordance with customer
design requirements and design cycles
- Changes in the relative volume of sales of various products with
different margins
- Changes in demand for 3dfx's products and its customers' products
- Gains or losses of significant customers or strategic relationships
- The volume and timing of customer orders
- The availability, pricing and timeliness of delivery of components for
3dfx's products
- The timing of new product announcements or introductions by competitors
- Product obsolescence and the management of product transitions
- Production delays
- Decreases in the average selling prices of products
Any one or more of the factors listed above or other factors could cause
3dfx to fail to achieve its revenue and profitability expectations. Most of
3dfx's operating expenses are relatively fixed in the short term. 3dfx may be
unable to rapidly adjust spending to compensate for any unexpected sales
shortfall, which could materially harm quarterly operating results. As a result
of the above factors, 3dfx believes that you should not rely on period-to-period
comparisons of results of operations as an indication of future performance. The
results of any one quarter are not indicative of results to be expected for a
full fiscal year.
3DFX IS GROWING RAPIDLY AND MAY NOT HAVE THE RESOURCES TO MANAGE EFFECTIVELY
ADDITIONAL GROWTH.
The recent growth and potential future growth of 3dfx has placed
significant demands on its management as well as on its technical,
administrative, operational and financial resources. As a result, 3dfx may not
have sufficient resources to sustain and effectively manage any additional
growth. The expansion of 3dfx's business to take advantage of new market
opportunities will require significant technical resources, management attention
and financial resources. To manage additional growth 3dfx may be required to:
- Expand its engineering, sales, marketing and customer support
organizations
- Attract and retain additional qualified personnel
- Expand its physical facilities
- Invest in the development or enhancement of its current products and
develop new technologies and products that meet changing industry needs
32
<PAGE> 33
- Develop systems, procedures or controls to support the expansion of its
operations
- An inability on the part of 3dfx to sustain or manage any additional
growth could have a material adverse effect on the business, operating
results and financial condition of 3dfx.
3DFX WILL DEPEND ON ITS ABILITY TO EFFECTIVELY DEVELOP NEW TECHNOLOGIES AND
PRODUCTS TO MEET THE CHANGING INDUSTRY STANDARDS, PRACTICES AND CUSTOMER NEEDS
ASSOCIATED WITH THE RAPIDLY CHANGING AND INTENSELY COMPETITIVE PC AND GRAPHICS
CHIP AND BOARD INDUSTRIES.
3dfx will depend, in part, on its ability to develop leading technologies,
enhance its existing services and develop and introduce new technologies and
products to meet the needs of 3dfx's customers. 3dfx also must continue to meet
the demands of technological advances and emerging industry standards and
practices on a timely and cost-effective basis. Although 3dfx will strive to be
a technological leader, future technology advances may not complement or be
compatible with its products. In addition, 3dfx may be unable to economically
and timely incorporate technology changes and technology advances into its
business. 3dfx may be unsuccessful in effectively using new technologies,
adapting its services to emerging industry standards or developing, introducing
and marketing product enhancements or new products. 3dfx may also experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these products. The inability of 3dfx to develop
and introduce new technologies or products or to enhance existing products or
services on a timely and cost-effective basis, or the failure of new
technologies or products to achieve market acceptance, could have a material
adverse effect on its business, operating results and financial condition.
3DFX'S OPERATIONS DEPEND ON THE EXPERIENCE OF KEY PERSONNEL AND ITS ABILITY TO
RETAIN, ATTRACT, AND INTEGRATE ITS KEY PERSONNEL.
3dfx's business operations depend on the continued services of its
executive officers and other key personnel. 3dfx may be unable to retain its key
personnel or to attract other qualified personnel. The future operations of 3dfx
depend upon its ability to retain, attract and integrate key management
personnel.
In addition, competition for highly-skilled technical personnel is intense
in the industries in which 3dfx operates. 3dfx's shareholders cannot be assured
that 3dfx will be able to successfully identify, attract, hire and retain
highly-skilled technical personnel in a timely and effective manner. Moreover,
competitors may intensify their efforts to recruit highly-skilled technical
personnel currently employed by 3dfx as a result of its proposed merger with
GigaPixel. The loss of services of one or more highly-skilled technical
personnel, the failure to attract and retain other highly-skilled technical
personnel or to recruit new highly-skilled technical personnel could disrupt
operations and have a negative effect on employee productivity and morale of
3dfx.
AS NEARLY ALL OF THE REVENUES OF 3DFX WILL BE DERIVED FROM THE PC AND GRAPHICS
BOARDS AND CHIPS INDUSTRIES, A DOWNTURN IN ANY ONE OF THESE INDUSTRIES WOULD
LIKELY ADVERSELY AFFECT 3DFX'S BUSINESS.
For the fiscal years ended December 31, 1997, December 31, 1998 and January
31, 2000, 93%, 100% and 100% of 3dfx's revenues were derived from graphics chips
and graphics boards sold for use in PCs. 3dfx expects to continue to derive its
revenues primarily from the sale of products for use in PCs and the sale of
graphics boards and graphics chips. The PC and graphics chip and board
industries are cyclical and have been characterized by:
- Rapid technological change;
- Evolving industry standards;
- Cyclical market patterns;
- Frequent new product introductions and short product life cycles;
- Significant price competition and price erosion;
33
<PAGE> 34
- Fluctuating inventory levels;
- Alternating periods of over-capacity and capacity constraints;
- Variations in manufacturing costs and yields; and
- Significant expenditures for capital equipment and product development.
The PC and graphics chip and board markets have also grown substantially in
recent years. However, such growth may not continue. A decline in PC or
semiconductor sales or in the growth rate of such sales would likely reduce
demand for 3dfx'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 forecasted product transitions. In such cases, the
manufacturers may abruptly stop purchasing additional inventory from suppliers
such as 3dfx until the excess inventory has been used. Such suspension of
purchases or any reduction in the demand for PCs generally, or for particular
products that incorporate 3dfx's products, would materially harm 3dfx's
business.
In addition, the PC and graphics chip and board industries have experienced
significant economic downturns at various times in the past, characterized by
lower product demand and accelerated reduction of product prices. 3dfx may
experience substantial period-to-period fluctuations in its results of
operations due to general conditions in the semiconductor industry.
BECAUSE 3DFX DEPENDS ON THE RETAIL/DISTRIBUTOR DISTRIBUTION CHANNEL, THE
INABILITY TO ADEQUATELY SUPPORT SUCH RETAIL DISTRIBUTION CHANNEL WOULD LIKELY
HARM 3DFX'S ABILITY TO SELL AND TO MARKET ITS PRODUCTS.
3dfx's products have historically been distributed in the
retail/distributor distribution channel. To access the retail/distributor
channel, 3dfx traditionally depended on graphics board manufacturers whose
products were sold to consumers. 3dfx developed a presence in the
retail/distributor distribution market through its own marketing efforts, as
well as through the significant marketing efforts of a number of its customers.
As a result of its merger with STB Systems, Inc. ("STB"), 3dfx lost some of its
largest customers, who were direct competitors of STB, and now depends primarily
on its subsidiary to support the retail/distributor sales channel. Although 3dfx
successfully penetrated the retail/distributor distribution channel, there can
be no assurances that this success will continue in the future.
3DFX'S LIMITED EXPERIENCE IN MANAGING AND INTEGRATING ORGANIZATIONS MAY RESULT
IN FUTURE ACQUISITIONS OR JOINT VENTURES BEING DIFFICULT AND DISRUPTIVE.
3dfx regularly evaluates acquisition and joint venture opportunities and in
the future 3dfx may make acquisitions of other companies or technologies or
enter into joint ventures. 3dfx's proposed merger with GigaPixel is an example
of such an acquisition. These acquisitions or joint ventures may divert the time
and resources of 3dfx's management. Further, 3dfx has limited experience in
integrating newly acquired organizations into its operations. Acquisitions
involve many risks, including:
- Difficulty in integrating or otherwise assimilating technologies,
products, personnel and operations;
- Diversion of management's attention from other business concerns;
- Issuance of dilutive equity securities and incurrence of debt or
contingent liabilities;
- Large write-offs and amortized expenses related to goodwill and other
intangible assets;
- Loss of key employees of acquired organizations;
- Risks of entering markets in which 3dfx has no or limited prior
experience; and
- Payments of cash, incurrence of debt or assumption of other liabilities
to acquire other businesses.
The result of one or more of these factors could have a material adverse
effect on the business, operating results and financial condition of 3dfx.
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3DFX'S LIMITED OPERATING HISTORY MAKES THE ASSESSMENT OF ITS FUTURE OPERATING
RESULTS DIFFICULT.
3dfx has been shipping products only since the third quarter of 1996. This
limited operating history makes the assessment of 3dfx's future operating
results difficult. Additionally, 3dfx incurred net losses of approximately $1.7
million in fiscal 1997 and $63.3 million in fiscal 2000. The net losses in
fiscal 2000 were attributable to substantial reduction in revenues due to a
delayed product launch, changes in component costs with no ability to adjust
pricing, additional unanticipated costs relating to the merger with STB and
continuing significant costs incurred in product research, development and
testing and in connection with the amortization of intangibles. Although 3dfx
had net income of $21.7 million in fiscal 1998, historical growth rates have not
been sustained in the past and may not be sustained in the future. 3dfx may also
be unable to sustain or to increase revenues or profits on a consistent basis in
the future.
3DFX'S FINANCIAL RESULTS DEPEND SIGNIFICANTLY ON ITS ABILITY TO CONTINUALLY
DEVELOP NEW PRODUCTS AND TECHNOLOGIES.
The markets for which 3dfx's products and technologies are intensely
competitive and are characterized by short product life cycles, rapidly changing
technology, evolving industry standards and declining average selling prices. As
a result, the financial performance of 3dfx depends to a significant extent on
3dfx's ability to successfully develop new products. Because of the rapidly
changing technologies in the businesses in which 3dfx will operate, 3dfx
believes that significant expenditures for research and development will
continue to be required by 3dfx in the future. To succeed in these businesses,
3dfx must anticipate the features and functionality that customers will demand.
3dfx must then incorporate those features and functionality into products that
meet the design requirements of the PC, graphics chip and graphics board markets
and the timing requirements of retail selling seasons. The success of 3dfx's new
product introductions will depend on several factors, including:
- Proper new product definition;
- Timely completion and introduction of new product designs;
- The ability of subcontractors and component manufacturers to effectively
design and implement the manufacture of new products and technologies;
- The quality of new products and technologies;
- Product and technology performance as compared to competitors' products
and technologies;
- Market acceptance of 3dfx's and its customers' products;
- Competitive pricing of products and technologies; and
- Introduction of new products and technologies to the market within the
limited time window for retail selling seasons and OEM design cycles.
As the markets for 3dfx's products continue to develop and competition
increases, 3dfx anticipates that product life cycles will shorten and that the
average selling prices of these products will decline. In particular, average
selling prices and, in some cases, gross margins for 3dfx's products and
technologies will decline as those products and technologies mature. Thus, 3dfx
will need to introduce new products and technologies to maintain average selling
prices and gross margins. To do this, 3dfx must successfully identify new
product and technology opportunities and develop and bring new products and
technologies to market in a timely manner. 3dfx has in the past experienced
delays in completing the development and introduction of new products. The
failure of 3dfx to successfully develop and introduce new products and
technologies or to achieve market acceptance for such products and technologies
would materially harm the business and financial performance of 3dfx.
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BECAUSE 3DFX'S PRODUCTS WILL HAVE SHORT PRODUCT LIFE CYCLES, 3DFX MUST
SUCCESSFULLY MANAGE PRODUCT TRANSITIONS.
3dfx's products have short product life cycles. A failure by 3dfx to
successfully introduce new products within a given product cycle could
materially harm its business for that cycle and possibly in subsequent cycles.
Any such failure could also damage 3dfx's brand name, reputation and
relationships with its customers and cause long-term harm to its business.
The PC market frequently undergoes transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
3dfx's products must be able to support the new features and performance levels
being required by PC manufacturers at the beginning of such a transition.
Otherwise, 3dfx will likely lose business as well as the opportunity to compete
for new design contracts until the next product transition. An inability to
develop products with required features and performance levels or even a short
delay in bringing a new product to market could significantly reduce 3dfx's
revenues for a substantial period.
The success of 3dfx will depend upon continued market acceptance of its
existing products, and its ability to continually develop and introduce new
products and technologies and new product features and enhancements to meet
changing customer requirements. Each new product cycle presents new
opportunities for competitors of 3dfx to gain market share.
Some components used in 3dfx's products have also historically required
long lead times. Therefore, 3dfx may not be able to quickly reduce its
production or inventory levels in response to unexpected shortfalls in sales or,
conversely, to increase production in response to unexpected demand. If 3dfx is
unable to quickly identify, develop, manufacture or market new products and
technologies or to enhance its existing products and technologies rapidly, then
3dfx's business and results of operations could be materially and adversely
affected.
BECAUSE 3dfx HAS SIGNIFICANT CUSTOMER CONCENTRATION, THE LOSS OF ANY OF ITS
SIGNIFICANT CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON 3dfx'S FINANCIAL
PERFORMANCE AND RESULTS OF OPERATIONS.
3dfx's sales are highly concentrated among a limited number of customers.
For the fiscal year ended January 31, 2000, 3dfx's largest customer, Ingram
MicroD, Inc., accounted for approximately 13.0% of its net revenues, while
3dfx's 6 largest customers collectively accounted for approximately 40.5% of its
net revenues. There can be no assurance that 3dfx will be able to retain such
customers or to continue to derive significant revenues from them. The loss of
any one of 3dfx's significant customers could have a material adverse effect on
its financial performance and results of operations
BECAUSE 3dfx DOES NOT TYPICALLY ENTER INTO LONG-TERM CONTRACTS WITH ITS
CUSTOMERS, THERE CAN BE NO ASSURANCE THAT HISTORICAL SALES VOLUMES WILL CONTINUE
IN THE FUTURE.
All of 3dfx's sales are made pursuant to purchase orders. The lack of
long-term commitments, together with the customer concentration noted above,
poses a significant risk to 3dfx. If a single customer of 3dfx cancels an order
or ceases to be a customer of 3dfx, then 3dfx's business and financial condition
could be materially harmed. As a result of its merger with STB, 3dfx lost
several of its customers. There can be no assurance that the proposed merger
with GigaPixel will not have a similar effect on 3dfx.
BECAUSE 3dfx HAS LIMITED PRODUCT DIVERSITY, IF 3DFX WERE UNABLE TO INCREASE OR
MAINTAIN 3DFX'S HISTORICAL SALES VOLUMES, THERE COULD BE A NEGATIVE IMPACT ON
3DFX'S RESULTS OF OPERATIONS.
3dfx's revenues depend on the markets for 3D/2D and 3D graphics chips and
boards for PCs and on 3dfx's ability to compete effectively in those markets.
Since 3dfx currently has no other products, 3dfx's business would be materially
harmed if it were unable to continue to sell these products at historical levels
or to increase these historical sales levels in the future.
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3dfx DEPENDS ON THIRD PARTY DEVELOPERS AND PUBLISHERS.
3dfx believes that the availability of numerous high quality, commercially
successful software entertainment titles and applications significantly affects
sales of its products. 3dfx depends on third party software developers and
publishers to create, produce and market software titles that will operate with
3dfx's graphics chips. Only a limited number of software developers are capable
of creating high quality entertainment software. Competition for these resources
is intense and is expected to increase. Therefore, a sufficient number of high
quality, commercially successful software titles compatible with 3dfx's products
may not be developed. In addition, the development and marketing of game titles
that do not fully demonstrate the technical capabilities of 3dfx's products
could create the impression that 3dfx's technology offers only marginal
performance improvements, if any, over competing products.
3dfx'S DEPENDENCE ON SINGLE SOURCE MANUFACTURERS WILL EXPOSE IT TO SIGNIFICANT
RISK IF THE OPERATIONS OF THESE MANUFACTURERS AND OTHER THIRD PARTIES ARE
INTERRUPTED.
3dfx's graphics chip products require wafers manufactured with
state-of-the-art fabrication equipment and techniques. Currently, 3dfx does not
manufacture the semiconductor wafers used for its graphics chip products and
does not own or operate a wafer fabrication facility, nor does 3dfx expect to
manufacture semiconductor wafers or to own or operate a wafer fabrication
facility in the future. Taiwan Semiconductor Manufacturing Company, or TSMC,
currently manufactures all of 3dfx's wafers in Taiwan. 3dfx obtains
manufacturing services from TSMC on a purchase order basis. 3dfx depends on TSMC
to:
- Produce wafers of acceptable quality and with acceptable manufacturing
yields;
- Deliver those wafers to 3dfx and its independent assembly and testing
subcontractors on a timely basis; and
- Allocate to 3dfx a portion of its manufacturing capacity sufficient to
meet 3dfx's needs.
3dfx expects to continue to be dependent upon TSMC to manufacture the
semiconductor wafers used in its graphics chip products. 3dfx has no readily
available alternative source of supply, and it could take several months to
establish a strategic relationship with a new manufacturing partner. As a
result, a manufacturing disruption (such as the one that occurred in September
1999 when an earthquake struck Taiwan) or capacity constraints experienced by
TSMC would negatively impact the production of 3dfx's graphics chips and boards
and, consequently, would have a negative effect on 3dfx's business and results
of operations.
3dfx IS SUBJECT TO RISKS RELATING TO ITS SINGLE GRAPHICS BOARD MANUFACTURING
FACILITY.
3dfx's sole graphics board manufacturing facility is located in Juarez,
Mexico. Although a portion of 3dfx's board production is secured from third
party sources, 3dfx is substantially dependent on this single manufacturing
facility and any disruption of 3dfx's graphics board manufacturing operations at
this facility would materially harm its business. Such disruption could result
from various factors, including difficulties in attracting and retaining
qualified manufacturing employees, difficulties associated with the use of new,
reconfigured or upgraded manufacturing equipment, labor disputes, human error,
governmental or political risks or a natural disaster such as an earthquake,
tornado, fire or flood.
In comparison to those of its competitors that do not maintain their own
graphics board manufacturing facilities, 3dfx incurs higher relative fixed
overhead and labor costs as a result of operating its own manufacturing
facility. Any failure to generate the level of product revenues needed to absorb
these overhead and labor costs would materially harm 3dfx's business.
3dfx'S INTERNATIONAL OPERATIONS WILL MAKE IT SUSCEPTIBLE TO GLOBAL ECONOMIC
FACTORS, FOREIGN TAX LAW ISSUES, FOREIGN BUSINESS PRACTICES AND CURRENCY
FLUCTUATIONS.
3dfx relies on foreign third-party manufacturing, assembly and testing
operations for its graphics chips, which are located in Asia, and primarily
relies on its own manufacturing facilities for graphics boards that
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are located in Mexico. 3dfx also has significant export sales. These
international operations subject 3dfx to a number of risks associated with
conducting business outside of the United States. These risks include:
- Unexpected changes in legislative or regulatory requirements;
- Delays resulting from difficulty in obtaining export licenses for some
technology;
- Tariffs, quotas and other trade barriers and restrictions;
- Longer accounts receivable payment cycles;
- Difficulties in collecting payment, including increased credit
exposures;
- Potentially adverse tax consequences, including repatriation of
earnings;
- Burdens of complying with a variety of foreign laws;
- Unfavorable intellectual property laws;
- Political instability; and
- Foreign currency fluctuations.
Any of these factors could materially harm the international operations and
sales of 3dfx, and consequently, its business. Recently, financial markets in
Asia have experienced significant turmoil, which could harm 3dfx's international
sales or operations. Currently, all of 3dfx's product sales and its arrangements
with its foundry, assembly and test vendors provide for pricing and payment in
U.S. dollars. To date, 3dfx has not engaged in any currency hedging activities,
although 3dfx may do so in the future. An increase in the value of the U.S.
dollar relative to foreign currencies could make 3dfx's products more expensive
and potentially less competitive in foreign markets.
3dfx MAY BE UNABLE TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS OR PREVENT THEIR
UNAUTHORIZED USE, WHICH COULD DIVERT ITS FINANCIAL RESOURCES AND HARM ITS
BUSINESS.
3dfx's success will depend upon its proprietary technology. 3dfx currently
relies upon a combination of patents, copyrights, trademarks, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
technology rights. Despite current efforts to protect these proprietary rights,
protective measures may not be adequate to prevent misappropriation or
independent third-party development of 3dfx's technology. The laws of many
foreign jurisdictions offer less protection of intellectual property rights than
the laws of the United States. Effective patent, copyright, trademark and trade
secret protection may not be available in other jurisdictions. In addition, 3dfx
may need to litigate claims against third parties to enforce its intellectual
property rights, protect its trade secrets, determine the validity and scope of
the proprietary rights of others or defend against claims of infringement or
invalidity. On September 21, 1998, 3dfx filed suit against nVidia in Northern
California District Federal Court. 3dfx's complaint alleges patent infringement
relating to nVidia's use of multi-texturing technology in its RIVA TNT product.
Discovery in this case is presently under way. This litigation, and other
litigation like it, could result in substantial cost and diversion of management
resources. A successful claim against 3dfx could effectively block its ability
to use or license its technology in the United States or abroad. The inability
of 3dfx to protect its proprietary rights adequately could have a material
adverse effect on the business, operating results and financial condition of
3dfx.
3DFX RELIES ON SEVERAL TECHNOLOGY LICENSES FROM THIRD PARTIES, THE LOSS OF WHICH
MAY HARM 3DFX'S ABILITY TO DEVELOP AND SELL ITS SERVICES.
3dfx currently possesses, and in the future 3dfx may procure, licenses from
third parties relating to its services or technology. Certain of these licenses
are critical to 3dfx's business and would be difficult to replace. If 3dfx were
unable to obtain or maintain these licenses, its ability to develop and to sell
its products could be impaired. If 3dfx or its suppliers are unable to obtain
licenses, 3dfx could be forced to market products without some technological
features. 3dfx also licenses some software and technology for
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its operations. If 3dfx were unable to obtain licenses or to obtain such
licenses on competitive terms, there could be a material adverse effect on the
ability of 3dfx to effectively offer its products.
BECAUSE THE MARKETS IN WHICH 3DFX WILL OPERATE ARE INTENSELY COMPETITIVE, 3DFX
MAY LOSE MARKET SHARE AND BE FORCED TO REDUCE THE PRICE OF ITS PRODUCTS.
The markets in which 3dfx competes are intensely competitive and are likely
to become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than 3dfx's products. 3dfx does not compete on the basis
of price alone. 3dfx believes that the principal competitive factors for 3D
graphics products are:
- Product performance and quality;
- Conformity to industry standard application programming interfaces, or
APIs;
- Access to customers and distribution channels;
- Brand awareness;
- Price;
- Product support; and
- Ability to bring new products to the market in a timely manner.
Many of 3dfx's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than 3dfx. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than 3dfx. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. Some of
3dfx's principal competitors offer a single vendor solution, because they
maintain their own semiconductor foundries and may therefore benefit from some
capacity, cost and technical advantages.
3dfx seeks to use strategic relationships to augment its capabilities.
However, the benefits of these relationships may not be realized or sufficient
to overcome the established market positions of 3dfx's largest competitors.
Regardless of the relative qualities of 3dfx's products, the market power,
product breadth and customer relationships of its larger competitors can be
expected to provide such competitors with substantial competitive advantages.
3dfx competes primarily against companies that offer a board or chip
solution to the 3D/2D PC graphics market. These companies typically have
operated in the PC 2D graphics market and now offer 3D capability as an
enhancement to their 2D solutions. These competitors include ATI Technologies,
Inc., S3 Incorporated, Creative Technology Ltd. and nVidia Corporation. 3dfx
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, including 3Dlabs, Inc., Integraph Corporation
and SGI. These companies are developing lower cost versions of their 3D
technology to bring workstation-like 3D graphics to mainstream applications.
Intel Corporation also competes in the 3D graphics market by offering an
integrated core logic/3D/2D solution aimed at the mainstream PC market. These
companies may enter the interactive electronics entertainment market, and, if
they do, then 3dfx may not be able to compete successfully against them.
3dfx now also competes with graphics board manufacturers, with suppliers
who sell graphics chips directly to OEMs, with OEMs who internally produce
graphics chips or integrate graphics chips on the main computer processing board
of their personal computers, commonly known as the motherboard, and with the
makers of other personal computer components and software that are increasingly
providing graphics processing capabilities.
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3DFX MAY REQUIRE ADDITIONAL FINANCING TO MEET ITS FUTURE CAPITAL AND OPERATIONAL
REQUIREMENTS AND MAY FACE UNCERTAINTY IN OBTAINING FAVORABLE FINANCING
ALTERNATIVES.
If the liquidity and cash flow from 3dfx's operations are insufficient to
meet its operating and capital requirements, then 3dfx may have to seek
additional financing, including public or private debt or equity offerings that
may be dilutive to 3dfx's shareholders. If adequate funds are not available on
acceptable terms, then 3dfx may be unable to develop or enhance its services,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. 3dfx's future capital requirements will depend on
numerous factors, including 3dfx's profitability, operational cash requirements,
competitive pressures, development of new services and applications, acquisition
of complementary businesses or technologies and response to unanticipated
requirements. There can be no assurance that any financing alternatives sought
by 3dfx will be available, or, if available, will be on terms or in amounts
attractive to 3dfx.
POTENTIAL YEAR 2000 ISSUES MAY EXPOSE 3DFX TO LIABILITY OR LOSS.
3dfx has not experienced any material adverse impact from the transition to
the year 2000. Even though no material adverse impact from the year 2000
transition has been noted through internal investigations and inquiries with its
major customers and suppliers, 3dfx cannot provide any assurance that its
suppliers and customers have not been affected in a manner that is not yet
apparent. 3dfx will continue to monitor its year 2000 compliance and the year
2000 compliance of its suppliers and customers.
LITIGATION MAY DIVERT 3DFX'S RESOURCES AND REDUCE THE MARKET PRICE OF 3DFX'S
COMMON STOCK.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. It is possible that similar litigation could be brought against
3dfx. Such litigation could result in substantial costs and would likely divert
management's attention and resources. Any adverse determination in such
litigation could also subject 3dfx to significant liabilities. A securities
class action lawsuit of this type was filed October 9, 1998 in Dallas County,
Texas against STB, which 3dfx acquired by merger in May 1999. The suit was
brought against STB and some of its officers and directors and the underwriters
who participated in the STB secondary offering on March 20, 1998. The petition
alleges that the registration statement for the secondary public offering
contained false and misleading statements of material facts and omitted to state
material facts. The petition asserts claims under Sections 11, 12(a)(2) and 15
of the Securities Act of 1933, as amended, and Sections 581-33A of the Texas
Securities Act on behalf of a purported class of persons who purchased or
otherwise acquired STB common stock in the public offering. The petition seeks
recission and/or unspecified damages. STB denies the allegations in the petition
and intends to defend the lawsuit vigorously. On December 17, 1999, a similar
securities class action lawsuit was also filed in the United States District
Court for the Northern District of Texas, Dallas Division, against STB and three
of its officers and directors. The action asserts claims under Sections 10 and
20 of the Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission. STB denies the allegations in the petition and intends to
defend the lawsuit vigorously. These two securities class actions have now been
consolidated. If the plaintiffs in this consolidated lawsuit prevail in
connection with any of their claims, then, depending upon the magnitude of
damages and expenses incurred by 3dfx and the extent to which such damages and
expenses are covered by insurance, the lawsuit could have a negative effect on
3dfx's financial condition and results of operations.
THE STOCK PRICE OF 3DFX HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE
TO MANY FACTORS, WHICH MAY MAKE IT MORE DIFFICULT FOR 3DFX SHAREHOLDERS TO SELL
THEIR SHARES AT PRICES THEY FIND ATTRACTIVE.
Several factors have caused the stock price of 3dfx common stock to be
extremely volatile in the past and may cause the stock price of 3dfx common
stock to be extremely volatile in the future. The 3dfx stock price could be
subject to wide fluctuations in response to a variety of factors, including the
following:
- Actual or anticipated variations in quarterly operating results;
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- The ability of 3dfx to successfully develop, introduce and market new or
enhanced products and technologies on a timely basis;
- Unexpected changes in demand for 3dfx's products and services;
- The pricing policies of 3dfx's competitors;
- Announcements of technological innovations or new products by 3dfx or
its competitors;
- Changes in securities analysts' recommendations;
- Changes in the market valuations of other similarly situated companies;
- Announcements by 3dfx or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments; and
- Market fluctuations and performance of the PC and graphics chip and
board industries.
In addition, the trading prices of technology stocks as a whole have
experienced particularly extreme price and volume fluctuations and such effects
have often been unrelated to the operating performance of the applicable
companies. Any negative change in the public's perception of the prospects of
technology companies or other broad market and industry factors could depress
the market price of 3dfx common stock, regardless of its operating performance.
Market fluctuations, as well as general political and economic conditions, such
as recession or interest rate or currency rate fluctuations, may also decrease
the market price of 3dfx's common stock.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk. 3dfx's cash equivalents are exposed to financial market
risk due to fluctuation in interest rates, which may affect interest income. As
of January 31, 2000, cash included money market funds and commercial paper
instruments. Due to the short term nature of the investment portfolio, 3dfx
would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates.
3dfx does not use its investment portfolio for trading or other speculative
purposes.
Foreign currency exchange risk. Substantially all of 3dfx's sales and
expenses are denominated in U.S. dollars, and, as a result, 3dfx has relatively
little exposure to foreign currency exchange risk. 3dfx does not currently enter
into forward exchange contracts to hedge exposures denominated in foreign
currencies or any other derivative financial instruments for trading or
speculative purposes. However, in the event exposure to foreign currency risk
increases, 3dfx may choose to hedge those exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplemental data
required by this item and set forth at the pages indicated in item 14(a) of this
Report and, for selected quarterly data, to the subsection "Results of
Operations -- Quarterly Results of Operations" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current executive officers and directors of 3dfx are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- ----------------------------------------------------------
<S> <C> <C>
Alex Leupp(1).................. 60 President, Chief Executive Officer and Director
Scott D. Sellers............... 31 Executive Vice President, Chief Technical Officer and
Director
Randall D. Eisenbach........... 50 Senior Vice President of Operations
Richard Burns.................. 45 Senior Vice President of Worldwide Sales
David Zacarias................. 50 Vice President, Administration and Chief Financial Officer
Gordon A. Campbell............. 55 Chairman of the Board of Directors
James L. Hopkins............... 55 Director
Anthony Sun(2)................. 47 Director
James Whims(1)................. 45 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
ALEX LEUPP has served as President and Chief Executive Officer of 3dfx
since December 1999 and has served as a director of 3dfx since October 1998.
From December 1998 until November 1999, Mr. Leupp was President and Chief
Executive Officer of Chip Express Corporation, a semiconductor company. Mr.
Leupp spent 12 years with Siemens Microelectronics, Inc, a semiconductor
company, where his most recent position was President and Chief Executive
Officer.
SCOTT D. SELLERS has served as Chief Technical Officer of 3dfx since May
1999. Between August 1998 and May 1999, Mr. Sellers served as Senior Vice
President, Product Development for 3dfx. Mr. Sellers co-founded 3dfx in August
1994 and served as Vice President, Research and Development from January 1995 to
August 1998. He has also served as a director of 3dfx since March 1995. Mr.
Sellers was Principal Engineer at MediaVision Technology, Inc., a multimedia
computer products company, from June 1993 to June 1994.
RANDALL D. EISENBACH has served as Senior Vice President of Operations
since September 1999, and as Vice President of Texas Operations from May 1999 to
September 1999. Prior to joining 3dfx, Mr. Eisenbach served as Executive Vice
President and Chief Operating Officer of STB Systems, Inc. Mr. Eisenbach held
various positions with STB including Director of Operations and Director of
Manufacturing.
RICHARD BURNS has served as Senior Vice President of Worldwide Sales since
January 2000. Between March 1999 and January 2000, Mr. Burns served as Vice
President -- Retail Channel Sales. Prior to joining 3dfx, Mr. Burns was a
consultant for Disney Interactive from August 1998 to March 1999 and Executive
Vice President, North America Publishing for GT Interactive Software, a
PC/Videogame software publisher, from December 1995 to May 1998.
DAVID ZACARIAS has served as Chief Financial Officer and Vice President,
Administration of 3dfx since February 1998. Prior to joining 3dfx, Mr. Zacarias
served as Chief Financial Officer from February 1993 to January 1998 and as
Chief Operating Officer from July 1995 to January 1998 of OPTi Inc., a fabless
semiconductor company.
GORDON A. CAMPBELL has served as the Chairman of the Board of Directors of
3dfx since August 1994 when he co-founded 3dfx. Mr. Campbell also served as
President and Chief Executive Officer of 3dfx from January 1995 to December
1996. Prior to joining 3dfx, Mr. Campbell founded Techfarm, Inc., a venture
capital investment firm, and has served as President since September 1993. In
1985, Mr. Campbell founded Chips and Technologies, Inc. or CHIPS, a
semiconductor and related device company, and served as Chairman, Chief
Executive Officer and President of CHIPS until July 1993. Mr. Campbell founded
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SEEQ Technology, Inc. or SEEQ, a semiconductor and related device company, in
1981. He served as President and Chief Executive Officer of SEEQ from 1981 to
1985. Mr. Campbell currently serves as a director of Palm, Inc. and Bell
Microproducts, Inc., is the Chairman of the Board of Cobalt Networks, Inc. and
is the managing partner of TechFund Capital, a venture capital fund, since
August 1997.
JAMES L. HOPKINS has served as a director of 3dfx since 3dfx's merger with
STB in May 1999. Mr. Hopkins is a Managing Director of Hoak Breedlove Wesneski &
Co., an investment banking firm. Mr. Hopkins served as an officer of 3dfx from
May 1999 (upon completion of the 3dfx/STB merger) to September 1999. Prior to
the 3dfx/STB merger, Mr. Hopkins was the Chief Financial Officer and Vice
President of Strategic Marketing for STB and served in these capacities since
December 1994. Mr. Hopkins' responsibilities in these positions included
directing European sales and marketing, managing specialized technology products
and planning financial strategy.
ANTHONY SUN has served as a director of 3dfx since March 1995. He is
currently a director of Award Software International, Inc., Cognex Corporation,
Inference Corporation, Komag, Inc. and Worldtalk Communications Corporation. He
is also the general partner of Venrock Associates and a director of several
private companies.
JAMES WHIMS has served as a director of 3dfx since November 1996. Mr. Whims
has been a Partner at Techfarm since November 1996. From November 1994 until
July 1996, Mr. Whims was the Executive Vice President of Sony Computer
Entertainment, a video game hardware and software company. From 1990 until July
1994, Mr. Whims was Executive Vice President of the Consumer Division of The
Software Toolworks, Inc., a diversified software company. From 1985 to 1988, Mr.
Whims served as Vice President of Sales of Worlds of Wonder, Inc., a toy
products company, which he co-founded.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16 (a) of the Exchange Act requires 3dfx's officers and directors,
and persons who own more than ten percent of a registered class of 3dfx's equity
securities, to file reports of ownership on Form 3 and changes in ownership on
Form 4 or Form 5 with the Securities and Exchange Commission or SEC and the
National Association of Securities Dealers, Inc. Such officers, directors and
10% shareholders are also required by SEC rules to furnish 3dfx with copies of
all such forms that they file. Based solely on its review of the copies of such
forms received by 3dfx, or written representations from some reporting persons
that no Forms 5 were required for such persons, 3dfx believes that its officers,
directors and ten percent shareholders have complied with all Section 16(a)
filing requirements applicable to them in fiscal 2000, except that each of Alex
Leupp, Anthony Sun, James Whims, Gordon A. Campbell, Philip Young, Gary Tarolli
and Scott D. Sellers will be filing a Form 5 late. Richard Burns will be filing
a Form 3 late.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The members of the Compensation Committee during fiscal 2000 were Alex
Leupp and James Whims. No executive officer of 3dfx serves as a member of the
board of directors or Compensation Committee of any entity which has one or more
executive officers serving as a member of 3dfx's board of directors or
Compensation Committee.
COMPENSATION OF DIRECTORS
Members of 3dfx's board of directors do not receive compensation for their
services as directors. 3dfx's 1997 Director Option Plan provides that options
shall be granted to non-employee directors of 3dfx pursuant to an automatic
nondiscretionary grant mechanism. The exercise price of the options is 100% of
the fair market value of the common stock on the grant date. The Director Plan
provides for an initial grant of options to purchase 12,500 shares of common
stock to each new non-employee director of 3dfx who is neither affiliated with
nor nominated by a shareholder that owns 1% or more of the outstanding capital
stock of 3dfx on the later of the effective date of the Director Plan or the
date he first becomes a director. In addition, each non-employee director will
automatically be granted an additional option to purchase 5,000 shares of common
stock at the next meeting of the board of directors following the annual
43
<PAGE> 44
meeting of shareholders if on such date, such director has served on the board
of directors for at least six months; provided, however, if such director is
elected as Chairman of the Board of Directors, such option grant shall be 10,000
shares. In addition to these grants, each director shall automatically be
granted an option to purchase 1,000 shares at the next meeting of the board of
directors following the annual meeting of shareholders if such director serves
on either the Audit Committee or Compensation Committee of the Board of
Directors. If such director serves on both such Committees, this grant shall be
2,000 shares. The options granted to the directors have different vesting
periods: 12,500 share options granted to a director vest at a rate of 1/48th of
the shares subject to the option per month following the date of grant; 5,000 or
10,000 share options granted to a director vest at a rate of 1/12th of the
shares subject to the option per month following the date of grant; and 1,000
share options granted to a director vest at a rate of 1/12th of the shares
subject to the option per month following the date of grant.
Pursuant to such automatic grant mechanism, in fiscal 2000, directors
received the following grants:
<TABLE>
<CAPTION>
NAME SHARES EXERCISE PRICE
- ---- ------ --------------
<S> <C> <C>
Alex Leupp.................................................. 6,000 $8.50
Anthony Sun................................................. 6,000 $8.50
James Whims................................................. 6,000 $8.50
Gordon A. Campbell.......................................... 10,000 $8.50
Philip Young................................................ 6,000 $8.50
</TABLE>
As of January 31, 2000, no shares of common stock had been issued upon the
exercise of options granted under the Director Plan, options to purchase 105,500
shares of common stock were outstanding and 44,500 shares remain available for
future option grants under the Director Plan.
44
<PAGE> 45
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the years ended December 31, 1997,
December 31, 1998 and January 31, 2000 the compensation earned by (a) each
person that served as 3dfx's Chief Executive Officer during the fiscal year
ended January 31, 2000, (b) each of the other top four executive officers whose
salary and bonus for the fiscal year ended January 31, 2000 was in excess of
$100,000 for services rendered in all capacities to 3dfx for that year and (c)
the individual for whom disclosure would have been provided pursuant to clause
(b) but for the fact that the individual was not serving as an executive officer
of 3dfx on January 31, 2000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION --------------
------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($)(1) BONUS ($) COMPENSATION(2) OPTIONS (#)(3) COMPENSATION ($)
- --------------------------- ------ ------------- --------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard(4).......... 2000 $276,097 $63,000 $ 7,500 90,000 $504,000(5)
Former President, Chief 1998 251,923 52,000 -- -- --
Executive
Officer and Director 1997 210,167 6,200 -- 18,750 --
Alex Leupp(6).................. 2000 $ 44,711 $50,000 $ 750 806,000(6) --
President, Chief Executive 1998 -- -- -- 13,500(7) --
Officer
and Director 1997 -- -- -- -- --
David Zacarias................. 2000 $224,384 $28,667 -- 25,000 --
Vice President, Administration 1998 190,192 26,545 -- 200,000(8) --
and
Chief Financial Officer 1997 -- -- --
Scott D. Sellers............... 2000 $209,230 $26,667 -- 270,000
Executive Vice President, Chief 1998 177,121 25,500 -- 68,750
Technical Officer and Director 1997 149,079 4,665 -- 100,000(9)
Richard Burns(10).............. 2000 $148,077 $25,000 $56,630(11) 70,000 --
Senior Vice President of World 1998 -- -- -- -- --
Wide Sales 1997 -- -- -- -- --
Janet Leising(12).............. 2000 $208,159 $61,667 -- 70,000 --
Former Senior Vice President 1998 174,591 40,825 -- 50,000(9) --
of Business Development 1997 143,236 5,000 -- 32,500 --
</TABLE>
- ---------------
(1) The salaries for the month ended January 31, 1999 for Messrs. Ballard,
Zacarias and Sellers and Ms. Leising were $26,981, $16,538, $15,385, and
$15,000 respectively.
(2) Represents car allowances, except where otherwise indicated.
(3) Except as otherwise indicated, these shares are subject to exercise under
stock options granted under 3dfx's 1995 Employee Stock Plan.
(4) Mr. Ballard resigned as the President and Chief Executive Officer, and as a
director of 3dfx in October 1999.
(5) In connection with 3dfx's severance arrangement with Mr. Ballard, 3dfx paid
to Mr. Ballard a lump sum severance amount of $504,000 plus other benefits.
(6) Mr. Leupp became the President and Chief Executive Officer of 3dfx in
December 1999. Prior to that time he served as an independent director of
3dfx. Included within the number of options granted to Mr. Leupp as
indicated in the table above in fiscal 2000 are 6,000 options granted to
him in his capacity as a director of 3dfx under the Director Plan.
(7) The options were granted to Mr. Leupp under the Director Plan.
45
<PAGE> 46
(8) These shares are subject to exercise under stock options granted under
3dfx's 1997 Supplementary Stock Option Plan, and constitutes a net option
to purchase 100,000 shares of 3dfx common stock granted to Mr. Zacarias in
connection with 3dfx's fiscal 1998 option repricing program in exchange for
options that had a higher exercise price.
(9) Constitutes a net option to purchase an aggregate of 50,000 shares of
common stock granted to Mr. Sellers. Ms. Leising holds an aggregate of
30,000 options, of which 20,000 net options were granted to Ms. Leising in
connection with 3dfx's option repricing program implemented in fiscal 1998
in exchange for options that had a higher exercise price.
(10) Mr. Burns joined 3dfx in March 1999.
(11) Represents commission paid to Mr. Burns in fiscal 2000.
(12) Ms. Leising resigned in February 2000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended January 31, 2000.
Except as otherwise noted, all such options were awarded under 3dfx's 1995
Employee Stock Plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS GRANTED EMPLOYEES IN PRICE PER EXPIRATION ------------------------------
NAME (2)(3) FISCAL 2000 SHARE DATE 5% 10%
- ---- --------------- ------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard... 45,000 2% $11.38 2/12/09 $ 110,475 $ 237,375
45,000 $17.00 5/14/09 164,700 355,050
Alex Leupp........... 800,000(4) 17% $ 8.88 11/30/09 1,552,000 3,292,000
6,000(5) $ 8.50 1/31/10 4,920 6,780
David Zacarias....... 12,500 -- $11.38 2/12/09 30,688 65,938
12,500 $17.00 5/14/09 45,750 98,625
Scott D. Sellers..... 35,000 6% $11.38 2/12/09 85,925 184,625
35,000 $17.00 5/14/09 128,100 276,150
200,000 $8.875 11/30/09 408,000 823,000
Richard Burns........ 70,000 1.5% $13.25 4/1/09 200,200 430,500
Janet Leising........ 35,000 1.5% $11.38 2/12/09 85,925 184,625
35,000 $17.00 5/14/09 128,100 276,150
</TABLE>
- ---------------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the exercise price per share are mandated by the
rules of the SEC and do not represent 3dfx's estimate or projection of the
future common stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial gains, if any, on stock option
exercises are dependent on the future financial performance of 3dfx, overall
market conditions and the option holders' continued employment through the
vesting period. This table does not take into account any appreciation in
the fair market value of 3dfx common stock from the date of grant to the
date of this Joint Proxy Statement/Prospectus, other than the columns
reflecting assumed rates of appreciation of 5% and 10%.
(2) Except as otherwise indicated, options become exercisable as to 25% of the
option shares on the first anniversary of the date of grant and as to 1/48
of the option shares each month thereafter, with full vesting occurring on
the fourth anniversary of the initial vesting date.
46
<PAGE> 47
(3) Options were granted at an exercise price equal to the fair market value of
3dfx's common stock on the date of grant. The exercise price may be paid in
cash, check, promissory note, delivery of already-owned shares of 3dfx's
common stock subject to some conditions, authorization to 3dfx to retain
from the total number of shares for which the option is exercised that
number of shares having a fair market value on the date of exercise equal to
the exercise price for the total number of shares as to which the option is
exercised, delivery of a properly executed exercise notice together with
irrevocable instructions to a broker to promptly deliver to 3dfx the amount
of sale or loan proceeds required to pay the exercise price, or any
combination of the foregoing methods of payment or such other consideration
or method of payment to the extent permitted under applicable law.
(4) These shares are subject to exercise under stock options granted under
3dfx's 1999 Supplementary Stock Plan.
(5) These shares are subject to exercise under stock options granted under the
Director Plan. The shares vest at the rate of 1/12 per month.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth some information regarding exercises of
stock options by the Named Executive Officers during the year ended January 31,
2000 and the stock options held as of January 31, 2000 by the Named Executive
Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT JANUARY 31, 2000 JANUARY 31, 2000
ACQUIRED ON VALUE (#)(1) ($)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAMES (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard..... 209,150 $1,967,304 -- -- --
Alex Leupp............. -- -- 7,906 811,594 -- --
David Zacarias......... -- -- 47,917 77,083
Scott D. Sellers....... -- -- 61,719 302,031 176,313 25,187
Richard Burns.......... -- -- -- 70,000 -- --
Janet Leising.......... 25,276 239,815 17,709 99,348 -- --
</TABLE>
- ---------------
(1) Options granted under 3dfx's 1995 Employee Stock Plan may be exercised by
the holder thereof prior to vesting with the shares purchased thereby
subject to repurchase by 3dfx until fully vested. The table presents options
as exercisable according to the vesting schedule of the option.
(2) Based upon the last sale price of 3dfx's common stock on January 31, 2000,
$8.50 per share, minus the exercise price.
EMPLOYMENT AGREEMENTS, SEVERANCE ARRANGEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Pursuant to a letter agreement entered into with Scott Sellers, in the
event there is a change of control of 3dfx and such executive is terminated
other than for cause within one year following the effective date of such change
of control, 25% of Mr. Sellers' stock subject to 3dfx's repurchase option under
a restricted stock purchase agreement shall be released from this repurchase
option (or all of such stock if less than 25% of Mr. Sellers' stock remains
subject to 3dfx's repurchase option). For purposes of this letter agreement a
"change of control" means the (i) the sale of all or substantially all of 3dfx's
assets, or (ii) a consolidation or merger of 3dfx with or into any other
corporation (other than a wholly-owned subsidiary of 3dfx) or engagement in a
transaction or series of transactions in which more than 50% of the voting power
of 3dfx is disposed. Termination other than for cause includes constructive
termination resulting from (i) the reduction of such employee's rate of
compensation, (ii) the reduction of such employee's scope of engagement or (iii)
the requirement that such employee provide services at a location more than 50
miles from the employee's office location as of the date of the letter
agreement.
47
<PAGE> 48
Mr. Ballard was a party to a letter agreement with 3dfx similar to that
described above for Mr. Sellers. Mr. Ballard's employment with 3dfx terminated
effective October 31, 1999 and at that time Mr. Ballard and 3dfx entered into an
agreement that provided for the payment to Mr. Ballard of a lump sum severance
amount of $504,000, the payment of certain COBRA costs, one year accelerated
vesting on options held by Mr. Ballard and the release of all claims between
3dfx and Mr. Ballard.
Mr. Ogle resigned as an officer, director and employee of 3dfx effective
January 31, 2000. The terms of his severance arrangement with 3dfx are still
under discussion.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
3dfx has adopted provisions in its articles of incorporation that eliminate
to the fullest extent permissible under California law the liability of its
directors to 3dfx for monetary damages. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission. 3dfx's bylaws provide that 3dfx shall indemnify its directors and
officers to the fullest extent permitted by California law, including in
circumstances in which indemnification is otherwise discretionary under
California law. 3dfx has entered into indemnification agreements with its
officers and directors containing provisions which may require 3dfx, among other
things, to indemnify the officers and directors against some liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of 3dfx in which indemnification
would be required or permitted. 3dfx is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 25, 2000 information regarding
the beneficial ownership of 3dfx's outstanding common stock by:
- Each person known by 3dfx to own beneficially more than five percent of
the outstanding common stock
- Each director and each chief executive officer and the four other most
highly compensated executive officers whose salary and bonus for fiscal
2000 exceeded $100,000
- All directors and executive officers of 3dfx as a group
The following calculations of the percentage of outstanding shares are
based on 25,141,083 shares of 3dfx's common stock outstanding as of April 25,
2000.
Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment power
with respect to securities, subject to community property laws, where
applicable. Information for each five percent stockholder is derived solely from
filings with the Commission on or before April 25, 2000.
48
<PAGE> 49
Shares of the common stock subject to options that are presently
exercisable or exercisable within 60 days of April 25, 2000 are deemed
outstanding and beneficially owned by the person holding such options for the
purpose of computing the percentage of ownership of such person but are not
treated as outstanding for the purpose of computing the percentage of any other
person. These options are separately set forth below in the column titled
"Options."
<TABLE>
<CAPTION>
NAME AND ADDRESS (1) SHARES OPTIONS TOTAL PERCENTAGE
- -------------------- -------- ------- --------- ----------
<S> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Gilder Gagnon Howe & Co. LLC (2)................. 2,868,670 -- 2,868,670 11.4%
1775 Broadway, 26th Floor
New York, NY 10019
DIRECTORS AND OFFICERS:
L. Gregory Ballard............................... 50,000 -- 50,000 *
Richard Burns.................................... -- 21,876 21,876 *
Gordon A. Campbell............................... 381,632(3) 80,333 461,965 1.8%
James L. Hopkins................................. 2,498 80,902 83,400 *
Alex Leupp....................................... -- 10,948 10,948 *
Scott D. Sellers................................. 205,000 90,861 295,861 1.2%
Anthony Sun...................................... 16,000 17,000 33,000 *
James Whims...................................... 2,400 60,750 63,150 *
David Zacarias................................... 1,261 65,886 67,147 *
Janet Leising.................................... 2,500 45,364 47,864 *
All executive officers and directors as a group
(9 persons).................................... 615,791 517,453 1,133,244 4.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted, address is c/o 3dfx Interactive, Inc., 4435
Fortran Drive, San Jose, CA 95134.
(2) Information with respect to Gilder Gagnon Howe & Co. LLC was obtained from a
Schedule 13G filed with the Securities and Exchange Commission, which
indicates that Gilder Gagnon Howe & Co. LLC has no voting power with respect
to the shares beneficially held, but does share dispositive power over these
shares that are held in customer accounts.
(3) Includes 77,084 shares held by Techfarm, L.P., and 3,854 held by Techfarm
Management Inc. (dba Techfarm, Inc.), 300,694 shares held by Gordon A.
Campbell. Mr. Campbell is President of Techfarm, Inc., the general partner
of Techfarm, L.P. and Mr. Campbell disclaims beneficial ownership of the
shares held by Techfarm, L.P. and Techfarm Management Inc.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Techfarm provides management services to 3dfx for which 3dfx pays a fee of
$5,000 per month. Gordon Campbell, the Chairman of the Board of Directors of
3dfx, and James Whims, a director of 3dfx, are each officers of Techfarm. 3dfx
made total payments to Techfarm for such management services during fiscal years
2000, 1998 and 1997 of $55,000, $60,000 and $60,000, respectively. In addition,
Mr. Whims provides consulting services to 3dfx for which 3dfx pays a fee of
$5,000 per month. 3dfx made total payments to Mr. Whims in fiscal years 2000,
1998 and 1997 of $45,000, $60,000 and $45,000, respectively.
3dfx has an agreement with Quantum3D, a supplier of advanced graphics
subsystems based on 3dfx's technology, pursuant to which 3dfx will supply
graphic boards and components to Quantum3D. Gordon Campbell, Chairman of the
Board of Directors of 3dfx, is a Director, significant investor in and
shareholder of Quantum3D. Sales to Quantum3D fiscal years 2000, 1998 and 1997 of
$1.6 million,
49
<PAGE> 50
$670,000 and $949,000, respectively. As of January 31, 2000, 3dfx had an
outstanding trade receivable from Quantum3D of approximately $360,000.
In April 1999, 3dfx invested an amount of $3.1 million in exchange for a
minority interest in Quantum 3D in the form of Convertible Preferred Shares in
connection with Quantum 3D's private round of financing. These terms and pricing
of these shares was equivalent to other unaffiliated third participants in the
financing round.
In connection with the termination of Gary Martin's employment with 3dfx,
3dfx and Mr. Martin, who was Chief Financial Officer and Vice President,
Administration until January 31, 1998, entered into a Separation Agreement
pursuant to which Mr. Martin will remain a temporary employee through August 1,
2000. In addition, all options granted to Mr. Martin pursuant to 3dfx's stock
plans will continue to vest through August 1, 2000. In the event of a Change of
Control, 3dfx will (i) waive its right to repurchase any unvested shares of
common stock owned by Mr. Martin and (ii) accelerate the vesting of all unvested
stock options granted to Mr. Martin pursuant to 3dfx's stock plans. For purposes
of the separation agreement, a "Change of Control" occurs, subject to some
conditions and exceptions, upon (i) the acquisition, directly or indirectly, by
any person (other than existing beneficial owners) of securities of 3dfx
representing 50% or more of the total voting power represented by 3dfx's then
outstanding voting securities; (ii) the merger or consolidation of 3dfx with
another corporation in which the voting securities of 3dfx outstanding
immediately prior to such merger or consolidation ceased to represent at least
50% of the voting power represented by the voting securities of 3dfx thereafter,
or (iii) the liquidation of 3dfx or the sale or disposition of all or
substantially all of 3dfx's assets.
3dfx loaned $100,000 to Janet Leising during fiscal 2000. This loan is
expected to be repaid in the near future.
In March 2000, 3dfx sold the Specialized Technology Group (STG), a business
unit that provides digital video products, multi-output MPEG decoder cards and
multi-monitor display adapters to a company of which Vanessa Ogle is President.
Ms. Ogle is a former employee of 3dfx and is the daughter of William E. Ogle.
Mr. Ogle served as the Executive Vice President and Vice Chairman of the Board
of Directors of 3dfx until he resigned these positions in January 2000. The
transaction was accounted for as an asset sale, comprised primarily of inventory
and accounts receivable, in a leveraged buyout by the STG management group. 3dfx
will maintain a minority equity interest in STG following the sale. The amount
of the transaction was $5.1 million, and as a result, 3dfx recorded a note
receivable in the amount of $3.0 million. The note is payable in accordance with
a payment schedule, beginning February 1, 2001 and concluding November 1, 2004.
3dfx believes that all of the transactions set forth above were made on
terms no less favorable to 3dfx than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between 3dfx and its
officers, directors, principal shareholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors, and will continue to be on
terms no less favorable to 3dfx than could be obtained from unaffiliated third
parties.
50
<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements are filed as part of this Report.
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 1998 and
January 31, 2000.......................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, December 31, 1998 and January 31, 2000
and for the month ended January 31, 1999.................. F-3
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997, December 31, 1998
and January 31, 2000 and for the month ended January 31,
1999...................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, December 31, 1998 and January 31, 2000
and for the month ended January 31, 1999.................. F-5
Notes to Consolidated Financial Statements.................. F-6
(a)(2) Financial Statement Schedules.
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Schedule II Valuation and Qualifying Accounts for the Years
Ended December 31, 1997, December 31, 1998 and January 31,
2000 and for the month ended January 31, 1999............. S-2
(a)(3) Exhibits.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization by and between the
Registrant and STB Systems, Inc. dated as of December 13,
1998 and the related Stock Option Agreement and form of
Voting Agreement
3.1(2) Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant (as amended October 1998)
3.3(5) Certificate of Designation of Rights Preferences and
Privileges of Series A Participating Preferred Stock of
Registrant
4.1(2) Specimen Common Stock Certificate
4.2(5) Preferred Shares Rights Agreement dated October 30, 1998,
between Registrant and BankBoston, N.A., Rights Agent
10.1(2) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(6) 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder
10.3(2) 1997 Director Option Plan and form of Director Stock Option
Agreement thereunder
10.4(2) 1997 Employee Stock Purchase Plan and forms of agreement
thereunder
10.5(2) Lease Agreement dated August 7, 1996 between Registrant and
South Bay/Fortan, and Tenant Estoppel Certificate dated
March 25, 1997 between Registrant and CarrAmerica Realty
Corporation for San Jose, California office
10.6(2) Investors' Rights Agreement dated September 12, 1996,
Amendment No. 1 to Investors' Rights Agreement dated
November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to
Investors' Rights Agreement dated March 27, 1997 by and
among the Registrant and holders of the Registrant's Series
A, Series B and Series Preferred Stock.
10.7.1(3) Warrant to purchase shares of Common Stock issued to
Creative Labs, Inc.
10.7.2(2) Warrant to purchase shares of Series B Preferred Stock
issued to MMC/GATX Partnership No. 1.
</TABLE>
51
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
10.8(2) Form of Restricted Stock Purchase Agreement between the
Registrant and certain shareholders
10.9(2) Master Equipment Lease Agreement dated January 1, 1996 by
and between the Registrant and MMC/GATX Partnership No. 1
10.10(2) Master Equipment Lease dated March 31, 1995 by and between
the Registrant and Lighthouse Capital Partners, L.P.
10.11.1* Amended and Restated Credit Agreement dated December 21,
1999 by and between STB Systems, Inc. and Bank One, Texas,
N.A. and Comerica Bank-Texas
10.11.2* First Amendment to Amended and Restated Credit Agreement
dated February 25, 2000 by and between STB Systems, Inc.,
Bank One, Texas, N.A. and the Original Lenders as therein
defined
10.11.3* Guaranty of the Registrant dated November 23, 1999 in favor
of Bank One, Texas, N.A. (and other lenders)
10.11.4* First Amendment to Guaranty of the Registrant dated as of
December 21, 1999 in favor of Bank One, Texas, N.A. (and
other lenders)
10.11.5* Security Agreement dated as of November 21, 1997 by STB
Systems, Inc. in favor of BankOne, Texas, N.A., (and other
lenders)
10.11.6* First Amendment to Security Agreement dated as of December
21, 1999 by STB Systems, Inc. in favor of BankOne, Texas,
N.A., (and other lenders)
10.11.7(7) Participation Agreement dated as of November 14, 1997 among
Asset XVII Holdings Company, L.L.C., as lessor, STB Systems,
Inc., as lessee and Bank One, Texas, N.A., as lender
10.11.8(7) Lease and Development Agreement dated as of November 14,
1997 among Asset XVII Holdings Company, L.L.C., as lessor,
and STB Systems, Inc., as lessee
10.12.1(2) Change of Control Letter Agreement between the Registrant
and Scott D. Sellers
10.12.2(2) Change of Control Letter Agreement between the Registrant
and Gary Tarolli
10.13.+(4) Software License and Co-marketing Agreement made as of June,
1997 by and between Electronic Arts, Inc. and the Registrant
10.14(4) Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.15(3) Lease Agreement dated as of January 6, 1998 by and between
the Registrant and GEOMAXX
10.16(3) Separation Agreement dated as of October 12, 1997 by and
between the Registrant and Gary P. Martin
10.17(3) 1997 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
10.18(8) 1999 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
21.1 Subsidiaries of the Registrant
(a) STB Systems, Inc.
(b) 3dfx kk Limited (Japan)
(c) 3dfx International
(d) Galapagos Acquisition Corp.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
* Filed herewith.
(1) Incorporated by reference to Schedule 13D filed by STB Systems, Inc. dated
December 23, 1998 with respect to the Registrant.
52
<PAGE> 53
(2) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-25365) which was declared
effective on June 25, 1997.
(3) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-46119) filed with the
Commission on February 11, 1998.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A which was filed with the Commission on
November 9, 1998.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(7) Incorporated by reference to exhibits filed with STB Systems, Inc.'s Annual
Report on Form 10-K for the fiscal year ended October 31, 1997.
(8) Incorporated by reference to exhibit 4.1 filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-86661) which was filed with
the Commission on September 7, 1999.
53
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: May 1, 2000
3dfx INTERACTIVE, INC.
/s/ L. ALEX LEUPP
By:
--------------------------------------
Alex Leupp
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Alex Leupp and David Zacarias, and each
of them, his true and lawful attorneys-in-fact and agents, each with full power
of substitution and resubstitution, to sign any and all amendments to this
Annual Report on Form 10-K and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ L. ALEX LEUPP President, Chief Executive Officer and May 1, 2000
- --------------------------------------------- Director (Principal Executive Officer)
(Alex Leupp)
/s/ DAVID ZACARIAS Vice President, Administration and Chief May 1, 2000
- --------------------------------------------- Financial Officer (Principal Financial
(David Zacarias) and Accounting Officer)
/s/ GORDON A. CAMPBELL Chairman of the Board May 1, 2000
- ---------------------------------------------
(Gordon A. Campbell)
/s/ JAMES HOPKINS Director May 1, 2000
- ---------------------------------------------
(James Hopkins)
/s/ SCOTT D. SELLERS Director May 1, 2000
- ---------------------------------------------
(Scott D. Sellers)
</TABLE>
54
<PAGE> 55
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Director May 1, 2000
- ---------------------------------------------
(Anthony Sun)
/s/ JAMES WHIMS Director May 1, 2000
- ---------------------------------------------
(James Whims)
</TABLE>
55
<PAGE> 56
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of 3dfx Interactive, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of 3dfx Interactive, Inc., at December
31, 1998 and January 31, 2000 and the results of its operations and its cash
flows for each of the years ended December 31, 1997, 1998 and January 31, 2000,
and for the month ended January 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of 3dfx's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 29, 2000, except for Note 13,
which is as of March 27, 2000
F-1
<PAGE> 57
3DFX INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 41,818 $ 92,922
Short-term investments.................................... 24,012 3,058
Accounts receivable less allowance for doubtful accounts
of $6,681 and $2,280................................... 66,160 36,335
Inventory................................................. 45,065 23,991
Other current assets...................................... 28,407 12,089
-------- --------
Total current assets...................................... 205,462 168,395
Property and equipment, net................................. 40,269 15,629
Intangibles................................................. 12,942 --
Goodwill.................................................... 32,709 --
Other assets................................................ 4,729 97
-------- --------
$296,111 $184,121
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of Credit............................................ $ 25,000 $ --
Accounts payable.......................................... 60,879 41,104
Accrued liabilities....................................... 20,385 16,031
Current portion of capitalized lease obligations.......... 732 389
-------- --------
Total current liabilities......................... 106,996 57,524
-------- --------
Capitalized lease obligations, less current portion......... 1,881 284
-------- --------
Commitments (Note 10)
Shareholders' Equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, no par value, 50,000,000 shares authorized;
24,442,370 and 15,671,067 shares issued and
outstanding............................................ 251,883 126,569
Warrants.................................................. 242 242
Deferred compensation..................................... (172) (697)
Accumulated other comprehensive income.................... 1,844
Accumulated deficit....................................... (66,563) 199
-------- --------
Total shareholders' equity........................ $187,234 126,313
-------- --------
$296,111 $184,121
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 58
3DFX INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR YEAR FOR YEAR ENDED FOR THE
ENDED DECEMBER 31, MONTH ENDED
JANUARY 31, ------------------ JANUARY 31,
2000 1998 1997 1999
----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $360,523 $202,601 $44,069 $17,048
Cost of revenues................................. 287,872 119,618 22,611 14,527
-------- -------- ------- -------
Gross profit..................................... 72,651 82,983 21,458 2,521
-------- -------- ------- -------
Operating expenses:
Research and development....................... 66,062 34,045 12,412 3,340
Selling, general and administrative............ 63,468 35,441 11,390 4,614
In-process research and development............ 4,302 -- -- --
Restructuring expense.......................... 4,382 -- -- --
Amortization of goodwill and intangibles....... 10,228 -- -- --
Total operating expenses............... 148,442 69,486 23,802 7,954
-------- -------- ------- -------
Income (loss) from operations.................... (75,791) 13,497 (2,344) (5,433)
Interest and other income, net................... 2,180 15,869 630 322
-------- -------- ------- -------
Income (loss) before income taxes................ (73,611) 29,366 (1,714) (5,111)
Provision (benefit) for income taxes............. (10,324) 7,663 -- (1,636)
-------- -------- ------- -------
Net income (loss)................................ $(63,287) $ 21,703 $(1,714) $(3,475)
======== ======== ======= =======
Net income (loss) per share:
Basic.......................................... $ (2.81) $ 1.45 $ (0.16) $ (.22)
======== ======== ======= =======
Diluted........................................ $ (2.81) $ 1.33 $ (0.16) $ (.22)
======== ======== ======= =======
Shares used in net income (loss) per share
calculations (Note 1):
Basic.......................................... 22,536 14,917 10,767 15,641
-------- -------- ------- -------
Diluted........................................ 22,536 16,353 10,767 15,641
-------- -------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
3DFX INTERACTIVE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- --------------------- NOTES DEFERRED
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION
---------- ------- ---------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 6,951,692 $28,701 1,890,013 $ 1,626 $353 $(19) $(1,250)
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, less issuance
costs............................. 70,167 521
Conversion of preferred stock to
common stock...................... (7,021,859) (29,222) 7,021,859 2,922
Issuance of common stock in
connection with the initial public
offering, less issuance costs..... 3,450,000 34,336
Issuance of common stock under
stock option and purchase plans... 214,757 413
Common stock repurchased........... (104,246) (9)
Exercise of warrants to purchase
common stock...................... 94,247 714 (329)
Issuance of warrant to purchase
common stock...................... 218
Repayment of notes receivable from
shareholders...................... 19
Deferred compensation.............. 415 (415)
Amortization of deferred
compensation...................... 484
Net loss...........................
---------- ------- ---------- -------- ---- ---- -------
Balance at December 31, 1997....... -- -- 12,566,630 66,717 242 -- (1,181)
Issuance of common stock in
connection with public offering,
less issuance costs............... 2,463,140 54,752
Issuance of common stock under
stock option and purchase plans... 643,451 2,301
Common stock repurchased........... (2,154) (1)
Tax benefit related to exercise of
stock options..................... 2,800
Amortization of deferred
compensation...................... 484
Net income.........................
---------- ------- ---------- -------- ---- ---- -------
Balance at December 31, 1998....... -- -- 15,671,067 126,569 242 -- (697)
Issuance of common stock under
stock option plan................. 44,815 140
Amortization of deferred
compensation...................... 40
Net loss...........................
---------- ------- ---------- -------- ---- ---- -------
Balance at January 31, 1999........ -- -- 15,715,882 126,709 242 -- (657)
Issuance of common stock under
stock option and purchase plans... 977,235 4,899
Common stock repurchased........... (517,501) (6,775)
Amortization of deferred
compensation...................... 484
STB acquisition.................... 8,266,754 127,050
Components of comprehensive income
(loss):
Net loss........................
Unrealized gain on
investments...................
Total comprehensive income
(loss)............................
---------- ------- ---------- -------- ---- ---- -------
Balance at January 31, 2000........ -- -- 24,442,370 $251,883 $242 $ -- $ (172)
========== ======= ========== ======== ==== ==== =======
<CAPTION>
ACCUMULATED RETAINED
OTHER EARNINGS/
COMPREHENSIVE (ACCUMULATED
INCOME DEFICIT) TOTAL
------------- ------------ --------
<S> <C> <C> <C>
Balance at December 31, 1996....... $(19,790) $ 9,621
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, less issuance
costs............................. 521
Conversion of preferred stock to
common stock...................... (26,300)
Issuance of common stock in
connection with the initial public
offering, less issuance costs..... 34,336
Issuance of common stock under
stock option and purchase plans... 413
Common stock repurchased........... (9)
Exercise of warrants to purchase
common stock...................... 385
Issuance of warrant to purchase
common stock...................... 218
Repayment of notes receivable from
shareholders...................... 19
Deferred compensation.............. --
Amortization of deferred
compensation...................... 484
Net loss........................... (1,714) (1,714)
-------- --------
Balance at December 31, 1997....... (21,504) 44,274
Issuance of common stock in
connection with public offering,
less issuance costs............... 54,752
Issuance of common stock under
stock option and purchase plans... 2,301
Common stock repurchased........... (1)
Tax benefit related to exercise of
stock options..................... 2,800
Amortization of deferred
compensation...................... 484
Net income......................... 21,703 21,703
-------- --------
Balance at December 31, 1998....... 199 126,313
Issuance of common stock under
stock option plan................. 140
Amortization of deferred
compensation...................... 40
Net loss........................... (3,475) (3,475)
-------- --------
Balance at January 31, 1999........ (3,276) 123,018
Issuance of common stock under
stock option and purchase plans... 4,899
Common stock repurchased........... (6,775)
Amortization of deferred
compensation...................... 484
STB acquisition.................... 127,050
Components of comprehensive income
(loss):
Net loss........................ (63,287) (63,287)
Unrealized gain on
investments................... 1,844 1,844
--------
Total comprehensive income
(loss)............................ (61,443)
------ -------- --------
Balance at January 31, 2000........ $1,844 $(66,563) $187,234
====== ======== ========
</TABLE>
The accompanying notes are an intergral part of these financial statements.
F-4
<PAGE> 60
3DFX INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE
FISCAL YEAR ENDED MONTH
----------------------------------------- ENDED
JANUARY 31, DECEMBER 31, DECEMBER 31, JANUARY 31,
2000 1998 1997 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(63,287) $21,703 $(1,714) $(3,475)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 14,930 5,249 2,238 675
Amortization..................................... 10,228 -- -- --
Write-off of acquired in-process R&D............. 4,302 -- -- --
Stock compensation............................... 484 484 484 40
Increase (decrease) in allowance for doubtful
accounts....................................... (646) 1,972 230 4,449
Changes in assets and liabilities:
Accounts receivable............................ 7,087 (24,920) (12,224) 4,341
Inventory...................................... 5,339 (20,146) 1,115 6,008
Other assets................................... (5,318) (9,456) (2,275) 327
Accounts payable............................... 1,765 28,531 10,337 (11,195)
Accrued and other long-term liabilities........ (8,340) 13,346 1,554 (869)
-------- ------- ------- -------
Net cash provided by/(used in) operating
activities..................................... (33,456) 16,763 (255) 301
-------- ------- ------- -------
Cash flows from investing activities:
Maturities (purchases) of short-term investments,
net............................................ (893) 2,926 (5,984) (18,330)
Acquisition of STB Systems....................... 21,243 -- -- --
Purchases of property and equipment.............. (25,733) (13,844) (4,730) (1,459)
-------- ------- ------- -------
Net cash used in investing activities............ (5,383) (10,918) (10,714) (19,789)
-------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock, net........................... -- -- 521 --
Proceeds from initial public offerings, net...... -- 54,752 34,336 --
Proceeds from issuance (repurchase) of
common stock, net.............................. (1,876) 2,300 423 140
Tax benefit related to exercise of stock
options........................................ -- 2,800 -- --
Proceeds from exercise of warrants............... -- -- 385 --
Principal payments of capitalized lease
obligations, net............................... (358) (935) (751) 108
Proceeds (payments) on line of credit, net....... 9,209 (777) (299) --
-------- ------- ------- -------
Net cash provided by financing activities........ 6,975 58,140 34,615 248
-------- ------- ------- -------
Net increase in cash and cash equivalents.......... (31,864) 63,985 23,646 (19,240)
Cash and cash equivalents at beginning of period... 73,682 28,937 5,291 92,922
-------- ------- ------- -------
Cash and cash equivalents at end of period......... $ 41,818 $92,922 $28,937 $73,682
======== ======= ======= =======
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest......... $ 1,289 $ 141 $ 263 $ 3
Cash paid during the period for income taxes..... 2,361 6,200 -- --
Acquisition of property and equipment under
capitalized lease obligations.................. -- -- 842 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- 3DFX AND ITS SIGNIFICANT ACCOUNTING POLICIES:
3dfx
3dfx Interactive Inc. ("3dfx") was incorporated in California on August 24,
1994. 3dfx develops high performance, cost-effective graphics chips, graphics
boards, software and related technology that enables a highly immersive,
interactive and realistic 3D experience across multiple hardware platforms. 3dfx
has subsidiaries in the United States, Mexico, and other key markets in the
world. The consolidated financial statements include the financial statements of
3dfx and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
In March 1999, the Board of Directors determined that it would be in the
best interests of 3dfx and its shareholders to change its fiscal year from a
December fiscal year to a year beginning on February 1 and ending on January 31
("January fiscal year"), beginning on February 1, 1999. Accordingly, 3dfx has
separately presented the results of operations and cash flows for the one month
period ended January 31, 1999.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is generally recognized upon product shipment.
Revenue resulting from development contracts is recognized under the percentage
of completion method based upon costs incurred relative to total contract costs
or when the related contractual obligations have been fulfilled and fees are
billable. Costs associated with development contracts are included in research
and development. Fiscal 1997 includes $1.7 million of development revenue and no
amounts were recognized in the other periods presented.
Cash equivalents and investments
3dfx considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. At January 31, 2000 and December
31, 1998, approximately $42,444,000 and $85,299,000, respectively, of money
market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.
Investments in debt securities are classified as "available for sale" and
have maturities greater than three months from the date of acquisition.
Investments classified as "available for sale" are reported at fair value with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of shareholders' equity. Unrealized gains were $1.8 million during
fiscal year ended January 31, 2000. Unrealized gains and losses were not
material during the years ended December 31, 1998 and 1997 or during the one
month period ended January 31, 1999.
Concentration of credit risk
Financial instruments that potentially subject 3dfx to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and accounts receivable.
F-6
<PAGE> 62
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3dfx invests primarily in money market accounts, commercial paper
instruments and term notes. Cash equivalents and short-term investments are
maintained with high quality institutions and their composition and maturities
are regularly monitored by management.
3dfx performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable. One customer
accounted for 11.4% of accounts receivable at January 31, 2000. Four customers
account for 25%, 24%, 11% and 10% of accounts receivable at December 31, 1998.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------- ONE MONTH
DECEMBER 31, ENDED
JANUARY 31, ------------ JANUARY 31,
2000 1998 1997 1999
----------- ---- ---- -----------
<S> <C> <C> <C> <C>
A.................................................... 13% -- -- --
B ................................................... -- 32% 37% --
C.................................................... -- 26% 0% 24%
D.................................................... -- 16% 16% 25%
E.................................................... -- -- -- 12%
</TABLE>
Inventory
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years or less. Assets held under
capital leases are amortized using the straight-line method over the term of the
lease or estimated useful lives, whichever is shorter.
Long-lived assets held and used by 3dfx are reviewed for impairment
whenever events or changes in circumstances indicate that their net book value
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between net book
values of the assets and their estimated fair values. 3dfx believes that no
long-lived assets were impaired at January 31, 2000 and December 31, 1998.
Research and software development costs
Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all software
development costs incurred subsequent to the establishment of technological
feasibility have been expensed as incurred due to their immateriality.
Stock-based compensation
3dfx accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In
January 1996, 3dfx adopted the disclosure
F-7
<PAGE> 63
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (see Note 8).
Comprehensive Income
Other comprehensive income for the fiscal year ended January 31, 2000 was
$1.8 million, primarily representing unrealized gains from investing activities,
resulting in comprehensive income (loss) of $(61.4) million. There was no
comprehensive income for the fiscal year ended December 31, 1998 nor for the one
month period ended January 31, 1999.
Earnings (loss) per share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted earnings (loss)
per share is computed using the weighted average number of common and
potentially dilutive common shares during the periods, except those that are
antidilutive. Reconciliations of the numerators and denominators of the basic
and diluted per share computations are as follows (in thousands):
<TABLE>
<CAPTION>
ONE MONTH
FISCAL YEAR ENDED ENDED
---------------------------- JANUARY 31,
2000 1998 1997 1999
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Net income (loss) available to common
shareholders (numerator)....................... $(63,287) $21,703 $(1,714) $(3,475)
-------- ------- ------- -------
Weighted average shares outstanding (denominator
for basic computations)........................ 22,536 14,917 10,767 15,641
======== ======= ======= =======
Effect of dilutive securities-common stock
equivalents.................................... -- 1,436 -- --
Weighted average shares outstanding (denominator
for diluted computation)....................... 22,536 16,353 10,767 15,641
======== ======= ======= =======
Basic income (loss) per share.................... $ (2.81) $ 1.45 $ (0.16) $ (0.22)
======== ======= ======= =======
Diluted income (loss) per share.................. $ (2.81) $ 1.33 $ (0.16) $ (0.22)
======== ======= ======= =======
</TABLE>
During the fiscal year ended January 31, 2000, the one month period ended
January 31, 1999 and the fiscal years ended December 31, 1998 and 1997, options
to purchase approximately 6,484,389, 3,499,000, 560,392 and 2,505,984 shares and
warrants to purchase approximately 36,960, 36,960, 36,960 and 93,636 shares,
respectively, were outstanding but are not included in the computation because
they are antidilutive.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended, requires that all
derivative instruments be recorded on the balance sheet at their fair market
value. Changes in the fair market value of derivatives are recorded each period
in current earnings or comprehensive income, depending on whether a derivative
is designed as part of a hedge transaction, and if so, the type of hedge
transaction. Substantially all of 3dfx's revenues and the majority of its costs
are denominated in U.S. dollars, and to date 3dfx has not entered into any
derivative contracts. 3dfx does not expect that the adoption of SFAS 133 will
have a material effect on its financial statements.
F-8
<PAGE> 64
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effective date of SFAS 133, as amended, is for fiscal quarters of fiscal
years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statement," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The application of SAB No. 101
did not have a material impact on 3dfx's financial statements.
NOTE 2 -- ACQUISITION OF STB SYSTEMS, INC.
In May 1999, 3dfx completed the STB merger. As a result of the merger, STB
is now a wholly owned subsidiary of 3dfx. The merger was accounted for under the
purchase method of accounting. The purchase price of $139.3 million included
$116.1 million of stock issued at fair value (fair value being determined as the
average price of the 3dfx stock for a period of three days before and after the
announcement of the merger), $9.9 million in STB stock option costs (being
determined under both the Black Sholes formula and in accordance with the merger
agreement) and $13.3 million in estimated expenses of the transaction. The
purchase price was allocated as follows: $85.6 million to the estimated fair
value of STB net tangible assets purchased (as of May 13, 1999), $(7.6) million
to establish deferred tax liabilities associated with the certain intangibles
acquired, $4.3 million to purchased in-process research and development, $11.4
million to purchased existing technology, $4.4 million to trademarks, $2.3
million to workforce-in-place, $1.0 million to executive covenants and $37.9
million to goodwill. The allocation of the purchase price to intangibles was
based upon an independent, third party appraisal and management's estimates. The
intangible assets and goodwill acquired have estimated useful lives and
estimated first year amortization, as follows:
<TABLE>
<CAPTION>
ESTIMATED FISCAL 2000
AMOUNT USEFUL LIFE AMORTIZATION
----------- ----------- ------------
<S> <C> <C> <C>
Purchased existing technology:
1.5 year life...................................... $ 6,475,000 1.5 years $3,540,000
3 year life........................................ 4,966,000 3 years 1,357,000
Trademarks........................................... 4,406,000 5 years 722,000
Workforce-in-place................................... 2,250,000 5 years 369,000
Executive covenants.................................. 1,000,000 5 years 164,000
Goodwill............................................. 37,900,000 5 years 5,190,000
</TABLE>
The value assigned to purchased in-process research and development
("IPR&D") was determined by identifying research projects in areas for which
technological feasibility had not been established. These include projects for
Voodoo3 as well as other specialized technologies totaling $4.3 million. The
value was determined by estimating the expected cash flows from the projects
once commercially viable, discounting the net cash flows back to their present
value and then applying a percentage of completion to the calculated value as
defined below.
Net Cash Flows. The net cash flows from the identified projects are based
on 3dfx's estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, royalty costs and income taxes from
those projects. These estimates are based on the assumptions mentioned below.
The research and development costs included in the model reflect costs to
sustain projects, but exclude costs to bring in-process projects to
technological feasibility. The estimated revenues are based on management
projections of each in-process project and the business projections were
compared and found to be in line with industry analysts' forecasts of growth in
substantially all of the relevant markets. Estimated total revenues from the
IPR&D product areas are expected to peak in the year ending December 31, 1999
and decline from 2000 into 2001 as other new products are expected to become
F-9
<PAGE> 65
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
available. These projections are based on our estimates of market size and
growth, expected trends in technology and the nature and expected timing of new
project introductions of our competitors and us.
Gross Margins. Projected gross margins associated with the identified
projects approximate STB's recent historical performance and are in line with
comparable industry margins. The estimated selling, general and administrative
costs are consistent with STB's historical cost structure, which is in line with
industry averages at approximately 10% of revenues. Research and development
costs are consistent with STB's historical cost structure.
Royalty Rate. 3dfx applied a royalty charge of 25% of operating income for
each in-process project to attribute value for dependency on predecessor core
technologies.
Discount Rate. Discounting the net cash flows back to their present value
is based on the industry weighted average cost of capital ("WACC"). The industry
WACC is approximately 14%. The discount rate used in discounting the net cash
flows from IPR&D is 20%, a 600 basis point increase from the industry WACC. This
discount rate is higher than the industry WACC due to inherent uncertainties
surrounding the successful development of the IPR&D, market acceptance of the
technology, the useful life of such technology and the uncertainty of
technological advances which could potentially impact the estimates described
above.
Percentage of Completion. The percentage of completion for each project
was determined using costs incurred to date on each project as compared to the
remaining research and development to be completed to bring each project
technological feasibility. The percentage of completion varied by individual
project ranging from 50% to 91%. If the projects discussed above are not
successfully developed, the sales and profitability of the combined company may
be adversely affected in future periods.
The following represents the unaudited pro forma results of operations of
3dfx for fiscal 2000 and 1998 as if the acquisition was consummated on January
1, 1998. The unaudited pro forma results of operations include certain pro forma
adjustments, including the amortization of intangible assets relating to the
acquisition. The unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisition occurred at January 1, 1998 or the results
that may occur in the future.
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Revenues.................................................... $441,312 $467,441
Net income (loss)........................................... $(81,061) $ 9,110
Basic net income (loss) per share........................... $ (3.69) $ 0.40
Diluted net income (loss) per share......................... $ (3.69) $ 0.37
</TABLE>
F-10
<PAGE> 66
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Inventory:
Raw material.............................................. $ 26,708 $ 2,891
Work-in-progress.......................................... 8,940 16,565
Finished goods............................................ $ 9,417 4,535
-------- -------
$ 45,065 $23,991
-------- -------
Property and equipment:
Computer equipment........................................ $ 27,108 $15,539
Purchased computer software............................... 18,035 5,253
Furniture and equipment................................... 28,113 3,350
-------- -------
73,256 24,142
Less: Accumulated depreciation and amortization........... (32,987) (8,513)
-------- -------
$ 40,269 $15,629
======== =======
</TABLE>
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $5,529,000 and $2,529,000 with related
accumulated amortization of $4,120,000 and $2,146,000 at January 31, 2000 and
December 31, 1998, respectively.
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Accrued liabilities:
Income taxes payable...................................... $ 4,807 $ 5,788
Accrued salaries, wages and benefits...................... 4,150 2,839
Sales returns reserves.................................... 1,245 2,938
Accrued marketing costs................................... 3,104 --
Other accrued liabilities................................. 7,079 4,466
-------- -------
$ 20,385 $16,031
======== =======
</TABLE>
NOTE 4 -- RESTRUCTURING CHARGES:
During the fiscal year ended January 31, 2000, 3dfx incurred restructuring
expenses totaling approximately $4,382,000. Approximately $2,552,000 of this
amount related to downsizing the expense levels of 3dfx given the 3dfx's current
financial losses, and $1,830,000 related to a one-time reduction in workforce
related to the merger with STB.
NOTE 5 -- DEBT:
3dfx has a line of credit agreement with a bank, which provides for maximum
borrowings in an amount up to the lesser of 80% of eligible accounts receivable
or $25,000,000. Borrowings under the line are secured by $25,000,000 of cash and
short-term investments and all of 3dfx's owned assets and bear interest at Libor
plus 100 basis points (6.82% as of January 31, 2000). The agreement requires
that 3dfx maintain certain levels of tangible net worth and generally prohibits
3dfx from paying cash dividends. As of January 31, 2000, 3dfx was in compliance
with its covenants. The line of credit expires on December 19, 2000. At January
31, 2000, $25,000,000 was outstanding under this line of credit.
F-11
<PAGE> 67
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3dfx has a $3,000,000 term loan which is payable in 60 monthly installments
of principal and interest beginning on November 1, 1997. The term loan bears
interest at Libor plus 250 basis points (8.32% as of January 31, 2000). At
January 31, 2000, $1,944,000 was outstanding under the term loan.
3dfx has a lease line of credit with a bank, which provides for the
purchase of up to $5,000,000 of property and equipment. Borrowings under this
line is secured by all of 3dfx's owned assets and bears interest at the bank's
prime rate plus 0.75% per annum. The agreement requires that 3dfx maintain
certain financial ratios and levels of tangible net worth, profitability and
liquidity. As of December 31, 1998, 3dfx was in compliance with its covenants.
The equipment line of credit expires in December 2001. At January 31, 2000,
there were no borrowings outstanding under this equipment line of credit.
NOTE 6 -- DEVELOPMENT CONTRACT:
In February 1997, 3dfx entered into a development and license agreement
with Sega Enterprises, Ltd., under which 3dfx is entitled to receive development
contract revenues and royalties based upon a cumulative volume of units sold by
Sega which include 3dfx's product. 3dfx recognized development contract revenues
of $1,817,000 in the year ended December 31, 1997, representing a non-refundable
amount due for the delivery of certain engineering designs and revenue
recognized under the percentage of completion method of accounting. 3dfx has no
further obligations to Sega with regard to the $1,817,000 of development
contract revenue recognized. 3dfx did not earn any royalty revenue in the year
ended December 31, 1997. Costs incurred during the period relating to this
contract are included in research and development expense.
In July 1997, Sega terminated the development and license agreement with
3dfx. In August 1997, 3dfx filed a lawsuit against Sega alleging breach of
contract, interference with the contract, misrepresentation, unfair competition
and threatened misappropriation of trade secrets. In September 1998, 3dfx
settled its lawsuit relating to this agreement and has accounted for this
settlement in its Consolidated Statements of Operations in the category,
Interest and Other Income, net.
NOTE 7 -- SHAREHOLDERS' EQUITY:
Common stock
3dfx has issued 1,646,250 shares of its common stock to founders and
investors. The shares either vested immediately or vested on various dates
through 1999. 3dfx can buy back unvested shares at the original price paid by
the purchasers in the event the purchasers' employment with 3dfx is terminated
for any reason. There were no such repurchases in fiscal 2000 or 1998.
In addition, during the fiscal years ended January 31, 2000 and December
31, 1998, certain employees exercised options to purchase 22,041 and 44,640
shares of common stock, respectively, which are subject to a right of repurchase
by 3dfx at the original share issuance price. The repurchase right lapses over a
period generally ranging from two to four years. During the fiscal years ended
January 31, 2000 and December 31, 1998, 12,501 and 2,154 shares of common stock,
respectively, were repurchased.
On June 16, 1999, 3dfx announced a stock repurchase program, whereby 3dfx
was authorized by its board of directors to repurchase shares of its common
stock in the open market. In accordance with the program, 3dfx subsequently
repurchased 505,000 shares of its common stock for approximately $6.8 million.
As of January 31, 2000 and December 31, 1998, approximately 8,917 and
44,640 shares, respectively, of common stock were subject to these repurchase
rights.
F-12
<PAGE> 68
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, 3dfx 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. 3dfx received cash of approximately $30,400,000, net of underwriting
discounts and commissions. Upon the closing of initial public offering, all
outstanding shares of 3dfx's then outstanding convertible preferred stock were
automatically converted into shares of common stock. On July 25, 1997, 3dfx's
underwriter exercised an option to purchase an additional 450,000 shares of
common stock at a price of $11.00 per share to cover over-allotments. 3dfx
received cash of approximately $3,900,000, net of underwriting discounts and
commissions.
In March 1998, 3dfx completed its secondary public offering of 2,900,000
shares of common stock at a price of $23.75 per share. Of the 2,900,000 shares
offered, 2,028,140 were sold by 3dfx and 871,860 were sold by selling
shareholders. 3dfx received cash of approximately $45,500,000, net of
underwriting discounts and commissions and other offering costs. 3dfx did not
receive any of the proceeds from the sale of shares by the selling shareholders.
On March 23, 1998, the 3dfx's underwriters exercised an option to purchase an
additional 435,000 shares of common stock at a price of $23.75 per share to
cover over-allotments. 3dfx received cash of approximately $9,300,000, net of
underwriting discounts and commissions and other offering costs.
Convertible preferred stock
At December 31, 1996, the aggregate authorized number of preferred shares
was 7,269,018, of which 2,794,742, 2,818,412 and 1,655,864 were designated as
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and
Series C Convertible Preferred Stock, respectively.
Each share of Series A, B and C Convertible Preferred Stock outstanding was
converted into one share of common stock upon the completion of the underwritten
initial public offering (IPO) of common stock in June 1997. The holders of
Series A, B and C Convertible Preferred Stock had voting rights equal to common
stock on an if-converted basis.
Warrants
In March 1995, 3dfx issued a warrant to a vendor to purchase 43,750 shares
of Series A Convertible Preferred Stock at $2.00 per share. The warrant was
deemed by management to have a nominal value at the date of grant. Upon
completion of 3dfx's IPO, this warrant was exchanged for a warrant to purchase
common stock. This warrant has been exercised in full and exchanged for 43,750
shares of common stock.
In January 1996, 3dfx entered into a line of credit. To secure the line,
3dfx issued to the lessor a warrant to purchase 19,886 shares of Series B
Convertible Preferred Stock at an exercise price of $4.40. The warrant expires
on January 1, 2003. The warrant was deemed by management to have a nominal value
at the date of grant. Upon completion of 3dfx' IPO, this warrant was exchanged
for a warrant to purchase common stock. A portion of this warrant has been
executed and exchanged for 12,926 shares of 3dfx common stock. 3dfx has reserved
6,960 shares of common stock for the exercise of this warrant.
In 1996, 3dfx issued to a university a warrant to purchase 5,000 shares of
Series C Convertible Preferred Stock at an exercise price of $7.50 per share.
This warrant was deemed to have a value of approximately $40,285 at the date of
grant and the related cost was recognized as other expense and research and
development expense, respectively, during 1996. The warrant for 5,000 shares
expires on December 31, 2001. Upon completion of 3dfx's IPO, the warrant for
5,000 shares was exchanged for a warrant to purchase common stock. 3dfx has
reserved 5,000 shares of common stock for the exercise of this warrant.
On December 3, 1997, 3dfx issued a warrant to purchase 25,000 shares of
common stock at a exercise price of $13.875 per share in conjunction with
developing a relationship with another company. The
F-13
<PAGE> 69
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
warrant is fully exercisable and expires December 3, 2002. 3dfx valued the
warrant under the "Black-Scholes" formula at approximately $218,000. The warrant
value will be amortized over a one-year period as a cost of revenue. 3dfx has
reserved 25,000 shares of common stock for the exercise of this warrant.
As of January 31, 2000, 3dfx had reserved 36,960 shares of common stock for
the exercise of warrants.
NOTE 8 -- STOCK OPTION PLANS:
The 1995 Plan
In May 1995, 3dfx adopted a Stock Plan (the "1995 Plan") which provides for
granting of incentive and nonqualified stock options to employees, consultants
and directors of 3dfx. In May 1998 and May 1999, 3dfx's shareholders approved an
increase of 1,700,000 and 2,000,000 shares, respectively, of Common Stock to be
reserved for issuance under the 1995 Plan. As of January 31, 2000, 6,375,000
shares of Common Stock have been reserved for issuance under the 1995 Plan.
Options granted under the 1995 Plan are generally for periods not to exceed
ten years, and are granted at prices not less than 100% and 85%, for incentive
and nonqualified stock options, respectively, of the fair market value on the
date of grant. Incentive stock options granted to shareholders who own greater
than 10% of the outstanding stock are for periods not to exceed five years, and
must be issued at prices not less than 110% of the fair market value of the
stock on the date of grant. Options granted under the 1995 Plan generally vest
25% on the first anniversary of the grant date and 1/48th of the option shares
each month thereafter, with full vesting occurring on the fourth anniversary of
the grant date.
The 1997 Plan
In October 1997, 3dfx adopted the 1997 Supplementary Stock Plan (the "1997
Plan"), which provides for granting of nonqualified stock options to employees
(excluding officers, consultants and directors) of 3dfx. Under the 1997 Plan,
1,200,000 shares of Common Stock have been reserved for issuance at January 31,
2000.
Options granted under the 1997 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1997 Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.
The 1999 Plan
In July 1999, 3dfx adopted the 1999 Supplementary Stock Plan (the "1999
Plan"), which provides for granting of nonqualified stock options to employees
(excluding officers, consultants and directors) of 3dfx and reserved 1,000,000
shares of Common Stock for issuance under the 1999 Plan. At January 31, 2000,
1,000,000 shares of Common Stock have been reserved for issuance under the 1999
Plan.
Options granted under the 1999 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1999 Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.
F-14
<PAGE> 70
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Directors' Option Plan
In March 1997, 3dfx adopted a 1997 Directors' Option Plan. Under this plan
options to purchase 150,000 shares of Common Stock may be granted. The plan
provides that options may be granted at a price not less than fair value of a
share at the date of grant. The Director's Option Plan provides for an initial
option grant to purchase 12,500 shares of Common Stock to each new non-employee
director of 3dfx at the date he or she becomes a director. Each non-employee
director and Chairman of the Board of Directors will annually be granted an
option to purchase 5,000 and 10,000 shares of Common Stock, respectively,
beginning with the 1998 annual meeting of shareholders. If a director serves on
either the Audit Committee or Compensation Committee, he or she will annually be
granted an option to purchase 1,000 shares of Common Stock, respectively,
beginning with the 1997 annual meeting of shareholders. Options granted under
the Director' Plan are generally for ten years and are granted at the fair
market value of the stock on the date of grant. The initial 12,500 option grant
vests at a rate of 1/48 per month following the date of grant. The annual option
grant of 5,000, 10,000 or 1,000 vests at a rate of 1/12 per month following the
date of grant.
The following is a summary of activity under the 1995 Plan, the 1997 Plan,
the 1999 Plan and the Directors' Option Plan during the periods ended December
31, 1997 and 1998, January 31, 1999, and January 31, 2000:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
AVAILABLE FOR OPTIONS AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996........................... 218,157 1,538,509 $ 0.54
Additional shares authorized........................... 1,274,992 -- --
Granted.............................................. (1,306,244) 1,306,244 $12.15
Exercised............................................ -- (180,015) $ 0.49
Canceled............................................. 158,754 (158,754) $ 3.86
Repurchased.......................................... 20,391 -- $ 0.08
---------- ----------
Balance at December 31, 1997........................... 366,050 2,505,984 $ 6.38
Additional shares authorized........................... 2,400,000 -- --
Granted.............................................. (3,617,765) 3,617,765 $15.72
Exercised............................................ -- (478,104) $ 1.34
Canceled............................................. 2,098,488 (2,098,488) $19.16
Repurchased.......................................... 2,154 -- $ 0.27
---------- ----------
Balance at December 31, 1998........................... 1,248,927 3,547,157 $ 9.02
Grants in January 1999............................... (83,850) 83,850 $12.38
Exercises in January 1999............................ -- (44,815) $ 3.13
Cancellations in January 1999........................ 87,192 (87,192) $ 7.80
---------- ---------- ------
Balance at January 31, 1999............................ 1,252,269 3,499,000 $ 9.21
Additional shares authorized........................... 3,000,000 --
Options related to acquisition of STB................ (566,913) 566,913 $10.72
Grants............................................... (4,800,897) 4,800,897 $11.68
Exercised............................................ -- (692,088) $ 3.60
Cancelled............................................ 1,690,333 (1,690,333) $12.46
---------- ----------
Balance at January 31, 2000............................ 574,792 6,484,389 $10.92
========== ==========
</TABLE>
At fiscal 2000, 1998 and 1997, 1,129,810, 768,183 and 471,937 respectively,
Common Stock options were vested.
F-15
<PAGE> 71
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Prior to 3dfx completing its IPO, 3dfx granted options for the purchase of
2,460,307 shares of Common Stock to employees at exercise prices ranging from
$0.20 to $12.00 per share. Management calculated deferred compensation of
approximately $1,900,000 related to options granted prior to the completion of
3dfx's IPO. Such deferred compensation will be amortized over the vesting period
of which relating to these options, of which $196,000, $484,000, $484,000 and
$484,000 has been amortized during the years ended December 31, 1996, 1997 and
1998 and January 31, 2000, respectively. Deferred compensation of $40,000 was
amortized for the one month period ended January 31, 1999.
In October 1998, substantially all outstanding options with an exercise
price in excess of $10.88 per share were canceled and replaced with new options
having an exercise price of $10.88, the fair market value on the date that the
employees accepted the repricing. A total of 1,409,790 options were repriced.
This repricing excluded executive officers. In December 1998, a repricing for
executive officers occurred where substantially all outstanding options with an
exercise price in excess of $13.13 per share were canceled and replaced with new
options having an exercise price of $13.13, the fair market value on the date
that the executive officers accepted the repricing. A total of 330,000 options
were repriced. In both the October and December repricings, any option holder
accepting such offer was not permitted to exercise the repriced option (both
vested and unvested shares) in the first twelve months following the date of the
applicable repricing.
Information relating to stock options outstanding under the 1995 Plan, the
1997 Plan, the 1999 Plan and the Directors' Plan at January 31, 2000 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE VESTED EXERCISE PRICE
- --------------- ----------- ----------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.20 - 0.90 227,337 6.53 $ 0.57 195,763 $ 0.55
$ 6.83 - 8.50 398,687 7.05 8.23 238,500 8.09
$ 8.88 1,232,250 9.83 8.88 -- --
$ 8.91 1,113,200 9.74 8.91 -- --
$ 9.05 - 10.77 472,144 9.27 9.70 78,995 10.24
$ 10.88 866,153 8.16 10.88 270,673 10.88
$11.00 - 16.00 1,109,556 8.20 12.74 323,414 12.98
$ 17.00 978,750 9.28 17.00 -- --
$17.37 - 23.25 86,312 8.56 20.90 22,465 22.50
- -------------- --------- ---- ------ --------- ------
Total 6,484,389 8.89 $10.92 1,129,810 $ 9.29
========= ==== ====== ========= ======
</TABLE>
Employee Stock Purchase Plan
In March 1997, 3dfx's board of directors approved an Employee Stock
Purchase Plan. Under this plan, employees of 3dfx can purchase common stock
through payroll deductions. A total of 2,350,000 shares have been reserved for
issuance under this plan. As of January 31, 2000, 485,228 shares have been
purchased under the Employee Stock Purchase Plan.
F-16
<PAGE> 72
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain Pro Forma Disclosures
3dfx accounts for its stock option plans and the Employee Stock Purchase
Plan in accordance with the provisions of APB 25. Had 3dfx recorded compensation
costs based on the estimated grant date fair value, as defined by SFAS 123, for
awards granted under its stock option plans and the Employee Stock Purchase
Plan, 3dfx's net income (loss) and net income (loss) per share would have been:
<TABLE>
<CAPTION>
YEAR YEAR ENDED ONE MONTH
ENDED DECEMBER 31, ENDED
JANUARY 31, ----------------- JANUARY 31,
2000 1998 1997 1999
----------- ------- ------- -----------
<S> <C> <C> <C> <C>
Pro forma net income (loss)........................ $(75,915) $16,067 $(3,705) $(3,913)
Pro forma basic net income (loss) per share........ $ (3.37) $ 1.08 $ (0.32) $ (0.25)
Pro forma diluted net income (loss) per share...... $ (3.37) $ 0.98 $ (0.32) $ (0.25)
</TABLE>
The pro forma effect on net income (loss) and net income (loss) per share
for fiscal 2000, 1998 and 1997 is not representative of the pro forma effect on
net income (loss) and net income (loss) per share in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
For the years ended January 31, 2000, December 31, 1998 and 1997, the fair
value of each option on the date of grant was determined utilizing the
Black-Scholes model.
The following assumptions were used for the stock option plans and the
Employee Stock Purchase Plan for the years ended January 31, 2000, December 31,
1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, DECEMBER 31,
----------- ------------
2000 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Stock option plans:
Expected dividend yield..................................... -- -- --
Expected stock price volatility............................. 70% 70% 70%
Risk free interest rate..................................... 5.7% 5.1% 5.7%
Expected life (years)....................................... 6.5 5.9 4.0
Employee stock purchase plan:
Expected dividend yield..................................... -- -- --
Expected stock price volatility............................. 70% 70% 70%
Risk free interest rate..................................... 5.2% 4.8% 5.4%
Expected life (years)....................................... 0.5 0.5 0.5
</TABLE>
The weighted average fair value of stock options granted in the years ended
January 31, 2000, December 31, 1998 and 1997 was $8.04, $13.12 and $12.15 per
share, respectively.
Benefit Plan
As of January 31, 2000, 3dfx had two 401(k) Savings Plans which plans allow
all United States employees to participate by making salary deferral
contributions to the 401(k) Savings Plans. 3dfx may make discretionary
contributions to the 401(k) Savings Plans upon approval by the board of
directors. As of January 31, 2000, 3dfx has contributed to one of the 401(k)
Savings Plans but not the other.
F-17
<PAGE> 73
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES:
Income before income taxes and the significant components of the provision
for income taxes comprise:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------- MONTH ENDED
JANUARY 31, DECEMBER 31, JANUARY 31,
2000 1998 1999
----------- ------------ -----------
<S> <C> <C> <C>
Income before income taxes........................... $(73,611) $29,366 $(5,111)
======== ======= =======
Provision for income taxes
Current:
Federal......................................... $ (8,936) $12,309 $(1,513)
State........................................... (1,558) 2,525 (124)
-------- ------- -------
(10,494) 14,834 (1,637)
-------- ------- -------
Deferred:
Federal......................................... 148 (6,252) 1
State........................................... 22 (919) 0
-------- ------- -------
170 (7,171) 1
-------- ------- -------
Total provision for income taxes..................... $(10,324) $ 7,663 $(1,636)
======== ======= =======
</TABLE>
The components of net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Net operating losses........................................ $ 9,876 $ 4,337
Expenses not currently deductible........................... 11,867 7,171
Tax credit carryforwards.................................... 2,422 186
-------- -------
Deferred tax assets......................................... 24,164 11,695
Less: valuation allowance................................... (17,164) (4,524)
-------- -------
Net deferred income tax assets.............................. $ 7,000 $ 7,171
======== =======
</TABLE>
3dfx's actual provision differs from the provision(benefit) computed by
applying the statutory federal income tax rate to income(loss) before income
taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------- MONTH ENDED
JANUARY 31, DECEMBER 31, DECEMBER 31, JANUARY 31,
2000 1998 1997 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax (benefit) at statutory federal tax
rate................................... (25,028) 10,278 (600) (1,738)
State taxes, net of federal tax
benefit................................ (3,959) 1,687 (98) (147)
R&D credit............................... -- (692) -- --
In process research and development...... 1,723 -- -- --
Goodwill amortization.................... 4,097 -- -- --
Change in valuation allowance............ 12,577 (4,299) 698 --
Other, net............................... 266 689 -- 249
------- ------ ---- ------
Total provision for taxes................ (10,324) 7,663 -- (1,636)
======= ====== ==== ======
</TABLE>
F-18
<PAGE> 74
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At January 31, 2000, 3dfx had net operating loss carryforwards for federal
and state income tax purposes of approximately $23,700,000 and $34,100,000,
respectively. If not utilized, the federal and state net operating losses will
begin to expire beginning in 2011 and 2001, respectively.
Deferred tax assets of approximately $1,500,000 as of January 31, 2000
relate to certain net operating loss carryforwards resulting from the
disqualifying sale of employee stock options and stock purchase plans. When
recognized, the tax benefit of these loss carryforwards are accounted for as a
credit to additional paid-in capital rather than a reduction of the income tax
provision.
Management regularly assesses the realizability of deferred tax assets
recorded based upon the weight of available evidence, including such factors as
the recent earnings history and expected future taxable income. Management
believes that it is more likely than not that the Company will not realize a
portion of its deferred tax assets and, accordingly, a valuation allowance of
$17,164,000 has been established for such amounts at January 31, 2000.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
3dfx leases under noncancelable operating leases for certain of its
facilities and equipment in addition to equipment capital leases. Rent expense
on the operating leases for fiscal 2000, 1998 and 1999 was approximately
$6,679,000, $1,657,000 and $658,000, respectively.
Future minimum lease payments under the operating and capitalized leases
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
2001........................................................ 8,857 900
2002........................................................ 8,773 720
2003........................................................ 8,366 540
2004........................................................ 6,419 --
2005........................................................ 5,836 --
Thereafter.................................................. 42,877 --
------ -----
Total minimum lease payments.............................. 81,128 2,160
====== =====
Less: amount representing interest.......................... 79
Present value of minimum lease payments..................... 2,081
Less: current portion....................................... 732
-----
Noncurrent portion of capitalized lease obligations......... 1,349
=====
</TABLE>
The non current portion of capitalized lease obligations does not include
$532,000, representing long-term lease liabilities to be amortized ratably over
3dfx's existing leases primarily in connection with its headquarters facilities
located in San Jose, Ca.
Purchase Commitments
3dfx's manufacturing relationship with Taiwan Semiconductor Manufacturing
Corporation ("TSMC") allows 3dfx to cancel all outstanding purchase orders, but
requires the repayment of all expenses incurred to date. As of January 31, 2000,
TSMC had incurred approximately $30,845,000 of manufacturing expenses on 3dfx's
outstanding purchase orders. 3dfx does not expect to cancel any of its
outstanding purchase orders.
F-19
<PAGE> 75
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contingencies
A securities class action lawsuit was filed October 9, 1998 in Dallas
County, Texas against STB, which 3dfx acquired by merger in May, 1999. The suit
was brought against STB and some of its officers and directors and the
underwriters who participated in the STB secondary offering on March 20, 1998.
The petition alleges that the registration statement for the secondary public
offering contained false and misleading statements of material facts and omitted
to state material facts. The petition asserts claims under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933, as amended, and Sections 581-33A of the
Texas Securities Act on behalf of a purported class of persons who purchased or
otherwise acquired STB common stock in the public offering. The petition seeks
recission and/or unspecified damages. STB denies the allegations in the petition
and intends to defend the lawsuit vigorously.
On December 17, 1999, a similar securities class action lawsuit was also
filed in the United States District Court for the Northern District of Texas,
Dallas Division, against STB and three of its officers and directors. The action
asserts claims against Sections 10 and 20 of the Securities Exchange Act of 1934
and Rule 10b-5 of the Securities and Exchange Commission. STB denies the
allegations in the petition and intends to defend the lawsuit vigorously. On
February 8, 2000 another similar securities class action lawsuit was filed in
the United States District Court for the Northern District of Texas, Dallas
Division against STB and three of its officers and directors. STB denies
allegations in the action and intends to vigorously defend the lawsuit. These
two actions have now been consolidated.
3dfx is a party from time to time to some other legal proceedings arising
in the ordinary course of business. Although the amount of any liability that
could arise with respect to these proceedings cannot be predicted accurately,
3dfx believes that any liability that might result from such claims will not
have a material adverse effect on its financial position.
NOTE 11 -- RELATED PARTY TRANSACTIONS:
Since April 1995, a consulting company has been providing management
services to 3dfx for which 3dfx pays a monthly fee of $5,000 for consulting
services. The Chairman and a director of the board of directors of 3dfx are also
officers of the consulting company. Total payments for such management services
during fiscal year 2000, calendar years 1998, and 1997 were $55,000, $60,000 and
$60,000, respectively.
During fiscal year 2000, calendar years 1998, and 1997 a member of the
board of directors provided consulting services to 3dfx. Total payments for such
consulting services in fiscal year 2000, calendar years 1998, and 1997 were
$45,000, $60,000 and $45,000, respectively.
In April 1997, an officer of 3dfx resigned and subsequently founded
Quantum3D, Inc., a supplier of advanced graphic subsystems based on 3dfx
technology. Sales to Quantum3D, Inc. during fiscal years 2000, 1998, and 1997
totaled $1,588,000, $670,000 and $949,000, respectively. As of January 31, 2000,
3dfx has an outstanding trade receivable from Quantum3D, Inc. of approximately
$360,000.
In April 1999, 3dfx invested an amount of $3.1 million in exchange for a
minority interest in Quantum 3D in the form of Convertible Preferred Shares in
connection with Quantum 3D's private round of financing. These terms and pricing
of these shares was equivalent to other unaffiliated third participants in the
financing round.
In connection with the termination of an employee's employment with 3dfx,
and its Chief Financial Officer and Vice President, Administration on January
31, 1998, 3dfx entered into a Separation Agreement pursuant to which the
employee will remain a temporary employee through August 1, 2000. In addition,
all options granted to the employee pursuant to 3dfx's stock plans will continue
to vest through August 1, 2000. In the event of a Change of Control (as defined
in the Separation Agreement), 3dfx will (i) waive its right to repurchase any
unvested shares of common stock owned by the employee and (ii) accelerate
F-20
<PAGE> 76
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the vesting of all unvested stock options granted to the employee pursuant to
3dfx's stock plans. For purposes of the separation agreement, a "Change of
Control" occurs, subject to some conditions and exceptions, upon (i) the
acquisition, directly or indirectly, by any person (other than existing
beneficial owners) of securities of 3dfx representing 50% or more of the total
voting power represented by 3dfx's then outstanding voting securities; (ii) the
merger or consolidation of 3dfx with another corporation in which the voting
securities of 3dfx outstanding immediately prior to such merger or consolidation
ceased to represent at least 50% of the voting power represented by the voting
securities of 3dfx thereafter, or (iii) the liquidation of 3dfx or the sale or
disposition of all or substantially all of 3dfx's assets.
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION:
3dfx has adopted Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information"
("SFAS131"). Based on its operating management and financial reporting
structure, 3dfx has determined that it has one reportable business segment: the
design, development and sale of graphics boards incorporating 3dfx's proprietary
graphics chips. The following is a summary of product revenue by geographic area
based on the location of shipments (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------- MONTH
DECEMBER 31, ENDED
JANUARY 31, ------------------- JANUARY 31,
2000 1998 1997 1999
----------- -------- ------- -----------
<S> <C> <C> <C> <C>
United States.................................. $193,941 $144,415 $29,835 $ 9,325
International.................................. 166,582 61,186 14,234 7,723
-------- -------- ------- -------
Total.......................................... $360,523 $202,601 $44,069 $17,048
======== ======== ======= =======
</TABLE>
All sales are denominated in United States dollars. For all periods
presented, substantially all of 3dfx's long-lived assets were located in the
United States.
NOTE 13 -- SUBSEQUENT EVENTS
In March 2000, 3dfx entered into a Merger Agreement with Gigapixel
Corporation, a Delaware Corporation ("Gigapixel"). The Merger Agreements
provides for the Merger of a newly formed, wholly owned subsidiary of 3dfx with
and into Gigapixel (the "Merger"). Gigapixel will be the surviving corporation
of the Merger and, upon consummation will become a wholly owned subsidiary of
3dfx. 3dfx intends to account for this merger under the purchase method of
accounting. The Merger is contingent upon approval of both 3dfx's and
Gigapixel's shareholders, among other conditions.
In March 2000, 3dfx sold the Specialized Technology Group (STG), a business
unit that provides digital video products, multi-output MPEG decoder cards and
multi-monitor display adapters to a company of which Vanessa Ogle is President.
Ms. Ogle is a former employee of 3dfx and is the daughter of William E. Ogle.
Mr. Ogle served as Executive Vice President and Vice Chairman of the Board of
Directors of 3dfx until he resigned these positions in January 2000. The
transaction was accounted for as an asset sale, comprised primarily of inventory
and accounts receivable, in a leveraged buyout by the STG management group. 3dfx
will maintain a minority equity interest of less than 15% in STG following the
sale. The amount of the transaction was $5.1 million, and as a result, 3dfx
recorded a note receivable in the amount of $3.0 million. The note is payable in
accordance with a payment schedule, beginning February 1, 2001 and concluding
November 1, 2004.
F-21
<PAGE> 77
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of 3dfx Interactive, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000, appearing in the 2000 Annual Report to
Shareholders of 3dfx Interactive, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
May 1, 2000
S-1
<PAGE> 78
SCHEDULE II
3DFX INTERACTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 21, 2000 AND DECEMBER 31, 1998, AND 1997
AND MONTH ENDED JANUARY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO ASSUMED
BEGINNING COSTS AND FROM STB ENDING
BALANCE EXPENSES ACQUISITION DEDUCTIONS BALANCE
--------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended January 31, 2000........... $6,729 $ 2,392 $ 598 $3,038 $ 6,681
Month ended January 31, 1999.......... $2,280 $ 4,449 $ 0 $ 0 $ 6,729
Year ended December 31, 1998.......... $ 308 $ 2,561 $ 0 $ 589 $ 2,280
Year ended December 31, 1997.......... $ 78 $ 250 $ 0 $ 20 $ 308
Inventory Reserves:
Year ended January 31, 2000........... $7,828 $ 909 $18,000 $8,241 $18,496
Month ended January 31, 1999.......... $7,828 $ 0 $ 0 $ 0 $ 7,828
Year ended December 31, 1998.......... $ 661 $10,817 $ 0 $3,650 $ 7,828
Year ended December 31, 1997.......... $ 632 $ 40 $ 0 $ 11 $ 661
</TABLE>
S-2
<PAGE> 79
3DFX INTERACTIVE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization by and between the
Registrant and STB Systems, Inc. dated as of December 13,
1998 and the related Stock Option Agreement and form of
Voting Agreement
3.1(2) Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant (as amended October 1998)
3.3(5) Certificate of Designation of Rights Preferences and
Privileges of Series A Participating Preferred Stock of
Registrant
4.1(2) Specimen Common Stock Certificate
4.2(5) Preferred Shares Rights Agreement dated October 30, 1998,
between Registrant and BankBoston, N.A., Rights Agent
10.1(2) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(6) 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder
10.3(2) 1997 Director Option Plan and form of Director Stock Option
Agreement thereunder
10.4(2) 1997 Employee Stock Purchase Plan and forms of agreement
thereunder
10.5(2) Lease Agreement dated August 7, 1996 between Registrant and
South Bay/Fortan, and Tenant Estoppel Certificate dated
March 25, 1997 between Registrant and CarrAmerica Realty
Corporation for San Jose, California office
10.6(2) Investors' Rights Agreement dated September 12, 1996,
Amendment No. 1 to Investors' Rights Agreement dated
November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to
Investors' Rights Agreement dated March 27, 1997 by and
among the Registrant and holders of the Registrant's Series
A, Series B and Series Preferred Stock.
10.7.1(3) Warrant to purchase shares of Common Stock issued to
Creative Labs, Inc.
10.7.2(2) Warrant to purchase shares of Series B Preferred Stock
issued to MMC/GATX Partnership No. 1.
10.8(2) Form of Restricted Stock Purchase Agreement between the
Registrant and certain shareholders
10.9(2) Master Equipment Lease Agreement dated January 1, 1996 by
and between the Registrant and MMC/GATX Partnership No. 1
10.10(2) Master Equipment Lease dated March 31, 1995 by and between
the Registrant and Lighthouse Capital Partners, L.P.
10.11.1* Amended and Restated Credit Agreement dated December 21,
1999 by and between STB Systems, Inc. and Bank One, Texas,
N.A. and Comerica Bank-Texas
10.11.2* First Amendment to Amended and Restated Credit Agreement
dated February 25, 2000 by and between STB Systems, Inc.,
Bank One, Texas, N.A. and the Original Lenders as therein
defined
10.11.3* Guaranty of the Registrant dated November 23, 1999 in favor
of Bank One, Texas, N.A. (and other lenders)
10.11.4* First Amendment to Guaranty of the Registrant dated as of
December 21, 1999 in favor of Bank One, Texas, N.A. (and
other lenders)
10.11.5* Security Agreement dated as of November 21, 1997 by STB
Systems, Inc. in favor of BankOne, Texas, N.A., (and other
lenders)
10.11.6* First Amendment to Security Agreement dated as of December
21, 1999 by STB Systems, Inc. in favor of BankOne, Texas,
N.A., (and other lenders)
</TABLE>
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
10.11.7(7) Participation Agreement dated as of November 14, 1997 among
Asset XVII Holdings Company, L.L.C., as lessor, STB Systems,
Inc., as lessee and Bank One, Texas, N.A., as lender
10.11.8(7) Lease and Development Agreement dated as of November 14,
1997 among Asset XVII Holdings Company, L.L.C., as lessor,
and STB Systems, Inc., as lessee
10.12.1(2) Change of Control Letter Agreement between the Registrant
and Scott D. Sellers
10.12.2(2) Change of Control Letter Agreement between the Registrant
and Gary Tarolli
10.13.+(4) Software License and Co-marketing Agreement made as of June,
1997 by and between Electronic Arts, Inc. and the Registrant
10.14(4) Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.15(3) Lease Agreement dated as of January 6, 1998 by and between
the Registrant and GEOMAXX
10.16(3) Separation Agreement dated as of October 12, 1997 by and
between the Registrant and Gary P. Martin
10.17(3) 1997 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
10.18(8) 1999 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
21.1 Subsidiaries of the Registrant
(a) STB Systems, Inc.
(b) 3dfx kk Limited (Japan)
(c) 3dfx International
(d) Galapagos Acquisition Corp.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
* Filed herewith.
(1) Incorporated by reference to Schedule 13D filed by STB Systems, Inc. dated
December 23, 1998 with respect to the Registrant.
(2) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-25365) which was declared
effective on June 25, 1997.
(3) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-46119) filed with the
Commission on February 11, 1998.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A which was filed with the Commission on
November 9, 1998.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(7) Incorporated by reference to exhibits filed with STB Systems, Inc.'s Annual
Report on Form 10-K for the fiscal year ended October 31, 1997.
(8) Incorporated by reference to exhibit 4.1 filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-86661) which was filed with
the Commission on September 7, 1999.
<PAGE> 1
EXHIBIT 10.11.1
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------------------------
STB SYSTEMS, INC.
and
BANK ONE, TEXAS, N.A.,
as Administrative Agent
and
COMERICA BANK-TEXAS,
as Documentation Agent
-------------------------------------------------------
$25,000,000
December 21, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - Definitions and References...................................................... 1
Section 1.1. Defined Terms......................................................... 1
Section 1.1. Exhibits and Schedules; Additional Definitions........................ 11
Section 1.2. Amendment of Defined Instruments...................................... 12
Section 1.3. References and Titles................................................. 12
Section 1.4. Calculations and Determinations....................................... 12
ARTICLE II - The Loans...................................................................... 12
Section 2.1. Commitments to Lend; Notes............................................ 12
Section 2.2. Requests for New Loans................................................ 13
Section 2.3. Continuations and Conversions of Existing Loans....................... 14
Section 2.4. Use of Proceeds....................................................... 15
Section 2.5. Fees.................................................................. 15
Section 2.6. Optional Prepayments.................................................. 16
Section 2.7. Mandatory Prepayments................................................. 16
Section 2.8. Subsequent Determinations of Borrowing Base........................... 16
ARTICLE III - Payments to Lenders........................................................... 17
Section 3.1. General Procedures.................................................... 17
Section 3.2. Capital Reimbursement................................................. 18
Section 3.3. Increased Cost of Eurodollar Loans.................................... 18
Section 3.4. Availability.......................................................... 19
Section 3.5. Funding Losses........................................................ 19
Section 3.6. Reimbursable Taxes.................................................... 19
Section 3.7. [RESERVED]............................................................ 21
Section 3.8. Replacement of Lenders................................................ 21
ARTICLE IV - Conditions Precedent to Lending................................................ 21
Section 4.1. Documents to be Delivered............................................. 21
Section 4.2. Additional Conditions Precedent....................................... 22
ARTICLE V - Representations and Warranties.................................................. 23
Section 5.1. No Default............................................................ 23
Section 5.2. Organization and Good Standing........................................ 23
Section 5.3. Authorization......................................................... 23
Section 5.4. No Conflicts or Consents.............................................. 24
Section 5.5. Enforceable Obligations............................................... 24
Section 5.6. Initial Financial Statements.......................................... 24
Section 5.7. Other Obligations and Restrictions. .................................. 24
Section 5.8. Full Disclosure....................................................... 24
Section 5.9. Litigation............................................................ 25
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 5.10. Labor Disputes and Acts of God........................................ 25
Section 5.11. ERISA Plans and Liabilities........................................... 25
Section 5.12. Environmental and Other Laws.......................................... 25
Section 5.13. Names and Places of Business.......................................... 26
Section 5.14. Borrower's Subsidiaries............................................... 26
Section 5.15. Title to Properties; Licenses......................................... 26
Section 5.16. Government Regulation................................................. 26
Section 5.17. Insider............................................................... 27
Section 5.18. Year 2000............................................................. 27
ARTICLE VI - Affirmative Covenants of Borrower.............................................. 27
Section 6.1. Payment and Performance............................................... 27
Section 6.2. Books, Financial Statements and Reports............................... 27
Section 6.3. Other Information and Inspections..................................... 29
Section 6.4. Notice of Material Events and Change of Address....................... 29
Section 6.5. Maintenance of Properties............................................. 30
Section 6.6. Maintenance of Existence and Qualifications........................... 30
Section 6.7. Payment of Trade Liabilities, Taxes, etc.............................. 30
Section 6.8. Insurance............................................................. 30
Section 6.9. Performance on Borrower's Behalf...................................... 31
Section 6.10. Interest.............................................................. 31
Section 6.11. Compliance with Agreements and Law.................................... 31
Section 6.12. Environmental Matters................................................. 31
Section 6.13. Evidence of Compliance................................................ 32
Section 6.14. Solvency.............................................................. 32
Section 6.15. Agreement to Deliver Security Documents............................... 32
Section 6.16. Bank Accounts; Offset................................................. 32
Section 6.17. Guaranties of Borrower's Subsidiaries................................. 33
Section 6.18. Audit................................................................. 33
ARTICLE VII - Negative Covenants of Borrower................................................ 33
Section 7.1. Indebtedness.......................................................... 34
Section 7.2. Limitation on Liens................................................... 34
Section 7.3. Hedging............................................................... 34
Section 7.4. Limitation on Mergers, Issuances of Securities........................ 35
Section 7.5. Limitation on Sales of Property....................................... 35
Section 7.6. Limitation on Dividends and Redemptions............................... 35
Section 7.7. Limitation on Investments and New Businesses.......................... 36
Section 7.8. Limitation on Credit Extensions....................................... 36
Section 7.9. Transactions with Affiliates.......................................... 36
Section 7.10. Certain Contracts; Amendments; Multiemployer ERISA Plans.............. 36
Section 7.11. Minimum Net Worth..................................................... 36
ARTICLE VIII - Events of Default and Remedies............................................... 36
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
Section 8.1. Events of Default..................................................... 36
Section 8.2. Remedies.............................................................. 39
ARTICLE IX - Agent........................................................................... 39
Section 9.1. Appointment and Authority............................................. 39
Section 9.2. Exculpation, Agent's Reliance, Etc.................................... 39
Section 9.3. Credit Decisions...................................................... 40
Section 9.4. Indemnification....................................................... 40
Section 9.5. Rights as Lender...................................................... 41
Section 9.6. Sharing of Set-Offs and Other Payments................................ 41
Section 9.7. Investments........................................................... 41
Section 9.8. Benefit of Article IX................................................. 42
Section 9.9. Resignation........................................................... 42
ARTICLE X - Miscellaneous.................................................................... 42
Section 10.1. Waivers and Amendments; Acknowledgments............................... 42
Section 10.2. Survival of Agreements; Cumulative Nature............................. 44
Section 10.3. Notices............................................................... 44
Section 10.4. Payment of Expenses; Indemnity........................................ 45
Section 10.5. Joint and Several Liability; Parties in Interest; Assignments......... 46
Section 10.6. Confidentiality....................................................... 48
Section 10.7. Governing Law; Submission to Process.................................. 48
Section 10.8. Limitation on Interest................................................ 49
Section 10.9. Termination; Limited Survival......................................... 50
Section 10.10. Severability.......................................................... 50
Section 10.11. Counterparts.......................................................... 50
Section 10.12. Waiver of Jury Trial, Punitive Damages, etc........................... 50
Section 10.13. Restatement; Ratification of Agreements............................... 51
</TABLE>
iii
<PAGE> 5
Schedules and Exhibits:
Lender Schedule
Schedule 1 - Disclosure Schedule
Schedule 2 - Security Schedule
Schedule 3 - Insurance Schedule
Exhibit A - Promissory Note
Exhibit B - Request for Loan
Exhibit C - Continuation/Conversion Notice
Exhibit D - Certificate Accompanying Financial Statements
Exhibit E - Assignment and Acceptance
Exhibit F - Opinion of Counsel for Borrower
Exhibit G - Subsidiary Guaranty
Exhibit H - Parent Security Agreement
iv
<PAGE> 6
AMENDED AND RESTATED CREDIT AGREEMENT
THIS AMENDED AND RESTATED CREDIT AGREEMENT is made as of DECEMBER 21,
1999, by and among STB Systems, Inc., a Texas corporation, doing business in the
State of Texas under the name of 3Dfx of Texas, Inc. (herein called "BORROWER"),
Bank One, Texas, N.A., individually and as agent (herein called "AGENT") and the
Lenders referred to below. In consideration of the mutual covenants and
agreements contained herein the parties hereto agree as follows:
ARTICLE I - Definitions and References
Section 1.1. Defined Terms. As used in this Agreement, each of the
following terms has the meaning given it in this Section 1.1 or in the sections
and subsections referred to below:
"AFFILIATE" means, as to any Person, each other Person that directly or
indirectly (through one or more intermediaries or otherwise) controls, is
controlled by, or is under common control with, such Person. A Person shall be
deemed to be "controlled by" any other Person if such other Person possesses,
directly or indirectly, power
(a) to vote 50% or more of the securities (on a fully diluted
basis) having ordinary voting power for the election of directors or
managing general partners; or
(b) to direct or cause the direction of the management and policies
of such Person whether by contract or otherwise.
"AGENT" means Bank One, Texas, N.A., as Agent hereunder, and its
successors in such capacity.
"AGREEMENT" means this Credit Agreement.
"APPLICABLE EURODOLLAR RATE MARGIN" means one percent (1.00%) per annum.
"BANK ONE" means Bank One, Texas, N.A., in its capacity as a Lender
hereunder.
"BANK PARTIES" means Agent and all Lenders.
"BASE RATE" means the higher of (a) the Prime Rate and (b) the Federal
Funds Rate, plus one-half percent (0.5%) per annum. If the Prime Rate or the
Federal Funds Rate changes after the date hereof the Base Rate shall be
automatically increased or decreased, as the case may be, without notice to
Borrower from time to time as of the effective time of each change in the Prime
Rate. The Base Rate shall in no event, however, exceed the Highest Lawful Rate.
"BASE RATE LOAN" means a Loan which does not bear interest at the
Eurodollar Rate.
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"BORROWER" means STB Systems, Inc., a Texas corporation.
"BORROWER'S MINIMUM ELIGIBLE RECEIVABLES" means at the particular time
in question, an amount equal to the amount determined by Agent from time to time
in its reasonable judgment (which judgment shall be exercised in good faith)
equal to the face amount of Eligible Receivables.
"BORROWING" means a borrowing of new Loans of a single Type pursuant to
Section 2.2 or a continuation or conversion of existing Loans into a single Type
(and, in the case of Eurodollar Loans, with the same Interest Period) pursuant
to Section 2.3.
"BORROWING BASE" means at the particular time in question, an amount
equal to the fair market value of the Marketable Securities Collateral
determined by Agent from time to time in its reasonable judgment (which judgment
shall be exercised in good faith); provided that in no event shall the Borrowing
Base exceed the Commitment.
"BORROWING BASE DEFICIENCY" has the meaning given it in Section 2.7(b).
"BORROWING BASE REPORT" means a report describing the Marketable
Securities Collateral in a form acceptable to Agent, prepared by Securities
Intermediary (and, upon request of Agent, copies of other information relating
to the Marketable Securities Collateral).
"BUSINESS DAY" means a day, other than a Saturday or Sunday, on which
commercial banks are open for business with the public in Dallas, Texas. Any
Business Day in any way relating to Eurodollar Loans (such as the day on which
an Interest Period begins or ends) must also be a day on which, in the judgment
of Agent, significant transactions in dollars are carried out in the interbank
eurocurrency market.
"COLLATERAL" means all property of any kind which is subject to a Lien
in favor of Lenders (or in favor of Agent for the benefit of Lenders) or which,
under the terms of any Security Document, is purported to be subject to such a
Lien.
"COMMITMENT" means the amount of $25,000,000.
"COMMITMENT PERIOD" means the period from and including the date hereof
until and including the Maturity Date (or, if earlier, the day on which any of
the Notes first becomes due and payable in full).
"CONSOLIDATED" refers to the consolidation of any Person, in accordance
with GAAP, with its properly consolidated subsidiaries. References herein to a
Person's Consolidated financial statements, financial position, financial
condition, liabilities, etc. refer to the consolidated financial statements,
financial position, financial condition, liabilities, etc. of such Person and
its properly consolidated subsidiaries.
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<PAGE> 8
"CONSOLIDATED BORROWER" means Borrower and Parent.
"CONSOLIDATED DEBT" means all Consolidated Indebtedness of Consolidated
Borrower that would under GAAP be shown on Consolidated Borrower's Consolidated
balance sheet as a liability.
"CONSOLIDATED NET WORTH" means, for any period, the total shareholder's
equity as reported on Consolidated Borrower's Consolidated Financial Statement
as reported to the Securities and Exchange Commission and/or Shareholders, or if
Consolidated Borrower's total shareholder's equity is not so reported,
Consolidated Borrower's Consolidated total shareholder's equity calculated in
accordance with GAAP.
"CONTINUATION/CONVERSION NOTICE" means a written or telephonic request,
or a written confirmation, made by Borrower which meets the requirements of
Section 2.3.
"DEFAULT" means any Event of Default and any default, event or condition
which would, with the giving of any requisite notices and the passage of any
requisite periods of time, constitute an Event of Default.
"DEFAULT RATE" means, at the time in question (a) with respect to any
Base Rate Loan, the rate per annum equal to two percent (2.0%) above the Base
Rate then in effect and (b) with respect to any Eurodollar Loan, the rate per
annum equal to two percent (2.0%) above the Eurodollar Rate then in effect for
such Loan, provided in each case that no Default Rate charged by any Person
shall ever exceed the Highest Lawful Rate.
"DISCLOSURE REPORT" means either a notice given by Borrower under
Section 6.4 or a certificate given by Borrower's chief financial officer under
Section 6.2(b).
"DISCLOSURE SCHEDULE" means Schedule 1 hereto.
"ELIGIBLE RECEIVABLES" means at any time an amount equal to the
aggregate net invoice or ledger amount owing on all trade accounts receivable of
Borrower for goods sold or services rendered, in which Agent has a perfected,
first priority security interest after deducting (a) any account that is owed by
the United States or any department, agency or instrumentality thereof, and (b)
all such accounts owing by Affiliates of Borrower or by officers or employees of
Borrower or any such Affiliate.
"ELIGIBLE TRANSFEREE" means a Person which either (a) is a Lender or an
Affiliate of a Lender, and (b) is consented to as an Eligible Transferee by
Agent (provided that no Person organized outside the United States may be an
Eligible Transferee if Borrower would be required to pay withholding taxes on
interest or principal owed to such Person).
"ENVIRONMENTAL LAWS" means any and all Laws relating to the environment
or to emissions, discharges, releases or threatened releases of pollutants,
contaminants, chemicals, or
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<PAGE> 9
industrial, toxic or hazardous substances or wastes into the environment
including ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, together with all rules and regulations promulgated
with respect thereto.
"ERISA PLAN" means any employee pension benefit plan subject to Title IV
of ERISA maintained by any Restricted Person with respect to which any
Restricted Person has a fixed or contingent liability.
"EURODOLLAR LOAN" means a Loan which is properly designated as a
Eurodollar Loan pursuant to Section 2.2 or 2.3.
"EURODOLLAR RATE" means, with respect to each particular Eurodollar Loan
and the associated LIBOR Rate and Reserve Percentage, the rate per annum
calculated by Agent (rounded upwards, if necessary, to the next higher 0.01%)
determined on a daily basis pursuant to the following formula:
Eurodollar Rate =
LIBOR Rate + Applicable Eurodollar Rate Margin
----------------------
100.0% - Reserve Percentage
The Eurodollar Rate for any Eurodollar Loan shall change whenever the Applicable
Eurodollar Rate Margin or the Reserve Percentage changes. No Eurodollar Rate
shall ever exceed the Highest Lawful Rate.
"EVENT OF DEFAULT" has the meaning given it in Section 8.1.
"FACILITY USAGE" means, at the time in question, the aggregate amount of
outstanding Loans at such time.
"FEDERAL FUNDS RATE" shall mean, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100th of one percent) equal to
the weighted average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds brokers on such
day, as published by the Federal Reserve Bank of New York on the Business Day
next succeeding such day, provided that (i) if the day for which such rate is to
be determined is not a Business Day, the Federal Funds Rate for such day shall
be such rate on such transactions on the next preceding Business Day as so
published on the next succeeding Business Day, and (ii) if such rate is not so
published for any day, the Federal Funds Rate for such day shall be the average
rate quoted to Agent on such day on such transactions as determined by Agent.
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<PAGE> 10
"FISCAL QUARTER" means a three-month period ending on January 31, April
30, July 31 or October 31 of any year.
"FISCAL YEAR" means a twelve-month period ending on January 31 of any
year.
"GAAP" means those generally accepted accounting principles and
practices which are recognized as such by the Financial Accounting Standards
Board (or any generally recognized successor) and which, in the case of Borrower
and its Consolidated subsidiaries, are applied for all periods after the date
hereof in a manner consistent with the manner in which such principles and
practices were applied to the audited Initial Financial Statements. If any
change in any accounting principle or practice is required by the Financial
Accounting Standards Board (or any such successor) in order for such principle
or practice to continue as a generally accepted accounting principle or
practice, all reports and financial statements required hereunder with respect
to Borrower or with respect to Borrower and its Consolidated subsidiaries.
"GUARANTOR" means any Person who has guaranteed the Obligations pursuant
to a guaranty listed on the Security Schedule or any other Person who has
guaranteed the Obligations and who has been accepted by Agent as a Guarantor or
any Subsidiary of Borrower which now or hereafter executes and delivers a
guaranty to Agent pursuant to Section 6.17.
"HAZARDOUS MATERIALS" means any substances regulated under any
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise.
"HEDGING CONTRACT" means (a) any agreement providing for options, swaps,
floors, caps, collars, forward sales or forward purchases involving interest
rates, commodities or commodity prices, equities, currencies, bonds, or indexes
based on any of the foregoing, (b) any option, futures or forward contract
traded on an exchange, and (c) any other derivative agreement or other similar
agreement or arrangement.
"HIGHEST LAWFUL RATE" means, with respect to each Lender, the maximum
nonusurious rate of interest that such Lender is permitted under applicable Law
to contract for, take, charge, or receive with respect to its Loan. All
determinations herein of the Highest Lawful Rate, or of any interest rate
determined by reference to the Highest Lawful Rate, shall be made separately for
each Lender as appropriate to assure that the Loan Documents are not construed
to obligate any Person to pay interest to any Lender at a rate in excess of the
Highest Lawful Rate applicable to such Lender.
"INDEBTEDNESS" of any Person means Liabilities in any of the following
categories:
(a) Liabilities for borrowed money,
(b) Liabilities constituting an obligation to pay the deferred purchase
price of property or services,
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<PAGE> 11
(c) Liabilities evidenced by a bond, debenture, note or similar
instrument,
(d) Liabilities which would under GAAP be shown on such Person's balance
sheet as a liability,
(e) Liabilities arising under Hedging Contracts,
(f) Liabilities constituting principal under leases capitalized in
accordance with GAAP,
(g) Liabilities arising under conditional sales or other title retention
agreements,
(h) Liabilities owing under direct or indirect guaranties of Liabilities
of any other Person or constituting obligations to purchase or acquire or to
otherwise protect or insure a creditor against loss in respect of Liabilities of
any other Person (such as obligations under working capital maintenance
agreements, agreements to keep-well, or agreements to purchase Liabilities,
assets, goods, securities or services), but excluding endorsements in the
ordinary course of business of negotiable instruments in the course of
collection,
(i) Liabilities (for example, repurchase agreements) consisting of an
obligation to purchase securities or other property, if such Liabilities arises
out of or in connection with the sale of the same or similar securities or
property,
(j) Liabilities with respect to letters of credit or applications or
reimbursement agreements therefor, or
(k) Liabilities with respect to other obligations to deliver goods or
services in consideration of advance payments therefor;
provided, however, that the "INDEBTEDNESS" of any Person shall not include
Liabilities that were incurred by such Person on ordinary trade terms to
vendors, suppliers, or other Persons providing goods and services for use by
such Person in the ordinary course of its business, unless and until such
Liabilities are outstanding more than 90 days past the original invoice or
billing date therefor.
"INITIAL FINANCIAL STATEMENTS" means (i) the audited annual Consolidated
financial statements of Consolidated Borrower dated as of October 31, 1999, and
(ii) the unaudited quarterly Consolidated financial statements of Consolidated
Borrower dated as of July 31, 1999.
"INSTRUMENTS" has the meaning given it in the UCC.
"INSURANCE SCHEDULE" means Schedule 3 attached hereto.
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<PAGE> 12
"INTEREST PERIOD" means, with respect to each particular Eurodollar Loan
in a Borrowing, a period of 1, 2, 3, or 6 months, as specified in the Request
for Loan applicable thereto, beginning on and including the date specified in
such Request for Loan (which must be a Business Day), and ending on but not
including the same day of the month as the day on which it began (e.g., a period
beginning on the third day of one month shall end on but not include the third
day of another month), provided that each Interest Period which would otherwise
end on a day which is not a Business Day shall end on the next succeeding
Business Day (unless such next succeeding Business Day is the first Business Day
of a calendar month, in which case such Interest Period shall end on the
immediately preceding Business Day). No Interest Period may be elected which
would extend past the date on which the associated Note is due and payable in
full.
"INVESTMENT" means any investment, in cash or by delivery of property
made, directly or indirectly in any Person, whether by acquisition of shares of
capital stock, indebtedness or other obligations or securities or by loan,
advance, capital contribution or otherwise.
"LAW" means any statute, law, regulation, ordinance, rule, treaty,
judgment, order, decree, permit, concession, franchise, license, agreement or
other governmental restriction of the United States or any state or political
subdivision thereof or of any foreign country or any department, province or
other political subdivision thereof.
"LENDERS" means each signatory hereto (other than Borrower and
Restricted Persons a party hereto), including Bank One and the successors of
each such party as holder of a Note.
"LENDING OFFICE" means, with respect to any Lender, the office, branch,
or agency through which it funds its Eurodollar Loans; and, with respect to
Agent or Collateral Agent, the office, branch, or agency through which it
administers this Agreement.
"LIABILITIES" means, as to any Person, all indebtedness, liabilities and
obligations of such Person, whether matured or unmatured, liquidated or
unliquidated, primary or secondary, direct or indirect, absolute, fixed or
contingent and whether or not required to be considered pursuant to GAAP.
"LIBOR RATE" means, with respect to each particular Eurodollar Loan for
the related Interest Period, the applicable British Bankers' Association
Interest Settlement Rate (rounded upwards, if necessary, to the nearest 1/16 of
1%) for deposits in U.S. dollars appearing on Reuters Screen FRBD as of 11:00
a.m. (London time) two Business Days prior to the first day of such Interest
Period, and having a maturity equal to such Interest Period, provided that, (i)
if Reuters Screen FRBD is not available to the Agent for any reason, the
applicable LIBOR Rate for the relevant Interest Period shall instead be the
applicable British Bankers' Association Interest Settlement Rate for deposits in
U.S. dollars as reported by any other generally recognized financial information
service as of 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period, and having a maturity equal to such Interest Period,
and (ii) if no such British Bankers' Association Interest Settlement Rate is
available to the Agent, the applicable LIBOR Rate for the relevant Interest
Period shall instead be the rate determined by the
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<PAGE> 13
Agent to be the rate at which Bank One or one of its Affiliate banks offers to
place deposits in U.S. dollars with first-class banks in the London interbank
market at approximately 11:00 a.m. (London time) two Business Days prior to the
first day of such Interest Period, in the approximate amount of such Eurodollar
Loan and having a maturity equal to such Interest Period.
"LIEN" means, with respect to any property or assets, any right or
interest therein of a creditor to secure Liabilities owed to him or any other
arrangement with such creditor which provides for the payment of such
Liabilities out of such property or assets or which allows him to have such
Liabilities satisfied out of such property or assets prior to the general
creditors of any owner thereof, including any lien, mortgage, security interest,
pledge, deposit, production payment, rights of a vendor under any title
retention or conditional sale agreement or lease substantially equivalent
thereto, tax lien, mechanic's or materialman's lien, or any other charge or
encumbrance for security purposes, whether arising by Law or agreement or
otherwise, but excluding any right of offset which arises without agreement in
the ordinary course of business. "LIEN" also means any filed financing
statement, any registration of a pledge (such as with an issuer of
uncertificated securities), or any other arrangement or action which would serve
to perfect a Lien described in the preceding sentence, regardless of whether
such financing statement is filed, such registration is made, or such
arrangement or action is undertaken before or after such Lien exists.
"LOANS" has the meaning given it in Section 2.1.
"LOAN DOCUMENTS" means this Agreement, the Notes, the Security
Documents, and all other agreements, certificates, documents, instruments and
writings at any time delivered in connection herewith or therewith (exclusive of
term sheets, commitment letters, correspondence and similar documents used in
the negotiation hereof, except to the extent the same contain information about
Borrower or its Affiliates, properties, business or prospects).
"MAJORITY LENDERS" means Agent and Lenders whose aggregate Percentage
Shares equal or exceed sixty-six and two-thirds percent (66 2/3%).
"MARKETABLE SECURITIES COLLATERAL" means, at any time, all Securities,
Instruments, funds and other property, now or at any time hereafter on deposit
in the Securities Account.
"MATERIAL ADVERSE CHANGE" means a material and adverse change, from the
state of affairs presented in the Initial Financial Statements, to (a)
Borrower's and its Subsidiaries' Consolidated financial condition, (b) the
operations or properties of Borrower and its Subsidiaries, considered as a
whole, (c) Borrower's ability to timely pay the Obligations, or (d) the
enforceability of the material terms of any Loan Documents.
"MATURITY DATE" means December 19, 2000.
"NOTES" has the meaning given it in Section 2.1.
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<PAGE> 14
"OBLIGATIONS" means all Liabilities from time to time owing by any
Restricted Person to any Bank Party under or pursuant to any of the Loan
Documents. "OBLIGATION" means any part of the Obligations.
"PARENT" means 3Dfx Interactive, Inc., a California corporation.
"PERCENTAGE SHARE" means, with respect to any Lender (a) when used in
Sections 2.1 or 2.5, in any Request for Loan or when no Loans are outstanding
hereunder, the percentage set forth opposite such Lender's name on Lender
Schedule attached hereto, and (b) when used otherwise, the percentage obtained
by dividing (i) the sum of the unpaid principal balance of such Lender's Loans
at the time in question, by (ii) the sum of the aggregate unpaid principal
balance of all Loans at such time.
"PERMITTED INVESTMENTS" means Investments in:
(a) marketable obligations, maturing within 12 months after acquisition
thereof, issued or unconditionally guaranteed by the United States of America or
an instrumentality or agency thereof and entitled to the full faith and credit
of the United States of America and securities purchased within the Bank One
Investment Advisors program.
(b) demand deposits, and time deposits (including certificates of
deposit) maturing within 12 months from the date of deposit thereof, with any
office of Bank One or with a domestic office of any national or state bank or
trust company which is organized under the Laws of the United States of America
or any state therein, which has capital, surplus and undivided profits of at
least $500,000,000, and whose certificates of deposit have at least the third
highest credit rating given by either Rating Agency.
(c) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (a) above entered into
with any commercial bank meeting the specifications of clause (b) above.
(d) open market commercial paper, maturing within 270 days after
acquisition thereof, which has the highest or second highest credit rating given
by either Rating Agency.
(e) investments in money market or other mutual funds substantially all
of whose assets comprise securities of the types described in clauses (a)
through (d) above.
(f) in joint ventures, so long as Agent is given 10 days advance notice
of each such investment and the aggregate amount paid, contributed, lent or
otherwise invested after the date hereof by the Restricted Persons in joint
ventures does not exceed $1,000,000.
"PERMITTED LIEN" has the meaning given to such term in Section 7.2.
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<PAGE> 15
"PERSON" means an individual, corporation, partnership, limited
liability company, association, joint stock company, trust or trustee thereof,
estate or executor thereof, unincorporated organization or joint venture,
Tribunal, or any other legally recognizable entity.
"PRIME RATE" means a rate per annum equal to the prime rate of interest
announced from time to time by Agent or its parent (which is not necessarily the
lowest rate charged to any customer), changing when and as said prime rate
changes.
"RATING AGENCY" means either Standard & Poor's Ratings Group (a division
of McGraw Hill, Inc.) or Moody's Investors Service, Inc., or their respective
successors.
"RECEIVABLES REPORT" means a report describing the Eligible Receivables
in a form acceptable to Agent, together with a detailed aged schedule of all
Eligible Receivables as of the date specified in such report, listing face
amounts and dates of invoices of each such Eligible Receivable and the name and
address of each account debtor obligated on such Eligible Receivable (and, upon
request of Agent, copies of invoices, credit reports, and any other matters and
information relating to the Eligible Receivables).
"REGULATION D" means Regulation D of the Board of Governors of the
Federal Reserve System as from time to time in effect.
"REQUEST FOR LOAN" means a written or telephonic request, or a written
confirmation, made by Borrower which meets the requirements of Section 2.2.
"RESTRICTED PERSON" means any of Borrower, Parent, each Guarantor and
each Subsidiary of Borrower.
"RESERVE PERCENTAGE" means, on any day with respect to each particular
Eurodollar Loan, the maximum reserve requirement, as determined by Agent
(including without limitation any basic, supplemental, marginal, emergency or
similar reserves), expressed as a percentage and rounded to the next higher
0.01%, which would then apply under Regulation D with respect to "EUROCURRENCY
LIABILITIES", as such term is defined in Regulation D, of $1,000,000 or more. If
such reserve requirement shall change after the date hereof, the Reserve
Percentage shall be automatically increased or decreased, as the case may be,
from time to time as of the effective time of each such change in such reserve
requirement.
"SECURITIES" means both certificated and uncertificated securities as
such terms are defined in the UCC.
"SECURITIES ACCOUNT" means Banc One Investment Advisors, Liquidity Asset
Management Account #8334001711 in the name of Debtor established with Securities
Intermediary, and any custodial account which replaces such account.
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"SECURITIES INTERMEDIARY" means Bank One Trust Company, N.A., a national
banking association.
"SECURITIES PLEDGE AGREEMENT" means that certain Securities Pledge
Agreement dated as of November 23, 1999, executed by Borrower in favor of Agent,
as amended, supplemented or restated from time to time.
"SECURITY DOCUMENTS" means the instruments listed in the Security
Schedule and all other security agreements, deeds of trust, mortgages, chattel
mortgages, pledges, guaranties, financing statements, continuation statements,
extension agreements and other agreements or instruments now, heretofore, or
hereafter delivered by any Restricted Person to Agent in connection with this
Agreement or any transaction contemplated hereby to secure or guarantee the
payment of any part of the Obligations or the performance of any Restricted
Person's other duties and obligations under the Loan Documents.
"SECURITY SCHEDULE" means Schedule 2 hereto.
"SUBSIDIARY" means, with respect to any Person, any corporation,
association, partnership, joint venture, or other business or corporate entity,
enterprise or organization which is directly or indirectly (through one or more
intermediaries) controlled by or owned fifty percent or more by such Person.
"TRIBUNAL" means any government, any arbitration panel, any court or any
governmental department, commission, board, bureau, agency or instrumentality of
the United States of America or any state, province, commonwealth, nation,
territory, possession, county, parish, town, township, village or municipality,
whether now or hereafter constituted and/or existing.
"TYPE" means, with respect to any Loans, the characterization of such
Loans as either Base Rate Loans or Eurodollar Loans.
"UCC" means the Uniform Commercial Code in effect in the State of Texas
on the date hereof.
"VOTING STOCK" means, with respect to any Person, securities of any
class or classes of capital stock in such Person normally entitling the holders
thereof to vote in the election of members of the Board of Directors or other
governing body of such Person.
"YEAR 2000 ISSUES" means anticipated costs, problems and uncertainties
associated with the inability of certain computer applications to effectively
handle data including dates on and after January 1, 2000, as such inability
affects the business, operations and financial condition of the Borrower and its
Subsidiaries and of the Borrower's and its Subsidiaries' material customers,
suppliers and vendors.
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Section 1.1. Exhibits and Schedules; Additional Definitions. All
Exhibits and Schedules attached to this Agreement are a part hereof for all
purposes. Reference is hereby made to the Security Schedule for the meaning of
certain terms defined therein and used but not defined herein, which definitions
are incorporated herein by reference.
Section 1.2. Amendment of Defined Instruments. Unless the context
otherwise requires or unless otherwise provided herein the terms defined in this
Agreement which refer to a particular agreement, instrument or document also
refer to and include all renewals, extensions, modifications, amendments and
restatements of such agreement, instrument or document, provided that nothing
contained in this section shall be construed to authorize any such renewal,
extension, modification, amendment or restatement.
Section 1.3. References and Titles. All references in this Agreement to
Exhibits, Schedules, articles, sections, subsections and other subdivisions
refer to the Exhibits, Schedules, articles, sections, subsections and other
subdivisions of this Agreement unless expressly provided otherwise. Titles
appearing at the beginning of any subdivisions are for convenience only and do
not constitute any part of such subdivisions and shall be disregarded in
construing the language contained in such subdivisions. The words "THIS
AGREEMENT", "THIS INSTRUMENT", "HEREIN", "HEREOF", "HEREBY", "HEREUNDER" and
words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. The phrases "THIS SECTION"
and "THIS SUBSECTION" and similar phrases refer only to the sections or
subsections hereof in which such phrases occur. The word "OR" is not exclusive,
and the word "INCLUDING" (in its various forms) means "INCLUDING WITHOUT
LIMITATION". Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
Section 1.4. Calculations and Determinations. All calculations under the
Loan Documents of interest chargeable with respect to Eurodollar Loans and of
fees shall be made on the basis of actual days elapsed (including the first day
but excluding the last) and a year of 360 days. Each determination by a Bank
Party of amounts to be paid under Sections 3.2 through 3.6 or any other matters
which are to be determined hereunder by a Bank Party (such as any Eurodollar
Rate, LIBOR Rate, Business Day, Interest Period, or Reserve Percentage) shall,
in the absence of manifest error, be conclusive and binding. Unless otherwise
expressly provided herein or unless Majority Lenders otherwise consent all
financial statements and reports furnished to any Bank Party hereunder shall be
prepared and all financial computations and determinations pursuant hereto shall
be made in accordance with GAAP.
ARTICLE II - The Loans
Section 2.1. Commitments to Lend; Notes. Subject to the terms and
conditions hereof, each Lender agrees to make advances to Borrower (herein
called such Lender's "LOANS") upon request from time to time during the
Commitment Period so long as (i) each Loan by such Lender does not exceed such
Lender's Percentage Share of the aggregate amount of Loans then
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requested from all Lenders, and (ii) the aggregate amount of such Lender's Loans
outstanding at any time does not exceed such Lender's Percentage Share of the
Borrowing Base determined as of the date on which the requested Loan is to be
made, and (iii) the aggregate amount of all Loans outstanding at any time does
not exceed the Borrowing Base. The aggregate amount of all Base Rate Loans
requested of all Lenders in any Request for Loan must be greater than or equal
to $100,000 or must equal the unadvanced portion of the Borrowing Base and the
aggregate amount of all Eurodollar Loans requested of all Lenders in any Request
for Loan must be greater than or equal to $1,000,000 (and in multiples of
$250,000 if in excess thereof). Borrower may have no more than five Borrowings
of Eurodollar Loans outstanding at any time. The obligation of Borrower to repay
to each Lender the aggregate amount of all Loans made by such Lender together
with interest accruing in connection therewith, shall be evidenced by a single
promissory note (herein called such Lender's "NOTE") made by Borrower payable to
the order of such Lender in the form of Exhibit A with appropriate insertions.
The amount of principal owing on any Lender's Note at any given time shall be
the aggregate amount of all Loans theretofore made by such Lender minus all
payments of principal theretofore received by such Lender on such Note. Interest
on each Note shall accrue and be due and payable as provided herein and therein,
with Eurodollar Loans bearing interest at the Eurodollar Rate and Base Rate
Loans bearing interest at the Base Rate (subject to the applicability of the
Default Rate). Subject to the terms and conditions hereof, Borrower may borrow,
repay, and reborrow under the Note during the Commitment Period.
Section 2.2. Requests for New Loans. Borrower must give to Agent written
notice (or telephonic notice promptly confirmed in writing) of any requested
Borrowing of new Loans to be advanced by Lenders. Each such notice constitutes a
"REQUEST FOR LOAN" hereunder and must:
(a) specify (i) the aggregate amount of any such Borrowing of new
Base Rate Loans and the date on which such Base Rate Loans are to be
advanced, or (ii) the aggregate amount of any such Borrowing of new
Eurodollar Loans, the date on which such Eurodollar Loans are to be
advanced (which shall be the first day of the Interest Period which is
to apply thereto), and the length of the applicable Interest Period; and
(b) be received by Agent (i) not later than 1:00 p.m., Dallas,
Texas time, on the day on which any such Base Rate Loans are to be made,
or (ii) on the third Business Day preceding the day on which any such
Eurodollar Loans are to be made.
Each such written request or confirmation must be made in the form and substance
of the "REQUEST FOR LOAN" attached hereto as Exhibit B, duly completed. Each
such telephonic request shall be deemed a representation, warranty,
acknowledgment and agreement by Borrower as to the matters which are required to
be set out in such written confirmation. Upon receipt of any such Request for
Loan, Agent shall give each Lender prompt notice of the terms thereof. If all
conditions precedent to such new Loans have been met, each Lender will on the
date requested promptly remit to Agent at Agent's office in Dallas, Texas the
amount of such Lender's new Loan in immediately available funds, and upon
receipt of such funds, unless to its actual knowledge any conditions precedent
to such Loans have been neither met nor waived as provided herein,
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Agent shall promptly make such Loans available to Borrower. Unless Agent shall
have received prompt notice from a Lender that such Lender will not make
available to Agent such Lender's new Loan, Agent may in its discretion assume
that such Lender has made such Loan available to Agent in accordance with this
section and Agent may if it chooses, in reliance upon such assumption, make such
Loan available to Borrower. If and to the extent such Lender shall not so make
its new Loan available to Agent, such Lender and Borrower severally agree to pay
or repay to Agent within three days after demand the amount of such Loan
together with interest thereon, for each day from the date such amount was made
available to Borrower until the date such amount is paid or repaid to Agent,
with interest at (i) the Federal Funds Rate, if such Lender is making such
payment and (ii) the interest rate applicable at the time to the other new Loans
made on such date, if Borrower is making such repayment. If neither such Lender
nor Borrower pay or repay to Agent such amount within such three-day period,
Agent shall in addition to such amount be entitled to recover from such Lender
and from Borrower, on demand, interest thereon at the Default Rate, calculated
from the date such amount was made available to Borrower. The failure of any
Lender to make any new Loan to be made by it hereunder shall not relieve any
other Lender of its obligation hereunder, if any, to make its new Loan, but no
Lender shall be responsible for the failure of any other Lender to make any new
Loan to be made by such other Lender.
Section 2.3. Continuations and Conversions of Existing Loans. Borrower
may make the following elections with respect to Loans already outstanding: to
convert Base Rate Loans to Eurodollar Loans, to convert Eurodollar Loans to Base
Rate Loans on the last day of the Interest Period applicable thereto, and to
continue Eurodollar Loans beyond the expiration of such Interest Period by
designating a new Interest Period to take effect at the time of such expiration.
In making such elections, Borrower may combine existing Loans made pursuant to
separate Borrowings into one new Borrowing or divide existing Loans made
pursuant to one Borrowing into separate new Borrowings. To make any such
election, Borrower must give to Agent written notice (or telephonic notice
promptly confirmed in writing) of any such conversion or continuation of
existing Loans, with a separate notice given for each new Borrowing. Each such
notice constitutes a "CONTINUATION/CONVERSION NOTICE" hereunder and must:
(a) specify the existing Loans which are to be continued or
converted;
(b) specify (i) the aggregate amount of any Borrowing of Base Rate
Loans into which such existing Loans are to be continued or converted
and the date on which such continuation or conversion is to occur, or
(ii) the aggregate amount of any Borrowing of Eurodollar Loans into
which such existing Loans are to be continued or converted, the date on
which such continuation or conversion is to occur (which shall be the
first day of the Interest Period which is to apply to such Eurodollar
Loans), and the length of the applicable Interest Period; and
(c) be received by Agent not later than 10:00 a.m., Dallas, Texas
time, on (i) the day on which any such continuation or conversion to
Base Rate Loans is to occur,
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or (ii) the third Business Day preceding the day on which any such
continuation or conversion to Eurodollar Loans is to occur.
Each such written request or confirmation must be made in the form and substance
of the "CONTINUATION/CONVERSION NOTICE" attached hereto as Exhibit C, duly
completed. Each such telephonic request shall be deemed a representation,
warranty, acknowledgment and agreement by Borrower as to the matters which are
required to be set out in such written confirmation. Upon receipt of any such
Request for Loan, Agent shall give each Lender prompt notice of the terms
thereof. Each Request for Loan shall be irrevocable and binding on Borrower.
During the continuance of any Default, Borrower may not make any election to
convert existing Loans into Eurodollar Loans or continue existing Loans as
Eurodollar Loans. If (due to the existence of a Default or for any other reason)
Borrower fails to timely and properly give any notice of continuation or
conversion with respect to a Borrowing of existing Eurodollar Loans at least
three days prior to the end of the Interest Period applicable thereto, such
Eurodollar Loans shall automatically be converted into Base Rate Loans at the
end of such Interest Period. No new funds shall be repaid by Borrower or
advanced by any Lender in connection with any continuation or conversion of
existing Loans pursuant to this section, and no such continuation or conversion
shall be deemed to be a new advance of funds for any purpose; such continuations
and conversions merely constitute a change in the interest rate applicable to
already outstanding Loans.
Section 2.4. Use of Proceeds. Borrower shall use all Loans to refinance
existing revolving debt, to provide working capital for its operations and for
other general business purposes. In no event shall the funds from any Loan be
used directly or indirectly by any Person for personal, family, household or
agricultural purposes or for the purpose, whether immediate, incidental or
ultimate, of purchasing, acquiring or carrying any "margin stock" or any "margin
securities" (as such terms are defined respectively in Regulation U and
Regulation G promulgated by the Board of Governors of the Federal Reserve
System) or to extend credit to others directly or indirectly for the purpose of
purchasing or carrying any such margin stock or margin securities. Borrower
represents and warrants that Borrower is not engaged principally, or as one of
Borrower's important activities, in the business of extending credit to others
for the purpose of purchasing or carrying such margin stock or margin
securities.
Section 2.5. Fees.
(a) Commitment Fees. (i) In consideration of Bank One's commitment to
make Loans, Borrower will pay to Agent for the account of Bank One a commitment
fee determined on a daily basis by applying a rate of twenty-five basis points
(0.25%) per annum to Bank One's Percentage Share of the unused portion of the
Commitment on each day during the Commitment Period, determined for each such
day by deducting from the amount of the Commitment at the end of such day the
Facility Usage. This commitment fee shall be due and payable in arrears on the
tenth day of each Fiscal Quarter for the immediately preceding Fiscal Quarter
and at the end of the Commitment Period.
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(ii) In consideration of the commitment of each Lender except for
Bank One, to make Loans, Borrower will pay to Agent for the account of each such
Lender, a commitment fee determined on a daily basis by applying a rate of
twenty-five basis points (0.25%) per annum to each such Lender's Percentage
Share of the unused portion of the Commitment on each day during the Commitment
Period, determined for each such day by deducting from the amount of the
Commitment at the end of such day the Facility Usage. This commitment fee shall
be due and payable in arrears on the tenth day of each Fiscal Quarter for the
immediately preceding Fiscal Quarter and at the end of the Commitment Period.
(iii) In consideration of Agent's obligations hereunder, Borrower
will pay to Agent for its own account a fee determined on a daily basis by
applying a rate of twelve and one-half basis points (0.125%) per annum to the
unused portion of the Commitment on each day during the Commitment Period,
determined for each such day by deducting from the amount of the Commitment at
the end of such day the Facility Usage. This fee shall be due and payable in
arrears on the tenth day of each Fiscal Quarter for the immediately preceding
Fiscal Quarter and at the end of the Commitment Period.
(b) Agent's Fees. In addition to all other amounts due to Agent under
the Loan Documents, Borrower will pay additional fees to Agent as mutually
agreed by Agent and Borrower from time to time.
Section 2.6. Optional Prepayments. Borrower may, upon one Business Days'
notice to each Lender, from time to time (and in the case of Eurodollar Loans,
prior to the last day of the Interest Period) and without premium or penalty
prepay the Notes, in whole or in part, so long as the aggregate amounts of all
partial prepayments of principal on the Notes equals $1,000,000 or any higher
integral multiple of $1,000,000 and so long as any applicable funding losses are
paid by Borrower as required by Section 3.5. Any principal or interest prepaid
pursuant to this section shall be in addition to, and not in lieu of, all
payments otherwise required to be paid under the Loan Documents at the time of
such prepayment.
Section 2.7. Mandatory Prepayments.
(a) If at any time the Facility Usage exceeds the Commitment (whether
due to a reduction in the Commitment in accordance with this Agreement, or
otherwise), Borrower shall immediately upon demand prepay the principal of the
Loans in an amount at least equal to such excess.
(b) If at any time the Facility Usage is less than the Commitment but in
excess of the Borrowing Base (such excess being herein called a "BORROWING BASE
DEFICIENCY"), Borrower shall, within one Business Day after Agent gives notice
of such fact to Borrower, prepay the principal of the Loans in an aggregate
amount at least equal to such Borrowing Base Deficiency. If any Lender notifies
Agent that a Borrowing Base Deficiency exists, Agent shall promptly notify
Borrower thereof.
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(c) Each prepayment of principal under this section shall be accompanied
by all interest then accrued and unpaid on the principal so prepaid. Any
principal or interest prepaid pursuant to this section shall be in addition to,
and not in lieu of, all payments otherwise required to be paid under the Loan
Documents at the time of such prepayment.
Section 2.8. Subsequent Determinations of Borrowing Base. Promptly after
receiving each Borrowing Base Report, Agent shall determine the Borrowing Base
(provided that all Lenders must agree to any increase in the Borrowing Base),
which determination shall take effect immediately and remain in effect until the
Agent receives the next Borrowing Base Report and determines the next Borrowing
Base. In the event Agent has not received an appropriately completed Borrowing
Base Report (with all attachments) within the time period specified therein,
Agent shall have no obligation to redetermine the Borrowing Base and no Lender
shall have any obligation to make any additional Advances until such time as
Agent shall have received such information.
ARTICLE III - Payments to Lenders
Section 3.1. General Procedures. Borrower will make each payment which
it owes under the Loan Documents to Agent for the account of the Bank Party to
whom such payment is owed. Each such payment must be received by Agent not later
than 11:00 a.m., Dallas, Texas time, on the date such payment becomes due and
payable, in lawful money of the United States of America, without set-off,
deduction or counterclaim, and in immediately available funds. Any payment
received by Agent after such time will be deemed to have been made on the next
following Business Day. Should any such payment become due and payable on a day
other than a Business Day, the maturity of such payment shall be extended to the
next succeeding Business Day, and, in the case of a payment of principal or past
due interest, interest shall accrue and be payable thereon for the period of
such extension as provided in the Loan Document under which such payment is due.
Each payment under a Loan Document shall be due and payable at the place
provided therein and, if no specific place of payment is provided, shall be due
and payable at the place of payment of Agent's Note. When Agent collects or
receives money on account of the Obligations, Agent shall distribute all money
so collected or received, and each Bank Party shall apply all such money so
distributed, as follows:
(a) first, for the payment of all Obligations which are then due
under the Loan Documents (and if such money is insufficient to pay all
such Obligations, first to any reimbursements due Agent under Section
6.9 or 10.4 and then to the partial payment of all other Obligations
then due in proportion to the amounts thereof, or as Bank Parties shall
otherwise agree);
(b) then for the prepayment of amounts owing under the Loan
Documents (other than principal on the Notes) if so specified by
Borrower;
(c) then for the prepayment of principal on the Notes, together
with accrued and unpaid interest on the principal so prepaid; and
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(d) last, for the payment or prepayment of any other obligations
secured by the Security Documents.
All payments applied to principal or interest on any Note shall be applied first
to any interest then due and payable, then to principal then due and payable,
and last to any prepayment of principal and interest in compliance with Sections
2.6 and 2.7. All distributions of amounts described in any of subsections (b),
(c) or (d) above shall be made by Agent pro rata to each Bank Party then owed
Obligations described in such subsection in proportion to all amounts owed to
all Bank Parties which are described in such subsection.
Section 3.2. Capital Reimbursement. If either (a) the introduction or
implementation of or the compliance with or any change in or in the
interpretation of any Law, or (b) the introduction or implementation of or the
compliance with any request, directive or guideline from any central bank or
other governmental authority (whether or not having the force of Law) affects or
would affect the amount of capital required or expected to be maintained by any
Bank Party or any corporation controlling any Bank Party, then, upon demand by
such Bank Party, Borrower will pay to Agent for the benefit of such Bank Party,
from time to time as specified by such Bank Party, such additional amount or
amounts which such Bank Party shall determine to be appropriate to compensate
such Bank Party or any corporation controlling such Bank Party in light of such
circumstances, to the extent that such Bank Party reasonably determines that the
amount of any such capital would be increased or the rate of return on any such
capital would be reduced by or in whole or in part based on the existence of the
face amount of such Bank Party's Loans, or participations in commitments under
this Agreement.
Section 3.3. Increased Cost of Eurodollar Loans. If any applicable Law
(whether now in effect or hereinafter enacted or promulgated, including
Regulation D) or any interpretation or administration thereof by any
governmental authority charged with the interpretation or administration thereof
(whether or not having the force of Law):
(a) shall change the basis of taxation of payments to any Bank
Party of any principal, interest, or other amounts attributable to any
Eurodollar Loan or otherwise due under this Agreement in respect of any
Eurodollar Loan (other than taxes imposed on the overall net income of
such Bank Party or any lending office of such Bank Party by any
jurisdiction in which such Bank Party or any such lending office is
located); or
(b) shall change, impose, modify, apply or deem applicable any
reserve, special deposit or similar requirements in respect of any
Eurodollar Loan (excluding those for which such Bank Party is fully
compensated pursuant to adjustments made in the definition of Eurodollar
Rate) or against assets of, deposits with or for the account of, or
credit extended by, such Bank Party; or
(c) shall impose on any Bank Party or the interbank eurocurrency
deposit market any other condition affecting any Eurodollar Loan, the
result of which is to increase the cost to any Bank Party of funding or
maintaining any Eurodollar Loan or to
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reduce the amount of any sum receivable by any Bank Party in respect of
any Eurodollar Loan by an amount deemed by such Bank Party to be
material,
then such Bank Party shall promptly notify Agent and Borrower in writing of the
happening of such event and of the amount required to compensate such Bank Party
for such event (on an after-tax basis, taking into account any taxes on such
compensation), whereupon (i) Borrower shall pay such amount to Agent for the
account of such Bank Party and (ii) Borrower may elect, by giving to Agent and
such Bank Party not less than three Business Days' notice, to convert all (but
not less than all) of any such Eurodollar Loans into Base Rate Loans.
Section 3.4. Availability. If (a) any change in applicable Laws, or in
the interpretation or administration thereof of or in any jurisdiction
whatsoever, domestic or foreign, shall make it unlawful or impracticable for any
Bank Party to fund or maintain Eurodollar Loans, or shall materially restrict
the authority of any Bank Party to purchase or take offshore deposits of dollars
(i.e., "eurodollars"), or (b) any Bank Party determines that matching deposits
appropriate to fund or maintain any Eurodollar Loan are not available to it, or
(c) any Bank Party determines that the formula for calculating the Adjusted
Eurodollar Rate does not fairly reflect the cost to such Bank Party of making or
maintaining loans based on such rate, then, upon notice by such Bank Party to
Borrower and Agent, Borrower's right to elect Eurodollar Loans from such Bank
Party shall be suspended to the extent and for the duration of such illegality,
impracticability or restriction and all Eurodollar Loans of such Bank Party
which are then outstanding or are then the subject of any Request for Loan and
which cannot lawfully or practicably be maintained or funded shall immediately
become or remain, or shall be funded as, Base Rate Loans of such Bank Party.
Borrower agrees to reimburse each Bank Party for all costs, expenses, claims,
penalties, liabilities and damages which may result from any such change in Law,
interpretation or administration. Such reimbursement shall be on an after-tax
basis, taking into account any taxes imposed on the amounts reimbursed.
Section 3.5. Funding Losses. In addition to its other obligations
hereunder, Borrower will reimburse each Bank Party on demand for, any loss or
expense incurred or sustained by such Bank Party (including any loss or expense
incurred by reason of the liquidation or reemployment of deposits or other funds
acquired by a Bank Party to fund or maintain Eurodollar Loans), as a result of
(a) any payment or prepayment (whether authorized or required hereunder or
otherwise) of all or a portion of a Eurodollar Loan on a day other than the day
on which the applicable Interest Period ends, (b) any payment or prepayment,
whether required hereunder or otherwise, of a Loan made after the delivery, but
before the effective date, of a Continuation/Conversion Notice, if such payment
or prepayment prevents such Continuation/Conversion Notice from becoming fully
effective, (c) the failure of any Loan to be made or of any
Continuation/Conversion Notice to become effective due to any condition
precedent not being satisfied or due to any other action or inaction of any
Restricted Person, or (d) any conversion (whether authorized or required
hereunder or otherwise) of all or any portion of any Eurodollar Loan into a Base
Rate Loan or into a different Eurodollar Loan on a day other than the day on
which the applicable Interest Period ends. Such reimbursement shall be on an
after-tax basis, taking into account any taxes imposed on the amounts
reimbursed.
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Section 3.6. Reimbursable Taxes. Borrower covenants and agrees that:
(a) Borrower will reimburse each Bank Party for all present and
future income, stamp and other taxes, levies, costs and charges
whatsoever imposed, assessed, levied or collected on or in respect of
this Agreement or any Eurodollar Loans (whether or not legally or
correctly imposed, assessed, levied or collected), excluding, however,
any taxes imposed on or measured by the overall net income of Agent or
such Bank Party or any lending office of such Bank Party by any
jurisdiction in which such Bank Party or any such lending office is
located (all such non-excluded taxes, levies, costs and charges being
collectively called "REIMBURSABLE TAXES" in this section). Such
reimbursement shall be on an after-tax basis, taking into account any
taxes imposed on the amounts reimbursed.
(b) All payments on account of the principal of, and interest on,
each Bank Party's Loans and Note, and all other amounts payable by
Borrower to any Bank Party hereunder, shall be made in full without
set-off or counterclaim and shall be made free and clear of and without
deductions or withholdings of any nature by reason of any Reimbursable
Taxes, all of which will be for the account of Borrower. In the event of
Borrower being compelled by Law to make any such deduction or
withholding from any payment to any Bank Party, Borrower shall pay on
the due date of such payment, by way of additional interest, such
additional amounts as are needed to cause the amount receivable by such
Bank Party after such deduction or withholding to equal the amount which
would have been receivable in the absence of such deduction or
withholding. If Borrower should make any deduction or withholding as
aforesaid, Borrower shall within 60 days thereafter forward to such Bank
Party an official receipt or other official document evidencing payment
of such deduction or withholding.
(c) If Borrower is ever required to pay any Reimbursable Tax with
respect to any Eurodollar Loan, Borrower may elect, by giving to Agent
and such Bank Party not less than three Business Days' notice, to
convert all (but not less than all) of any such Eurodollar Loan into a
Base Rate Loan, but such election shall not diminish Borrower's
obligation to pay all Reimbursable Taxes.
(d) Notwithstanding the foregoing provisions of this section,
Borrower shall be entitled, to the extent it is required to do so by
Law, to deduct or withhold (and not to make any reimbursement for)
income or other similar taxes imposed by the United States of America
(other than any portion thereof attributable to a change in federal
income tax Laws effected after the date hereof) from interest, fees or
other amounts payable hereunder for the account of any Bank Party, other
than a Bank Party (i) who is a U.S. person for Federal income tax
purposes or (ii) who has the Prescribed Forms on file with Agent (with
copies provided to Borrower) for the applicable year to the extent
deduction or withholding of such taxes
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is not required as a result of the filing of such Prescribed Forms,
provided that if Borrower shall so deduct or withhold any such taxes, it
shall provide a statement to Agent and such Bank Party, setting forth
the amount of such taxes so deducted or withheld, the applicable rate
and any other information or documentation which such Bank Party may
reasonably request for assisting such Bank Party to obtain any allowable
credits or deductions for the taxes so deducted or withheld in the
jurisdiction or jurisdictions in which such Bank Party is subject to
tax. As used in this section, "Prescribed Forms" means such duly
executed forms or statements, and in such number of copies, which may,
from time to time, be prescribed by Law and which, pursuant to
applicable provisions of (x) an income tax treaty between the United
States and the country of residence of the Bank Party providing the
forms or statements, (y) the Internal Revenue Code of 1986, as amended
from time to time, or (z) any applicable rules or regulations
thereunder, permit Borrower to make payments hereunder for the account
of such Bank Party free of such deduction or withholding of income or
similar taxes.
Section 3.7. [RESERVED].
Section 3.8. Replacement of Lenders. If any Bank Party seeks
reimbursement for increased costs under Sections 3.2 through 3.6, then within
ninety days thereafter -- provided no Event of Default then exists -- Borrower
shall have the right (unless such Bank Party withdraws its request for
additional compensation) to replace such Bank Party by requiring such Bank Party
to assign its Loans and Notes and its commitments hereunder to an Eligible
Transferee reasonably acceptable to Agent and to Borrower, provided that: (i)
all Obligations of Borrower owing to such Bank Party being replaced (including
such increased costs, but excluding principal and accrued interest on the Notes
being assigned) shall be paid in full to such Bank Party concurrently with such
assignment, (ii) the replacement Eligible Transferee shall purchase the Note
being assigned by paying to such Bank Party a price equal to the principal
amount thereof plus accrued and unpaid interest thereon, and (iii) any
applicable funding losses are paid by Borrower as required by Section 3.5 a
result of such replacement. In connection with any such assignment Borrower,
Agent, such Bank Party and the replacement Eligible Transferee shall otherwise
comply with Section 10.5. Notwithstanding the foregoing rights of Borrower under
this section, however, Borrower may not replace any Bank Party which seeks
reimbursement for increased costs under Section 3.2 through 3.6 unless Borrower
is at the same time replacing all Bank Parties which are then seeking such
compensation.
ARTICLE IV - Conditions Precedent to Lending
Section 4.1. Documents to be Delivered. No Lender has any obligation to
make its first Loan, unless Agent shall have received all of the following, at
Agent's office in Dallas, Texas, duly executed and delivered and in form,
substance and date satisfactory to Agent:
(a) This Agreement and any other documents that Lenders are to
execute in connection herewith.
(b) Each Note.
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(c) Each Security Document listed in the Security Schedule.
(d) Certain certificates of Borrower including:
(i) An "Omnibus Certificate" of the Secretary and of the
Chairman of the Board or President of Borrower, which shall contain
the names and signatures of the officers of Borrower authorized to
execute Loan Documents and which shall certify to the truth,
correctness and completeness of the following exhibits attached
thereto: (1) a copy of resolutions duly adopted by the Board of
Directors of Borrower and in full force and effect at the time this
Agreement is entered into, authorizing the execution of this
Agreement and the other Loan Documents delivered or to be delivered
in connection herewith and the consummation of the transactions
contemplated herein and therein, (2) a copy of the charter
documents of Borrower and all amendments thereto, certified by the
appropriate official of Borrower's state of organization, and (3) a
copy of any bylaws of Borrower; and
(ii) A "Compliance Certificate" of the Chairman of the Board
or President and of the chief financial officer of Borrower, of
even date with such Loan, in which such officers certify to the
satisfaction of the conditions set out in subsections (a), (b), (c)
and (d) of Section 4.2.
(e) A certificate (or certificates) of the due formation, valid
existence and good standing of Borrower in its state of organization,
issued by the appropriate authorities of such jurisdiction, and
certificates of Borrower's good standing and due qualification to do
business, issued by appropriate officials in any states in which
Borrower owns property subject to Security Documents.
(f) Documents similar to those specified in subsections (d)(i) and
(e) of this section with respect to each Guarantor and the execution by
it of its guaranty of Borrower's Obligations.
(g) A favorable opinion of Locke Liddell Sapp, counsel for
Restricted Persons, substantially in the form set forth in Exhibit F.
(h) The Initial Financial Statements.
(i) Certificates or binders evidencing Restricted Persons'
insurance in effect on the date hereof.
Section 4.2. Additional Conditions Precedent. No Lender has any
obligation to make any Loan (including its first), unless the following
conditions precedent have been satisfied:
(a) All representations and warranties made by any Restricted
Person in any Loan Document shall be true on and as of the date of such
Loan (except to the extent that
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the facts upon which such representations are based have been changed by
the extension of credit hereunder) as if such representations and
warranties had been made as of the date of such Loan.
(b) No Default shall exist at the date of such Loan.
(c) No Material Adverse Change shall have occurred to, and no event
or circumstance shall have occurred that could cause a Material Adverse
Change to, Borrower's Consolidated financial condition or businesses
since the date of this Agreement.
(d) Each Restricted Person shall have performed and complied with
all agreements and conditions required in the Loan Documents to be
performed or complied with by it on or prior to the date of such Loan.
(e) The making of such Loan shall not be prohibited by any Law and
shall not subject any Lender to any penalty or other onerous condition
under or pursuant to any such Law.
(f) Agent shall have received all documents and instruments which
Agent has then requested, in addition to those described in Section 4.1
(including opinions of legal counsel for Restricted Persons and Agent;
corporate documents and records; documents evidencing governmental
authorizations, consents, approvals, licenses and exemptions; and
certificates of public officials and of officers and representatives of
Borrower and other Persons), as to (i) the accuracy and validity of or
compliance with all representations, warranties and covenants made by
any Restricted Person in this Agreement and the other Loan Documents,
(ii) the satisfaction of all conditions contained herein or therein, and
(iii) all other matters pertaining hereto and thereto. All such
additional documents and instruments shall be satisfactory to Agent in
form, substance and date.
(g) Payment of all commitment, facility, agency and other fees
required to be paid to any Bank Party pursuant to any Loan Documents or
any commitment agreement heretofore entered into.
ARTICLE V - Representations and Warranties
To confirm each Bank Party's understanding concerning Restricted Persons
and Restricted Persons' businesses, properties and obligations and to induce
each Bank Party to enter into this Agreement and to extend credit hereunder,
Borrower represents and warrants to each Bank Party that:
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Section 5.1. No Default. No Restricted Person is in default in the
performance of any of the covenants and agreements contained in any Loan
Document. To the best of Borrower's knowledge, no event has occurred and is
continuing which constitutes a Default.
Section 5.2. Organization and Good Standing. Each Restricted Person is
duly organized, validly existing and in good standing under the Laws of its
jurisdiction of organization, having all powers required to carry on its
business and enter into and carry out the transactions contemplated hereby. Each
Restricted Person is duly qualified, in good standing, and authorized to do
business in all other jurisdictions within the United States wherein the
character of the properties owned or held by it or the nature of the business
transacted by it makes such qualification necessary. Each Restricted Person has
taken all actions and procedures customarily taken in order to enter, for the
purpose of conducting business or owning property, each jurisdiction outside the
United States wherein the character of the properties owned or held by it or the
nature of the business transacted by it makes such actions and procedures
desirable.
Section 5.3. Authorization. Each Restricted Person has duly taken all
action necessary to authorize the execution and delivery by it of the Loan
Documents to which it is a party and to authorize the consummation of the
transactions contemplated thereby and the performance of its obligations
thereunder. Borrower is duly authorized to borrow funds hereunder.
Section 5.4. No Conflicts or Consents. The execution and delivery by the
various Restricted Persons of the Loan Documents to which each is a party, the
performance by each of its obligations under such Loan Documents, and the
consummation of the transactions contemplated by the various Loan Documents, do
not and will not (i) conflict with any provision of (1) any Law, (2) the
organizational documents of any Restricted Person, or (3) any agreement,
judgment, license, order or permit applicable to or binding upon any Restricted
Person, (ii) result in the acceleration of any Indebtedness owed by any
Restricted Person, or (iii) result in or require the creation of any Lien upon
any assets or properties of any Restricted Person except as expressly
contemplated in the Loan Documents. Except as expressly contemplated in the Loan
Documents no consent, approval, authorization or order of, and no notice to or
filing with, any Tribunal or third party is required in connection with the
execution, delivery or performance by any Restricted Person of any Loan Document
or to consummate any transactions contemplated by the Loan Documents.
Section 5.5. Enforceable Obligations. This Agreement is, and the other
Loan Documents when duly executed and delivered will be, legal, valid and
binding obligations of each Restricted Person which is a party hereto or
thereto, enforceable in accordance with their terms except as such enforcement
may be limited by bankruptcy, insolvency or similar Laws of general application
relating to the enforcement of creditors' rights.
Section 5.6. Initial Financial Statements. Borrower has heretofore
delivered to each Bank Party true, correct and complete copies of the Initial
Financial Statements. The Initial Financial Statements fairly present Borrower's
Consolidated financial position at the respective dates thereof and the
Consolidated results of Borrower's operations and Borrower's Consolidated
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cash flows for the respective periods thereof. Since the date of the annual
Initial Financial Statements no Material Adverse Change has occurred. All
Initial Financial Statements were prepared in accordance with GAAP.
Section 5.7. Other Obligations and Restrictions. No Restricted Person
has any outstanding Liabilities of any kind (including contingent obligations,
tax assessments, and unusual forward or long-term commitments) which is, in the
aggregate, material to Borrower or material with respect to Borrower's
Consolidated financial condition and not shown in the Initial Financial
Statements or disclosed in the Disclosure Schedule or a Disclosure Report.
Except as shown in the Initial Financial Statements or disclosed in the
Disclosure Schedule or a Disclosure Report, no Restricted Person is subject to
or restricted by any franchise, contract, deed, charter restriction, or other
instrument or restriction which could cause a Material Adverse Change.
Section 5.8. Full Disclosure. No certificate, statement or other
information delivered herewith or heretofore by any Restricted Person to any
Bank Party in connection with the negotiation of this Agreement or in connection
with any transaction contemplated hereby contains any untrue statement of a
material fact or omits to state any material fact known to any Restricted Person
(other than industry-wide risks normally associated with the types of businesses
conducted by Restricted Persons) necessary to make the statements contained
herein or therein not misleading as of the date made or deemed made. There is no
fact known to any Restricted Person that has not been disclosed to each Bank
Party in writing which could cause a Material Adverse Change.
Section 5.9. Litigation. Except as disclosed in the Initial Financial
Statements or in the Disclosure Schedule: (i) there are no actions, suits or
legal, equitable, arbitrative or administrative proceedings pending, or to the
knowledge of any Restricted Person threatened, against any Restricted Person
before any Tribunal which could cause a Material Adverse Change, and (ii) there
are no outstanding judgments, injunctions, writs, rulings or orders by any such
Tribunal against any Restricted Person or any Restricted Person's stockholders,
partners, directors or officers which could cause a Material Adverse Change.
Section 5.10. Labor Disputes and Acts of God. Except as disclosed in the
Disclosure Schedule or a Disclosure Report, neither the business nor the
properties of any Restricted Person has been affected by any fire, explosion,
accident, strike, lockout or other labor dispute, drought, storm, hail,
earthquake, embargo, act of God or of the public enemy or other casualty
(whether or not covered by insurance), which could cause a Material Adverse
Change.
Section 5.11. ERISA Plans and Liabilities. All currently existing ERISA
Plans are listed in the Disclosure Schedule or a Disclosure Report. All
Restricted Persons are in compliance with ERISA in all material respects. No
Restricted Person is required to contribute to, or has any other absolute or
contingent liability in respect of, any "multiemployer plan" as defined in
Section 4001 of ERISA. Except as set forth in the Disclosure Schedule or a
Disclosure Report: (i) no "accumulated funding deficiency" (as defined in
Section 412(a) of the Internal Revenue Code of 1986, as amended) exists with
respect to any ERISA Plan, whether or not waived by the
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Secretary of the Treasury or his delegate, and (ii) the current value of each
ERISA Plan's benefits does not exceed the current value of such ERISA Plan's
assets available for the payment of such benefits by more than $500,000.
Section 5.12. Environmental and Other Laws. Except as disclosed in the
Disclosure Schedule or a Disclosure Report: (a) Restricted Persons are
conducting their businesses in material compliance with all applicable Laws,
including Environmental Laws, and have and are in compliance with all licenses
and permits required under any such Laws; (b) none of the operations or
properties of any Restricted Person is the subject of federal, state or local
investigation evaluating whether any material remedial action is needed to
respond to a release of any Hazardous Materials into the environment or to the
improper storage or disposal (including storage or disposal at offsite
locations) of any Hazardous Materials; (c) no Restricted Person (and to the best
knowledge of Borrower, no other Person) has filed any notice under any Law
indicating that any Restricted Person is responsible for the improper release
into the environment, or the improper storage or disposal, of any material
amount of any Hazardous Materials or that any Hazardous Materials have been
improperly released, or are improperly stored or disposed of, upon any property
of any Restricted Person; (d) no Restricted Person has transported or arranged
for the transportation of any Hazardous Material to any location which is (i)
listed on the National Priorities List under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, listed for
possible inclusion on such National Priorities List by the Environmental
Protection Agency in its Comprehensive Environmental Response, Compensation and
Liability Information System List, or listed on any similar state list or (ii)
the subject of federal, state or local enforcement actions or other
investigations which may lead to claims against any Restricted Person for
clean-up costs, remedial work, damages to natural resources or for personal
injury claims (whether under Environmental Laws or otherwise); and (e) no
Restricted Person otherwise has any known material contingent liability under
any Environmental Laws or in connection with the release into the environment,
or the storage or disposal, of any Hazardous Materials.
Section 5.13. Names and Places of Business. No Restricted Person has,
during the preceding five years, had, been known by, or used any other trade or
fictitious name, except as disclosed in the Disclosure Schedule. Except as
otherwise indicated in the Disclosure Schedule or a Disclosure Report, the chief
executive office and principal place of business of each Restricted Person are
(and for the preceding five years have been) located at the address of Borrower
set out in Section 10.3. Except as indicated in the Disclosure Schedule or a
Disclosure Report, no Restricted Person has any other office or place of
business.
Section 5.14. Borrower's Subsidiaries. Borrower does not presently have
any Subsidiary or own any stock in any other corporation or association except
those listed in the Disclosure Schedule or a Disclosure Report. Neither Borrower
nor any Restricted Person is a member of any general or limited partnership,
joint venture or association of any type whatsoever except those listed in the
Disclosure Schedule or a Disclosure Report. Except as otherwise revealed in a
Disclosure Report, Borrower owns, directly or indirectly, the equity interest in
each of its Subsidiaries which is indicated in the Disclosure Schedule.
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Section 5.15. Title to Properties; Licenses. Each Restricted Person has
good and to the best of Borrower's knowledge, defensible title to all of its
material properties and assets, free and clear of all Liens other than Permitted
Liens and of all impediments to the use of such properties and assets in such
Restricted Person's business. Each Restricted Person possesses all licenses,
permits, franchises, patents, copyrights, trademarks and trade names, and other
intellectual property (or otherwise possesses the right to use such intellectual
property without violation of the rights of any other Person) which are
necessary to carry out its business as presently conducted and as presently
proposed to be conducted hereafter, and no Restricted Person is in violation in
any material respect of the terms under which it possesses such intellectual
property or the right to use such intellectual property.
Section 5.16. Government Regulation. Neither Borrower nor any other
Restricted Person owing Obligations is subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Investment
Company Act of 1940 (as any of the preceding acts have been amended) or any
other Law which regulates the incurring by such Person of Indebtedness,
including Laws relating to common contract carriers or the sale of electricity,
gas, steam, water or other public utility services.
Section 5.17. Insider. To the best of Borrower's knowledge, no
Restricted Person, nor any Person having "control" (as that term is defined in
12 U.S.C. Section 375b(9) or in regulations promulgated pursuant thereto) of any
Restricted Person, is a "director" or an "executive officer" or "principal
shareholder" (as those terms are defined in 12 U.S.C. Section 375b(8) or (9) or
in regulations promulgated pursuant thereto) of any Bank Party, of a bank
holding company of which any Bank Party is a Subsidiary or of any Subsidiary of
a bank holding company of which any Bank Party is a Subsidiary.
Section 5.18. Year 2000. Borrower has made a full and complete
assessment of the Year 2000 Issues and has a realistic and achievable program
for remediating the Year 2000 Issues on a timely basis (the "Year 2000
Program"). Based on such assessment and on the Year 2000 Program Borrower does
not reasonably anticipate that Year 2000 Issues will result in a Material
Adverse Change.
ARTICLE VI - Affirmative Covenants of Borrower
To conform with the terms and conditions under which each Bank Party is
willing to have credit outstanding to Borrower, and to induce each Bank Party to
enter into this Agreement and extend credit hereunder, Borrower warrants,
covenants and agrees that until the full and final payment of the Obligations
and the termination of this Agreement, unless Majority Lenders have previously
agreed otherwise:
Section 6.1. Payment and Performance. Borrower will pay all amounts due
under the Loan Documents in accordance with the terms thereof and will observe,
perform and comply with every covenant, term and condition expressed or implied
in the Loan Documents. Borrower
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will cause each other Restricted Person to observe, perform and comply with
every such term, covenant and condition.
Section 6.2. Books, Financial Statements and Reports. Each Restricted
Person will at all times maintain full and accurate books of account and
records. Borrower will maintain and will cause its Subsidiaries to maintain a
standard system of accounting, will maintain its Fiscal Year, and will furnish
the following statements and reports to each Bank Party at Borrower's expense:
(a) As soon as available, and in any event within 120 days after
the end of each Fiscal Year, complete Consolidated financial statements
of Borrower together with all notes thereto, prepared in reasonable
detail in accordance with GAAP, together with an unqualified opinion,
based on an audit using generally accepted auditing standards, by Price
Waterhouse, LLP or other independent certified public accountants
selected by Borrower and reasonably acceptable to Agent, stating that
such Consolidated financial statements have been so prepared. These
financial statements shall contain a Consolidated balance sheet as of
the end of such Fiscal Year and Consolidated statements of earnings, of
cash flows, and of changes in owners' equity for such Fiscal Year, each
setting forth in comparative form the corresponding figures for the
preceding Fiscal Year.
(b) Upon the reasonable request of Agent, complete consolidating
financial statements of Borrower, prepared by Borrower, together with
all notes thereto, prepared in reasonable detail in accordance with
GAAP. These financial statements shall contain a consolidating balance
sheet as of the end of such Fiscal Year and consolidating statements of
earnings for such Fiscal Year, each setting forth in comparative form
the corresponding figures for the preceding Fiscal Year.
(c) As soon as available, and in any event within forty-five (45)
days after the end of each Fiscal Quarter Borrower's Consolidated
balance sheet as of the end of such Fiscal Quarter and Consolidated
statements of Borrower's earnings and cash flows for the period from the
beginning of the then current Fiscal Year to the end of such Fiscal
Quarter, all in reasonable detail and prepared in accordance with GAAP,
subject to changes resulting from normal year-end adjustments. In
addition Borrower will, together with each such set of financial
statements, furnish a certificate in the form of Exhibit D signed by the
chief financial officer of Borrower stating that such financial
statements are accurate and complete, stating that he has reviewed the
Loan Documents, containing calculations showing compliance (or
non-compliance) at the end of such Fiscal Quarter with the requirements
of Sections 7.11, 7.12, 7.13, and 7.14, and stating that no Default
exists at the end of such Fiscal Quarter or at the time of such
certificate or specifying the nature and period of existence of any such
Default.
(d) Promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent by any Restricted
Person to its stockholders and all registration statements, periodic
reports and other statements and schedules filed
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by any Restricted Person with any securities exchange, the Securities
and Exchange Commission or any similar governmental authority.
(e) Concurrently with any Request for Loan, and in any event at
least monthly, a Borrowing Base Report, appropriately completed and with
all attachments.
(f) As soon as available, and in any event within ninety (90) days
after the end of each Fiscal Year, financial projections for Borrower
(in form reasonably satisfactory to Agent), prepared by a senior
financial officer thereof, setting forth the financial projections for
the next Fiscal Year, including but not limited to, a projected balance
sheet and statements of projected earnings and cash flows for Borrower
for such Fiscal Year, and stating that such projections were based on
good faith estimates and assumptions at that time contained in such
projection believed by Borrower to be reasonable and such projections
have at that time been prepared in accordance with such assumptions.
Upon reasonable request, Borrower shall provide updated financial
projections, if available.
(g) Upon the request of Agent, but in no event more frequently than
one time per month a Receivables Report, appropriately completed and
with all attachments.
Section 6.3. Other Information and Inspections. Each Restricted Person
will furnish to each Bank Party any information which Agent may from time to
time reasonably request in writing concerning the Marketable Securities
Collateral (such as face amounts and dates of invoices and the name and address
of each account debtor obligated on such Eligible Receivable) and any covenant,
provision or condition of the Loan Documents or any matter in connection with
Restricted Persons' businesses and operations. Each Restricted Person will
permit representatives appointed by Agent (including independent accountants,
auditors, agents, attorneys, appraisers, representatives of any Lender and any
other Persons) to visit and inspect during normal business hours any of such
Restricted Person's property, including its books of account, other books and
records, and any facilities or other business assets, and to make extra copies
therefrom and photocopies and photographs thereof, and to write down and record
any information such representatives obtain, and each Restricted Person shall
permit Agent or its representatives to investigate and verify the accuracy of
the information furnished to Agent or any Lender in connection with the Loan
Documents and to discuss all such matters with its officers, employees and
representatives.
Section 6.4. Notice of Material Events and Change of Address. Borrower
will promptly notify each Bank Party in writing, stating that such notice is
being given pursuant to this Agreement, of:
(a) the occurrence of any Material Adverse Change,
(b) the occurrence of any Default,
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(c) the acceleration of the maturity of any Indebtedness owed by
any Restricted Person or of any default by any Restricted Person under
any indenture, mortgage, agreement, contract or other instrument to
which any of them is a party or by which any of them or any of their
properties is bound, if such acceleration or default could cause a
Material Adverse Change,
(d) any claim of $100,000 or more, any notice of potential
liability under any Environmental Laws which might exceed such amount,
or any other material adverse claim asserted against any Restricted
Person or with respect to any Restricted Person's properties,
(e) the filing of any suit or proceeding against any Restricted
Person in which an adverse decision could cause a Material Adverse
Change, and
(f) a reduction in Borrower's Minimum Eligible Receivables below
$40,000,000 at any time.
Upon the occurrence of any of the foregoing Restricted Persons will take all
necessary or appropriate steps to remedy promptly any such Material Adverse
Change, Default, acceleration, or default, to protect against any such adverse
claim, to defend any such suit or proceeding, and to resolve all controversies
on account of any of the foregoing. Borrower will also notify Agent and Agent's
counsel in writing at least twenty Business Days prior to the date that any
Restricted Person changes its name or the location of its chief executive office
or principal place of business or the place where it keeps its books and records
concerning the Collateral, furnishing with such notice any necessary financing
statement amendments or requesting Agent and its counsel to prepare the same.
Section 6.5. Maintenance of Properties. Each Restricted Person will
maintain, preserve, protect, and keep all Collateral and all other property used
or useful in the conduct of its business in good condition (ordinary wear and
tear excepted) and in compliance with all applicable Laws, and will from time to
time make all repairs, renewals and replacements needed to enable the business
and operations carried on in connection therewith to be promptly and
advantageously conducted at all times.
Section 6.6. Maintenance of Existence and Qualifications. Each
Restricted Person will maintain and preserve its existence and its rights and
franchises in full force and effect and will qualify to do business in all
states or jurisdictions where required by applicable Law, except where the
failure so to qualify will not cause a Material Adverse Change. Borrower will
maintain and preserve or cause to be maintained and preserved the existence and
rights and franchises in full force and effect of any management service
organization that is not a Restricted Person, but which enters into a management
service agreement on behalf of any Restricted Person.
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Section 6.7. Payment of Trade Liabilities, Taxes, etc. Each Restricted
Person will (a) timely file all required tax returns; (b) timely pay all taxes,
assessments, and other governmental charges or levies imposed upon it or upon
its income, profits or property; (c) within ninety (90) days after the same
becomes due pay all Liabilities owed by it on ordinary trade terms to vendors,
suppliers and other Persons providing goods and services used by it in the
ordinary course of its business; (d) pay and discharge when due all other
Liabilities now or hereafter owed by it; and (e) maintain appropriate accruals
and reserves for all of the foregoing in accordance with GAAP. Each Restricted
Person may, however, delay paying or discharging any of the foregoing so long as
it is in good faith contesting the validity thereof by appropriate proceedings
and has set aside on its books adequate reserves therefor.
Section 6.8. Insurance. Each Restricted Person will keep or cause to be
kept insured by financially sound and reputable insurers its property in
accordance with the Insurance Schedule. Borrower will maintain the additional
insurance coverage as described in the respective Security Documents. Upon
demand by Agent any insurance policies covering Collateral shall be endorsed (a)
to provide for payment of losses to Agent as its interests may appear, (b) to
provide that such policies may not be canceled or reduced or affected in any
material manner for any reason without fifteen days prior notice to Agent, (c)
to provide for any other matters specified in any applicable Security Document
or which Agent may reasonably require; and (d) to provide for insurance against
fire, casualty and any other hazards normally insured against, in the amount of
the full value (less a reasonable deductible not to exceed amounts customary in
the industry for similarly situated businesses and properties) of the property
insured. Each Restricted Person shall at all times maintain insurance against
its liability for injury to persons or property in accordance with the Insurance
Schedule, which insurance shall be by financially sound and reputable insurers.
Without limiting the foregoing, each Restricted Person shall at all time
maintain liability insurance in the amounts set out on the Insurance Schedule.
Section 6.9. Performance on Borrower's Behalf. If any Restricted Person
fails to pay any taxes, insurance premiums, expenses, attorneys' fees or other
amounts it is required to pay under any Loan Document, Agent may pay the same.
Borrower shall immediately reimburse Agent for any such payments and each amount
paid by Agent shall constitute an Obligation owed hereunder which is due and
payable on the date such amount is paid by Agent.
Section 6.10. Interest. Borrower hereby promises to each Bank Party to
pay interest at the Default Rate on all Obligations (including Obligations to
pay fees or to reimburse or indemnify any Bank Party) which Borrower has in this
Agreement promised to pay to such Bank Party and which are not paid when due.
Such interest shall accrue from the date such Obligations become due until they
are paid.
Section 6.11. Compliance with Agreements and Law. Each Restricted Person
will perform all material obligations it is required to perform under the terms
of each indenture, mortgage, deed of trust, security agreement, lease,
franchise, agreement, contract or other instrument or obligation to which it is
a party or by which it or any of its properties is bound.
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Each Restricted Person will conduct its business and affairs in compliance with
all Laws applicable thereto.
Section 6.12. Environmental Matters.
(a) Each Restricted Person will comply in all material respects with all
Environmental Laws now or hereafter applicable to such Restricted Person and
shall obtain, at or prior to the time required by applicable Environmental Laws,
all environmental, health and safety permits, licenses and other authorizations
necessary for its operations and will maintain such authorizations in full force
and effect.
(b) Borrower will promptly furnish to Agent all written notices of
violation, orders, claims, citations, complaints, penalty assessments, suits or
other proceedings received by Borrower, or of which it has notice, pending or
threatened against Borrower, by any governmental authority with respect to any
alleged violation of or non-compliance with any Environmental Laws or any
permits, licenses or authorizations in connection with its ownership or use of
its properties or the operation of its business.
(c) Borrower will promptly furnish to Agent all requests for
information, notices of claim, demand letters, and other notifications, received
by Borrower in connection with its ownership or use of its properties or the
conduct of its business, relating to potential responsibility with respect to
any investigation or clean-up of Hazardous Material at any location.
Section 6.13. Evidence of Compliance. Each Restricted Person will
furnish to each Bank Party at such Restricted Person's or Borrower's expense all
evidence which Agent from time to time reasonably requests in writing as to the
accuracy and validity of or compliance with all representations, warranties and
covenants made by any Restricted Person in the Loan Documents, the satisfaction
of all conditions contained therein, and all other matters pertaining thereto.
Section 6.14. Solvency. Upon giving effect to the issuance of the Notes,
the execution of the Loan Documents by Borrower and the consummation of the
transactions contemplated hereby, Borrower will be solvent (as such term is used
in applicable bankruptcy, liquidation, receivership, insolvency or similar
laws).
Section 6.15. Agreement to Deliver Security Documents.
(a) Borrower agrees to deliver and to cause each other Restricted Person
to deliver, to further secure the Obligations whenever requested by Agent in its
reasonable discretion, security agreements, financing statements and other
Security Documents in form and substance satisfactory to Agent for the purpose
of granting, confirming, and perfecting first and prior liens or security
interests in any real or personal property which is at such time Collateral or
which was intended to be Collateral pursuant to any Security Document previously
executed and not then released by Agent. Borrower will from time to time
deliver, and will cause each other Restricted
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Person from time to time to deliver, to Agent any financing statements,
continuation statements, extension agreements and other documents, properly
completed and executed (and acknowledged when required) by Restricted Persons in
form and substance reasonably satisfactory to Agent, which Agent requests for
the purpose of perfecting, confirming, or protecting any Liens or other rights
in Collateral securing any Obligations.
(b) If Borrower's Minimum Eligible Receivables are less than $40,000,000
at any time, then Parent shall deliver to Agent a security agreement in the form
as provided in Exhibit H, together with written evidence satisfactory to Agent
and its counsel that Parent has taken all corporate action necessary to duly
approve and authorize its execution, delivery and performance of such security
agreement and any other documents which it is required to execute.
Section 6.16. Bank Accounts; Offset. To secure the repayment of the
Obligations Borrower hereby grants to each Bank Party a security interest, a
lien, and a right of offset, each of which shall be in addition to all other
interests, liens, and rights of any Bank Party at common law, under the Loan
Documents, or otherwise, and each of which shall be upon and against (a) any and
all moneys, securities or other property (and the proceeds therefrom) of
Borrower now or hereafter held or received by or in transit to any Bank Party
from or for the account of Borrower, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, (b) any and all deposits (general or
special, time or demand, provisional or final) of Borrower with any Bank Party,
and (c) any other credits and claims of Borrower at any time existing against
any Bank Party, including claims under certificates of deposit and excluding
Borrower's account number 8334001710 established with Bank One and all funds on
deposit therein which shall have the sole purpose of providing collateral to
secure Borrower's obligations under the lease covering its corporate
headquarters. At any time and from time to time after the occurrence of any
Default, each Bank Party is hereby authorized to foreclose upon, or to offset
against the Obligations then due and payable (in either case without notice to
Borrower), any and all items hereinabove referred to. The remedies of
foreclosure and offset are separate and cumulative, and either may be exercised
independently of the other without regard to procedures or restrictions
applicable to the other.
Section 6.17. Guaranties of Borrower's Subsidiaries. Parent and each
domestic Subsidiary of Borrower, now existing or created, acquired or coming
into existence after the date hereof shall, promptly upon request by Agent,
execute and deliver to Agent an absolute and unconditional guaranty of the
timely repayment of the Obligations and the due and punctual performance of the
obligations of Borrower hereunder, which guaranty shall be in the form of
Exhibit G attached hereto. Each Subsidiary of Borrower existing on the date
hereof shall duly execute and deliver such a guaranty prior to the making of any
Loan hereunder. Borrower will cause each of its Subsidiaries to deliver to
Agent, simultaneously with its delivery of such a guaranty, written evidence
satisfactory to Agent and its counsel that such Subsidiary has taken all
corporate or partnership action necessary to duly approve and authorize its
execution, delivery and performance of such guaranty and any other documents
which it is required to execute.
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Section 6.18. Audit. Allow (and cause each other Restricted Person to
allow) Agent or its representatives (including independent accountants,
auditors, agents, attorneys, appraisers, representatives of any Lender and any
other Persons, upon reasonable notice and during such Restricted Person's usual
business hours) (i) to inspect any Restricted Person's books, records, accounts,
and properties (including, without limitation, a field examination by Lender's
secured lending group to test systems and controls it deems appropriate in its
own reasonable discretion), (ii) to make and take away copies of those books,
records, and accounts, (iii) to discuss any Restricted Person's affairs,
conditions, finances, and prospects with any Restricted Person's directors,
officers, employees, or general or limited partners (or their respective
directors, officers, employees, or partners). If no Default or Potential Default
exists, any such audit shall be at the expense of Borrower only once during each
twelve month period during the term hereof. During any time when a Default or
Potential Default exists each such audit performed hereunder shall be at the
expense of Borrower.
ARTICLE VII - Negative Covenants of Borrower
To conform with the terms and conditions under which each Bank Party is
willing to have credit outstanding to Borrower, and to induce each Bank Party to
enter into this Agreement and make the Loans, Borrower warrants, covenants and
agrees that until the full and final payment of the Obligations and the
termination of this Agreement, unless Majority Lenders have previously agreed
otherwise:
Section 7.1. Indebtedness. No Restricted Person will in any manner owe
or be liable for Indebtedness except:
(a) the Obligations.
(b) Indebtedness outstanding under the instruments and agreements
described on the Disclosure Schedule, excluding any renewals or extensions of
such Indebtedness and providing that the original principal amount of any such
Indebtedness is not in excess of the purchase price of the asset acquired
thereby and such Indebtedness is secured only by the acquired asset.
(c) lease obligations arising pursuant to that certain Lease and
Development Agreement dated as of November 14, 1997, between Borrower and Asset
XVII Holdings Company, L.L.C., together with all amendments and supplements
thereto.
(d) purchase money Indebtedness or capital lease obligations in an
aggregate Consolidated principal amount not to exceed $3,000,000 at any time
(excluding those lease obligations permitted in 7.1 (c) above), provided that
the original principal amount of any such Indebtedness shall not be in excess of
the purchase price of the asset acquired thereby and such Indebtedness shall be
secured only by the acquired asset; provided that if Borrower requests that
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Lenders consent to an increase in such amount, Lenders' consent shall not be
unreasonably withheld.
(e) Indebtedness arising under Hedging Contracts permitted under Section
7.3 provided that no such contract requires any Restricted Person to meet margin
calls, or otherwise to put up money or other assets against the event of its
nonperformance, prior to actual default by such Restricted Person in performing
its obligations thereunder.
Section 7.2. Limitation on Liens. No Restricted Person will create,
assume or permit to exist any Lien upon any of the properties or assets which it
now owns or hereafter acquires, except, to the extent not otherwise forbidden by
the Security Documents the following ("Permitted Liens"):
(a) Liens which secure Obligations only.
(b) Statutory Liens for taxes, statutory mechanics' and materialmen's
Liens incurred in the ordinary course of business, and other similar Liens
incurred in the ordinary course of business, provided such Liens do not secure
Indebtedness and secure only Indebtedness which is not delinquent or which is
being contested as provided in Section 6.6.
(c) Liens securing Indebtedness described in Section 7.1(c) and leases
with Bank One Leasing described in the Disclosure Schedule.
Section 7.3. Hedging. No Restricted Person will be a party to or in any
manner be liable on any Hedging Contract except:
(a) contracts entered into by a Restricted Person with the purpose and
effect of fixing interest rates on a principal amount of indebtedness of such
Restricted Person that is accruing interest at a variable rate, provided that
(i) the aggregate notional amount of such contracts never exceeds seventy-five
percent (75%) of the anticipated outstanding principal balance of the
indebtedness to be hedged by such contracts or an average of such principal
balances calculated using a generally accepted method of matching interest swap
contracts to declining principal balances, (ii) the floating rate index of each
such contract generally matches the index used to determine the floating rates
of interest on the corresponding indebtedness to be hedged by such contract and
(iii) each such contract is with a counterparty or has a guarantor of the
obligations of the counterparty who (unless such counterparty is a Lender or one
of its Affiliates) at the time the contract is made has long-term obligations
rated AA or Aa2 or better, respectively, by either Rating Agency.
(b) interest rate swaps currently in place between Borrower and any
Affiliate of Agent (and any replacement swap in substantially the same terms)
with respect to that certain Lease and Development Agreement dated as of
November 14, 1997, between Borrower and Asset XVII Holdings Company, L.L.C.,
together with all amendments and supplements thereto.
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Section 7.4. Limitation on Mergers, Issuances of Securities. Except as
expressly provided in this subsection no Restricted Person will merge or
consolidate with or into any other business entity. Any Subsidiary of Borrower
may, however, be merged into or consolidated with (i) another Subsidiary of
Borrower, so long as a Guarantor is the surviving business entity, or (ii)
Borrower, so long as Borrower is the surviving business entity. No Restricted
Person will issue any additional shares of its capital stock or other securities
or any options, warrants or other rights to acquire such additional shares or
other securities, except that Borrower's wholly-owned Subsidiaries may issue
such shares, options, warrants or other rights to Borrower, and Borrower may
issue its common stock and warrants to purchase its common stock, but only to
the extent not otherwise forbidden under the terms hereof. No Subsidiary of
Borrower which is a partnership will allow any diminution of Borrower's interest
(direct or indirect) therein.
Section 7.5. Limitation on Sales of Property. No Restricted Person will
sell, transfer, lease, exchange, alienate or dispose of any of its material
assets or properties or any material interest therein except equipment which is
worthless or obsolete or which is replaced by equipment of equal suitability and
value. Neither Borrower nor any of Borrower's Subsidiaries will sell, transfer
or otherwise dispose of capital stock of any of Borrower's Subsidiaries except
that any Subsidiary of Borrower may sell or issue its own capital stock to the
extent not otherwise prohibited hereunder. No Restricted Person will discount,
sell, pledge or assign any notes payable to it, accounts receivable or future
income except to the extent expressly permitted under the Loan Documents.
Section 7.6. Limitation on Dividends and Redemptions. No Restricted
Person will declare or pay any dividends on, or make any other distribution in
respect of, any class of its capital stock or any partnership or other interest
in it, nor will any Restricted Person directly or indirectly make any capital
contribution to or purchase, redeem, acquire or retire any shares of the capital
stock of or partnership interests in any Restricted Person (whether such
interests are now or hereafter issued, outstanding or created), or cause or
permit any reduction or retirement of the capital stock of any Restricted
Person. The foregoing provisions of this Section 7.6 notwithstanding, so long as
no Default or Event of Default has occurred and is continuing (i) Borrower may
declare and pay dividends in its common stock and (ii) Parent may repurchase its
common stock so long as the price for all such common stock paid by Parent may
not exceed $15,000,000 in the aggregate.
Section 7.7. Limitation on Investments and New Businesses. No Restricted
Person will (i) make any expenditure or commitment or incur any obligation or
enter into or engage in any transaction except in the ordinary course of
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business, (ii) engage directly or indirectly in any business or conduct any
operations except in connection with or incidental to its present businesses and
operations, (iii) make any acquisitions of or capital contributions to or other
investments in any Person, other than Permitted Investments.
Section 7.8. Limitation on Credit Extensions. Except for Permitted
Investments, no Restricted Person will extend credit, make advances or make
loans other than (i) normal and prudent extensions of credit to customers buying
goods and services in the ordinary course of business, which extensions shall
not be for longer periods than those extended by similar businesses operated in
a normal and prudent manner, and (ii) loans to Parent in an aggregate amount not
to exceed $25,000,000, which shall be evidenced by a promissory note in form and
substance acceptable to Agent.
Section 7.9. Transactions with Affiliates. Neither Borrower nor any of
its Subsidiaries will engage in any material transaction with any of its
Affiliates on terms which are less favorable to it than those which would have
been obtainable at the time in arm's-length dealing with Persons other than such
Affiliates, provided that such restriction shall not apply to transactions among
Borrower, Parent and Borrower's wholly owned Subsidiaries.
Section 7.10. Certain Contracts; Amendments; Multiemployer ERISA Plans.
Except as expressly provided for in the Loan Documents, no Restricted Person
will, directly or indirectly, enter into, create, or otherwise allow to exist
any contract or other consensual restriction on the ability of any Subsidiary of
Borrower to: (i) pay dividends or make other distributions to Borrower, (ii) to
redeem equity interests held in it by Borrower, (iii) to repay loans and other
indebtedness owing by it to Borrower, or (iv) to transfer any of its assets to
Borrower. No Restricted Person will amend or permit any amendment to any
contract or lease which releases, qualifies, limits, makes contingent or
otherwise detrimentally affects the rights and benefits of Agent or any Lender
under or acquired pursuant to any Security Documents. No Restricted Person will
establish or incur any obligation to contribute to any ERISA Plan.
Section 7.11. Minimum Net Worth. The Consolidated Net Worth at the end
of each Fiscal Quarter will not be less than $175,000,000.
ARTICLE VIII - Events of Default and Remedies
Section 8.1. Events of Default. Each of the following events constitutes
an Event of Default under this Agreement:
(a) Any Restricted Person fails to pay any Obligation within five (5)
Business Days after the date when due, whether at a date for the payment of a
fixed installment or as a contingent or other payment becomes due and payable or
as a result of acceleration or otherwise;
(b) Any "default" or "event of default" occurs under any Loan Document
which defines either such term, and the same is not remedied within the
applicable period of grace (if any) provided in such Loan Document;
(c) Any Restricted Person fails to duly observe, perform or comply with
any covenant, agreement or provision of Section 6.4 or Article VII and such
failure remains unremedied for a period of fifteen (15) days after the earlier
to occur of: (i) written notice thereof is given by Agent to the Borrower or
(ii) any Restricted Person otherwise becomes aware of such failure;
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(d) Any Restricted Person fails (other than as referred to in
subsections (a), (b), (c) or (d) above) to duly observe, perform or comply with
any covenant, agreement, condition or provision of any Loan Document, and such
failure remains unremedied for a period of thirty (30) days after written notice
of such failure is given by Agent to Borrower;
(e) Any representation or warranty previously, presently or hereafter
made in writing by or on behalf of any Restricted Person in connection with any
Loan Document shall prove to have been false or incorrect in any material
respect on any date on or as of which made, or any Loan Document at any time
ceases to be valid, binding and enforceable as warranted in Section 5.5 for any
reason other than its release or subordination by Agent;
(f) Any Restricted Person fails to duly observe, perform or comply with
any agreement with any Person or any term or condition of any instrument, if
such agreement or instrument is materially significant to Borrower or to
Borrower and its subsidiaries on a Consolidated basis or materially significant
to any Guarantor, and such failure is not remedied within the applicable period
of grace (if any) provided in such agreement or instrument;
(g) Subject to Section 6.7, any Restricted Person (i) fails to pay any
portion, when such portion is due, of any of its Indebtedness in excess of
$350,000 or (ii) breaches or defaults in the performance of any agreement or
instrument by which any such Indebtedness is issued, evidenced, governed, or
secured, and any such failure, breach or default continues beyond any applicable
period of grace provided therefor;
(h) Any Restricted Person:
(i) suffers the entry against it of a judgment, decree or order for
relief by a Tribunal of competent jurisdiction in an involuntary
proceeding commenced under any applicable bankruptcy, insolvency or
other similar Law of any jurisdiction now or hereafter in effect,
including the federal Bankruptcy Code, as from time to time amended, or
has any such proceeding commenced against it which remains undismissed
for a period of thirty days; or
(ii) commences a voluntary case under any applicable bankruptcy,
insolvency or similar Law now or hereafter in effect, including the
federal Bankruptcy Code, as from time to time amended; or applies for or
consents to the entry of an order for relief in an involuntary case
under any such Law; or makes a general assignment for the benefit of
creditors; or fails generally to pay (or admits in writing its inability
to pay) its debts as such debts become due; or takes corporate or other
action to authorize any of the foregoing; or
(iii) suffers the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of all or a substantial part of its assets or of any
part of the Collateral in a proceeding brought against or initiated by
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it, and such appointment or taking possession is neither made
ineffective nor discharged within thirty days after the making thereof,
or such appointment or taking possession is at any time consented to,
requested by, or acquiesced to by it; or
(iv) suffers the entry against it of a final judgment for the
payment of money in excess of $1,000,000 (not covered by insurance
satisfactory to Agent in its discretion), unless the same is discharged
within thirty days after the date of entry thereof or an appeal or
appropriate proceeding for review thereof is taken within such period
and a stay of execution pending such appeal is obtained; or
(v) suffers a writ or warrant of attachment or any similar process
to be issued by any Tribunal against all or any substantial part of its
assets or any part of the Collateral, and such writ or warrant of
attachment or any similar process is not stayed or released within
thirty days after the entry or levy thereof or after any stay is vacated
or set aside; and
(i) Any Material Adverse Change occurs.
Upon the occurrence of an Event of Default described in subsection (h)(i),
(h)(ii) or (h)(iii) of this section with respect to Borrower, all of the
Obligations shall thereupon be immediately due and payable, without demand,
presentment, notice of demand or of dishonor and nonpayment, protest, notice of
protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Restricted Person who at any time
ratifies or approves this Agreement. Upon any such acceleration, any obligation
of any Lender to make any further Loans shall be permanently terminated. During
the continuance of any other Event of Default, Agent at any time and from time
to time may (and upon written instructions from Majority Lenders, Agent shall),
without notice to Borrower or any other Restricted Person, do either or both of
the following: (1) terminate any obligation of Lenders to make Loans hereunder,
and (2) declare any or all of the Obligations immediately due and payable, and
all such Obligations shall thereupon be immediately due and payable, without
demand, presentment, notice of demand or of dishonor and nonpayment, protest,
notice of protest, notice of intention to accelerate, declaration or notice of
acceleration, or any other notice or declaration of any kind, all of which are
hereby expressly waived by Borrower and each Restricted Person who at any time
ratifies or approves this Agreement.
Section 8.2. Remedies. If any Default shall occur and be continuing,
each Bank Party may protect and enforce its rights under the Loan Documents by
any appropriate proceedings, including proceedings for specific performance of
any covenant or agreement contained in any Loan Document, and each Bank Party
may enforce the payment of any Obligations due it or enforce any other legal or
equitable right which it may have. All rights, remedies and powers conferred
upon Bank Parties under the Loan Documents shall be deemed cumulative and not
exclusive of any other rights, remedies or powers available under the Loan
Documents or at Law or in equity.
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ARTICLE IX - Agent
Section 9.1. Appointment and Authority. Each Lender which becomes a
party to this Agreement hereby irrevocably authorizes Agent, and Agent hereby
undertakes, to receive payments of principal, interest and other amounts due
hereunder as specified herein and to take all other actions and to exercise such
powers under the Loan Documents as are specifically delegated to Agent by the
terms hereof or thereof, together with all other powers reasonably incidental
thereto. The relationship of Agent to the other Bank Parties is only that of one
commercial lender acting as administrative agent for others, and nothing in the
Loan Documents shall be construed to constitute Agent a trustee or other
fiduciary for any holder of any of the Notes or of any participation therein nor
to impose on Agent duties and obligations other than those expressly provided
for in the Loan Documents. With respect to any matters not expressly provided
for in the Loan Documents and any matters which the Loan Documents place within
the discretion of Agent, Agent shall not be required to exercise any discretion
or take any action, and it may request instructions from Lenders with respect to
any such matter, in which case it shall be required to act or to refrain from
acting (and shall be fully protected and free from liability to all Lenders in
so acting or refraining from acting) upon the instructions of Majority Lenders
(including itself), provided, however, that Agent shall not be required to take
any action which exposes it to a risk of personal liability that it considers
unreasonable or which is contrary to the Loan Documents or to applicable Law.
Upon receipt by Agent from Borrower of any communication calling for action on
the part of Lenders or upon notice from any other Bank Party to Agent of any
Default or Event of Default, Agent shall promptly notify each other Bank Party
thereof.
Section 9.2. Exculpation, Agent's Reliance, Etc. Neither Agent nor any
of its directors, officers, agents, attorneys, or employees shall be liable for
any action taken or omitted to be taken by any of them under or in connection
with the Loan Documents, INCLUDING THEIR NEGLIGENCE OF ANY KIND, except that
each shall be liable for its own gross negligence or willful misconduct. Without
limiting the generality of the foregoing, Agent (a) may treat the payee of any
Note as the holder thereof until Agent receives written notice of the assignment
or transfer thereof in accordance with this Agreement, signed by such payee and
in form satisfactory to Agent; (b) may consult with legal counsel (including
counsel for Borrower), independent public accountants and other experts selected
by it and shall not be liable for any action taken or omitted to be taken in
good faith by it in accordance with the advice of such counsel, accountants or
experts; (c) makes no warranty or representation to any other Bank Party and
shall not be responsible to any other Bank Party for any statements, warranties
or representations made in or in connection with the Loan Documents; (d) shall
not have any duty to ascertain or to inquire as to the performance or observance
of any of the terms, covenants or conditions of the Loan Documents on the part
of any Restricted Person or to inspect the property (including the books and
records) of any Restricted Person; (e) shall not be responsible to any other
Bank Party for the due execution, legality, validity, enforceability,
genuineness, sufficiency or value of any Loan Document or any instrument or
document furnished in connection therewith; (f) may rely upon the
representations and warranties of each Restricted Person and the Lenders in
exercising its
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powers hereunder; and (g) shall incur no liability under or in respect of the
Loan Documents by acting upon any notice, consent, certificate or other
instrument or writing (including any telecopy, telegram, cable or telex)
believed by it to be genuine and signed or sent by the proper Person or Persons.
Section 9.3. Credit Decisions. Each Bank Party acknowledges that it has,
independently and without reliance upon any other Bank Party, made its own
analysis of Borrower and the transactions contemplated hereby and its own
independent decision to enter into this Agreement and the other Loan Documents.
Each Bank Party also acknowledges that it will, independently and without
reliance upon any other Bank Party and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
decisions in taking or not taking action under the Loan Documents.
Section 9.4. Indemnification. Each Lender agrees to indemnify Agent (to
the extent not reimbursed by Borrower within ten (10) days after demand) from
and against such Lender's Percentage Share of any and all liabilities,
obligations, claims, losses, damages, penalties, fines, actions, judgments,
suits, settlements, costs, expenses or disbursements (including reasonable fees
of attorneys, accountants, experts and advisors) of any kind or nature
whatsoever (in this section collectively called "liabilities and costs") which
to any extent (in whole or in part) may be imposed on, incurred by, or asserted
against Agent growing out of, resulting from or in any other way associated with
any of the Collateral, the Loan Documents and the transactions and events
(including the enforcement thereof) at any time associated therewith or
contemplated therein (including any violation or noncompliance with any
Environmental Laws by any Person or any liabilities or duties of any Person with
respect to Hazardous Materials found in or released into the environment).
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM
OR THEORY OF STRICT LIABILITY, OR ARE CAUSED, IN WHOLE OR IN PART, BY ANY
NEGLIGENT ACT OR OMISSION OF ANY KIND BY AGENT,
provided only that no Lender shall be obligated under this section to indemnify
Agent for that portion, if any, of any liabilities and costs which is
proximately caused by Agent's own individual gross negligence or willful
misconduct, as determined in a final judgment. Cumulative of the foregoing, each
Lender agrees to reimburse Agent promptly upon demand for such Lender's
Percentage Share of any costs and expenses to be paid to Agent by Borrower under
Section 10.4(a) to the extent that Agent is not timely reimbursed for such
expenses by Borrower as provided in such section. As used in this section the
term "Agent" shall refer not only to the Person designated as such in Section
1.1 but also to each director, officer, agent, attorney, employee,
representative and Affiliate of such Person.
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Section 9.5. Rights as Lender. In its capacity as a Lender, Agent shall
have the same rights and obligations as any Lender and may exercise such rights
as though it were not Agent. Agent may accept deposits from, lend money to, act
as Trustee under indentures of, and generally engage in any kind of business
with any Restricted Person or their Affiliates, all as if it were not Agent
hereunder and without any duty to account therefor to any other Lender.
Section 9.6. Sharing of Set-Offs and Other Payments. Each Bank Party
agrees that if it shall, whether through the exercise of rights under Security
Documents or rights of banker's lien, set off, or counterclaim against Borrower
or otherwise, obtain payment of a portion of the aggregate Obligations owed to
it which, taking into account all distributions made by Agent under Section 3.1,
causes such Bank Party to have received more than it would have received had
such payment been received by Agent and distributed pursuant to Section 3.1,
then (a) it shall be deemed to have simultaneously purchased and shall be
obligated to purchase interests in the Obligations as necessary to cause all
Bank Parties to share all payments as provided for in Section 3.1, and (b) such
other adjustments shall be made from time to time as shall be equitable to
ensure that Agent and all Lenders share all payments of Obligations as provided
in Section 3.1; provided, however, that nothing herein contained shall in any
way affect the right of any Bank Party to obtain payment (whether by exercise of
rights of banker's lien, set-off or counterclaim or otherwise) of indebtedness
other than the Obligations. Borrower expressly consents to the foregoing
arrangements and agrees that any holder of any such interest or other
participation in the Obligations, whether or not acquired pursuant to the
foregoing arrangements, may to the fullest extent permitted by Law exercise any
and all rights of banker's lien, set-off, or counterclaim as fully as if such
holder were a holder of the Obligations in the amount of such interest or other
participation. If all or any part of any funds transferred pursuant to this
section is thereafter recovered from the seller under this section which
received the same, the purchase provided for in this section shall be deemed to
have been rescinded to the extent of such recovery, together with interest, if
any, if interest is required pursuant to Tribunal order to be paid on account of
the possession of such funds prior to such recovery.
Section 9.7. Investments. Whenever Agent in good faith determines that
it is uncertain about how to distribute to Lenders any funds which it has
received, or whenever Agent in good faith determines that there is any dispute
among Lenders about how such funds should be distributed, Agent may choose to
defer distribution of the funds which are the subject of such uncertainty or
dispute. If Agent in good faith believes that the uncertainty or dispute will
not be promptly resolved, or if Agent is otherwise required to invest funds
pending distribution to Lenders, Agent shall invest such funds pending
distribution; all interest on any such investment shall be distributed upon the
distribution of such investment and in the same proportion and to the same
Persons as such investment. All moneys received by Agent for distribution to
Lenders (other than to the Person who is Agent in its separate capacity as a
Lender) shall be held by Agent pending such distribution solely as Agent for
such Lenders, and Agent shall have no equitable title to any portion thereof.
Section 9.8. Benefit of Article IX. The provisions of this Article
(other than the following Section 9.9) are intended solely for the benefit of
Bank Parties, and no Restricted
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Person shall be entitled to rely on any such provision or assert any such
provision in a claim or defense against any Bank Party. Bank Parties may waive
or amend such provisions as they desire without any notice to or consent of
Borrower or any Restricted Person.
Section 9.9. Resignation. Agent may resign at any time by giving written
notice thereof to Lenders and Borrower. Each such notice shall set forth the
date of such resignation. Upon any such resignation Lenders having aggregate
Percentage Shares of at least one hundred percent (100%) shall have the right to
appoint a successor Agent. A successor must be appointed for any retiring Agent,
and such Agent's resignation shall become effective when such successor accepts
such appointment. If, within thirty days after the date of the retiring Agent's
resignation, no successor Agent has been appointed and has accepted such
appointment, then the retiring Agent may appoint a successor Agent, which shall
be a commercial bank organized or licensed to conduct a banking or trust
business under the Laws of the United States of America or of any state thereof.
Upon the acceptance of any appointment as Agent hereunder by a successor Agent,
the retiring Agent shall be discharged from its duties and obligations under
this Agreement and the other Loan Documents. After any retiring Agent's
resignation hereunder the provisions of this Article IX shall continue to inure
to its benefit as to any actions taken or omitted to be taken by it while it was
Agent under the Loan Documents.
ARTICLE X - Miscellaneous
Section 10.1. Waivers and Amendments; Acknowledgments.
(a) Waivers and Amendments. No failure or delay (whether by course of
conduct or otherwise) by any Bank Party in exercising any right, power or remedy
which such Bank Party may have under any of the Loan Documents shall operate as
a waiver thereof or of any other right, power or remedy, nor shall any single or
partial exercise by any Bank Party of any such right, power or remedy preclude
any other or further exercise thereof or of any other right, power or remedy. No
waiver of any provision of any Loan Document and no consent to any departure
therefrom shall ever be effective unless it is in writing and signed as provided
below in this section, and then such waiver or consent shall be effective only
in the specific instances and for the purposes for which given and to the extent
specified in such writing. No notice to or demand on any Restricted Person shall
in any case of itself entitle any Restricted Person to any other or further
notice or demand in similar or other circumstances. This Agreement and the other
Loan Documents set forth the entire understanding between the parties hereto
with respect to the transactions contemplated herein and therein and supersede
all prior discussions and understandings with respect to the subject matter
hereof and thereof, and no waiver, consent, release, modification or amendment
of or supplement to this Agreement or the other Loan Documents shall be valid or
effective against any party hereto unless the same is in writing and signed by
(i) if such party is Borrower, by Borrower, (ii) if such party is Agent, by
Agent, and (iii) if such party is a Lender, by such Lender or by Agent on behalf
of such Lender with the written consent of Majority Lenders (which consent has
already been given as to the termination of the Loan Documents as provided in
Section 10.9). Anything to the contrary herein
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notwithstanding, Agent shall not, without the prior consent of each individual
Lender, execute and deliver on behalf of such Lender any waiver or amendment
which would: (1) waive any of the conditions specified in Article IV (provided
that Agent may in its discretion withdraw any request it has made under Section
4.2(f)), (2) increase the commitment of such Lender or subject such Lender to
any additional obligations, (3) reduce any fees payable to such Lender
hereunder, or the principal of, or interest on, such Lender's Note, (4) postpone
any date fixed for any payment of any such fees, principal or interest, or (5)
release Borrower from its obligation to pay such Lender's Note or any Guarantor
from its guaranty of such payment or, (6) release any Collateral, or (7) amend
the definition of Marketable Securities Collateral set forth in Section 1.1.
(b) Acknowledgments and Admissions. Borrower hereby represents,
warrants, acknowledges and admits that (i) it has been advised by counsel in the
negotiation, execution and delivery of the Loan Documents to which it is a
party, (ii) it has made an independent decision to enter into this Agreement and
the other Loan Documents to which it is a party, without reliance on any
representation, warranty, covenant or undertaking by Agent or any Lender,
whether written, oral or implicit, other than as expressly set out in this
Agreement or in another Loan Document delivered on or after the date hereof,
(iii) there are no representations, warranties, covenants, undertakings or
agreements by any Bank Party as to the Loan Documents except as expressly set
out in this Agreement or in another Loan Document delivered on or after the date
hereof, (iv) no Bank Party has any fiduciary obligation toward Borrower with
respect to any Loan Document or the transactions contemplated thereby, (v) the
relationship pursuant to the Loan Documents between Borrower and the other
Restricted Persons, on one hand, and each Bank Party, on the other hand, is and
shall be solely that of debtor and creditor, respectively, (vi) no partnership
or joint venture exists with respect to the Loan Documents between any
Restricted Person and any Bank Party, (vii) Agent is not Borrower's Agent, but
Agent for Lenders, (viii) should an Event of Default or Default occur or exist,
each Bank Party will determine in its sole discretion and for its own reasons
what remedies and actions it will or will not exercise or take at that time,
(ix) without limiting any of the foregoing, Borrower is not relying upon any
representation or covenant by any Bank Party, or any representative thereof, and
no such representation or covenant has been made, that any Bank Party will, at
the time of an Event of Default or Default, or at any other time, waive,
negotiate, discuss, or take or refrain from taking any action permitted under
the Loan Documents with respect to any such Event of Default or Default or any
other provision of the Loan Documents, and (x) all Bank Parties have relied upon
the truthfulness of the acknowledgments in this section in deciding to execute
and deliver this Agreement and to become obligated hereunder.
(c) Representation by Lenders. Each Lender hereby represents that it
will acquire its Note for its own account in the ordinary course of its lending
business; however, the disposition of such Lender's property shall at all times
be and remain within its control and, in particular and without limitation, such
Lender may sell or otherwise transfer its Note, any participation interest or
other interest in its Note, or any of its other rights and obligations under the
Loan Documents.
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(d) Joint Acknowledgment. THIS WRITTEN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 10.2. Survival of Agreements; Cumulative Nature. All of
Restricted Persons' various representations, warranties, covenants and
agreements in the Loan Documents shall survive the execution and delivery of
this Agreement and the other Loan Documents and the performance hereof and
thereof, including the making or granting of the Loans and the delivery of the
Notes and the other Loan Documents, and shall further survive until all of the
Obligations are paid in full to each Bank Party and all of Bank Parties'
obligations to Borrower are terminated. All statements and agreements contained
in any certificate or other instrument delivered by any Restricted Person to any
Bank Party under any Loan Document shall be deemed representations and
warranties by Borrower or agreements and covenants of Borrower under this
Agreement. The representations, warranties, indemnities, and covenants made by
Restricted Persons in the Loan Documents, and the rights, powers, and privileges
granted to Bank Parties in the Loan Documents, are cumulative, and, except for
expressly specified waivers and consents, no Loan Document shall be construed in
the context of another to diminish, nullify, or otherwise reduce the benefit to
any Bank Party of any such representation, warranty, indemnity, covenant, right,
power or privilege. In particular and without limitation, no exception set out
in this Agreement to any representation, warranty, indemnity, or covenant herein
contained shall apply to any similar representation, warranty, indemnity, or
covenant contained in any other Loan Document, and each such similar
representation, warranty, indemnity, or covenant shall be subject only to those
exceptions which are expressly made applicable to it by the terms of the various
Loan Documents.
Section 10.3. Notices. All notices, requests, consents, demands and
other communications required or permitted under any Loan Document shall be in
writing, unless otherwise specifically provided in such Loan Document (provided
that Agent may give telephonic notices to the other Bank Parties), and shall be
deemed sufficiently given or furnished if delivered by personal delivery, by
telecopy or telex, by delivery service with proof of delivery, or by registered
or certified United States mail, postage prepaid, to Borrower and Restricted
Persons at the address of Borrower specified on the signature pages hereto and
to each Bank Party at its address specified on the signature pages hereto
(unless changed by similar notice in writing given by the particular Person
whose address is to be changed). Any such notice or communication shall be
deemed to have been given (a) in the case of personal delivery or delivery
service, as of the date of first attempted delivery during normal business hours
at the address provided herein, (b) in the case of telecopy or telex, upon
receipt, or (c) in the case of registered or certified United States mail, three
days after deposit in the mail; provided, however, that no Request for Loan
shall become effective until actually received by Agent.
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<PAGE> 51
Section 10.4. Payment of Expenses; Indemnity.
(a) Payment of Expenses. Whether or not the transactions contemplated by
this Agreement are consummated, Borrower will promptly (and in any event, within
30 days after any invoice or other statement or notice) pay: (i) all transfer,
stamp, mortgage, documentary or other similar taxes, assessments or charges
levied by any governmental or revenue authority in respect of this Agreement or
any of the other Loan Documents or any other document referred to herein or
therein, (ii) all reasonable costs and expenses incurred by or on behalf of
Agent (including reasonable attorneys' fees, consultants' fees and engineering
fees, travel costs and miscellaneous expenses) in connection with (1) the
negotiation, preparation, execution and delivery of the Loan Documents, and any
and all consents, waivers or other documents or instruments relating thereto,
(2) the filing, recording, refiling and re-recording of any Loan Documents and
any other documents or instruments or further assurances required to be filed or
recorded or refiled or re-recorded by the terms of any Loan Document, (3) the
borrowings hereunder and other action reasonably required in the course of
administration hereof, (4) monitoring or confirming (or preparation or
negotiation of any document related to) Borrower's compliance with any covenants
or conditions contained in this Agreement or in any Loan Document, and (iii) all
reasonable costs and expenses incurred by or on behalf of any Bank Party
(including reasonable attorneys' fees, consultants' fees and accounting fees) in
connection with the defense or enforcement of any of the Loan Documents with
respect to the obligations of Borrowers (including this section) or the defense
of any Bank Party's exercise of its rights thereunder with respect to the
obligations of Borrower. In addition to the foregoing, until and all Obligations
have been paid in full, Borrower will also pay or reimburse Agent for all
reasonable out-of-pocket costs and expenses of Agent or its agents or employees
in connection with the continuing administration of the Loans and the related
due diligence of Agent, including travel and miscellaneous expenses and fees and
expenses of Agent's outside counsel, reserve engineers and consultants engaged
in connection with the Loan Documents.
(b) Indemnity. Borrower agrees to indemnify each Bank Party, upon
demand, from and against any and all liabilities, obligations, claims, losses,
damages, penalties, fines, actions, judgments, suits, settlements, costs,
expenses or disbursements (including reasonable fees of attorneys, accountants,
experts and advisors) of any kind or nature whatsoever (in this section
collectively called "liabilities and costs") which to any extent (in whole or in
part) may be imposed on, incurred by, or asserted against such Bank Party
growing out of, resulting from or in any other way associated with any of the
Collateral, the Loan Documents and the transactions and events (including the
enforcement or defense thereof) at any time associated therewith or contemplated
therein (including any violation or noncompliance with any Environmental Laws by
any Restricted Person or any liabilities or duties of any Restricted Person or
any Bank Party with respect to Hazardous Materials found in or released into the
environment).
THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH LIABILITIES AND
COSTS ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE OR IN PART, UNDER ANY CLAIM
OR THEORY OF STRICT LIABILITY, OR ARE
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CAUSED, IN WHOLE OR IN PART, BY ANY NEGLIGENT ACT OR OMISSION OF ANY KIND BY ANY
BANK PARTY,
provided only that no Bank Party shall be entitled under this section to receive
indemnification for that portion, if any, of any liabilities and costs which is
proximately caused by its own individual gross negligence or willful misconduct,
as determined in a final judgment. If any Person (including Borrower or any of
its Affiliates) ever alleges such gross negligence or willful misconduct by any
Bank Party, the indemnification provided for in this section shall nonetheless
be paid upon demand, subject to later adjustment or reimbursement, until such
time as a court of competent jurisdiction enters a final judgment as to the
extent and effect of the alleged gross negligence or willful misconduct. As used
in this section the term "Bank Parties" shall refer not only to the Persons
designated as such in Section 1.1 but also to each director, officer, agent,
attorney, employee, representative and Affiliate of such Persons.
Section 10.5. Joint and Several Liability; Parties in Interest;
Assignments. All Obligations which are incurred by two or more Restricted
Persons shall be their joint and several obligations and liabilities. All
grants, covenants and agreements contained in the Loan Documents shall bind and
inure to the benefit of the parties thereto and their respective successors and
assigns; provided, however, that no Restricted Person may assign or transfer any
of its rights or delegate any of its duties or obligations under any Loan
Document without the prior consent of Agent. Neither Borrower nor any Affiliates
of Borrower shall directly or indirectly purchase or otherwise retire any
Obligations owed to any Lender nor will any Lender accept any offer to do so,
unless each Lender shall have received substantially the same offer with respect
to the same Percentage Share of the Obligations owed to it. If Borrower or any
Affiliate of Borrower at any time purchases some but less than all of the
Obligations owed to all Bank Parties, such purchaser shall not be entitled to
any rights of any Bank Party under the Loan Documents unless and until Borrower
or its Affiliates have purchased all of the Obligations.
(b) No Lender shall sell any participation interest in its commitment
hereunder or any of its rights under its Loans or under the Loan Documents to
any Person other than an Eligible Transferee, and then only if the agreement
between such Lender and such participant at all times provides: (i) that such
participation exists only as a result of the agreement between such participant
and such Lender and that such transfer does not give such participant any right
to vote as a Lender or any other direct claims or rights against any Person
other than such Lender, (ii) that such participant is not entitled to payment
from any Restricted Person under Sections 3.2 through 3.6 of amounts in excess
of those payable to such Lender under such sections (determined without regard
to the sale of such participation), and (iii) unless such participant is an
Affiliate of such Lender, that such participant shall not be entitled to require
such Lender to take any action under any Loan Document or to obtain the consent
of such participant prior to taking any action under any Loan Document, except
for actions which would require the consent of all Lenders under the
next-to-last sentence of subsection (a) of Section 10.1. No Lender selling such
a participation shall, as between the other parties hereto and such Lender, be
relieved of any of its obligations hereunder as a result of the sale of such
participation. Each Lender
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<PAGE> 53
which sells any such participation to any Person (other than an Affiliate of
such Lender) shall give prompt notice thereof to Agent and Borrower.
(c) Except for sales of participations under the immediately preceding
subsection (b), no Lender shall make any assignment or transfer of any kind of
its commitments or any of its rights under its Loans or under the Loan
Documents, except for assignments to an Eligible Transferee, and then only if
such assignment is made in accordance with the following requirements:
(i) Each such assignment shall apply to all Obligations owing to
the assignor Lender hereunder and to the unused portion of the assignor
Lender's commitments, so that after such assignment is made the assignor
Lender shall have a fixed (and not a varying) Percentage Share in its
Loans and Note and be committed to make that Percentage Share of all
future Loans, the assignee shall have a fixed Percentage Share in such
Loans and Note and be committed to make that Percentage Share of all
future Loans, and the Percentage Share of the Commitment of both the
assignor and assignee shall equal or exceed $10,000,000.
(ii) The parties to each such assignment shall execute and deliver
to Agent, for its acceptance and recording in the "Register" (as defined
below in this section), an Assignment and Acceptance in the form of
Exhibit E, appropriately completed, together with the Note subject to
such assignment and a processing fee payable to Agent of $2,500. Upon
such execution, delivery, and payment and upon the satisfaction of the
conditions set out in such Assignment and Acceptance, then (i) Borrower
shall issue new Notes to such assignor and assignee upon return of the
old Notes to Borrower, and (ii) as of the "Settlement Date" specified in
such Assignment and Acceptance the assignee thereunder shall be a party
hereto and a Lender hereunder and Agent shall thereupon deliver to
Borrower and each Lender a schedule showing the revised Percentage
Shares of such assignor Lender and such assignee Lender and the
Percentage Shares of all other Lenders.
(iii) Each assignee Lender which is not a United States person (as
such term is defined in Section 7701(a)(30) of the Internal Revenue Code
of 1986, as amended) for Federal income tax purposes, shall (to the
extent it has not already done so) provide Agent and Borrower with the
"Prescribed Forms" referred to in Section 3.6(d).
(d) Nothing contained in this section shall prevent or prohibit any
Lender from assigning or pledging all or any portion of its Loans and Note to
any Federal Reserve Bank as collateral security pursuant to Regulation A of the
Board of Governors of the Federal Reserve System and any Operating Circular
issued by such Federal Reserve Bank; provided that no such assignment or pledge
shall relieve such Lender from its obligations hereunder.
(e) By executing and delivering an Assignment and Acceptance, each
assignee Lender thereunder will be confirming to and agreeing with Borrower,
Agents and each other
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Lender hereunder that such assignee understands and agrees to the terms hereof,
including Article IX hereof.
(f) Agent shall maintain a copy of each Assignment and Acceptance and a
register for the recordation of the names and addresses of Lenders and the
Percentage Shares of, and principal amount of the Loans owing to, each Lender
from time to time (in this section called the "Register"). The entries in the
Register shall be conclusive, in the absence of manifest error, and Borrower and
each Bank Party may treat each Person whose name is recorded in the Register as
a Lender hereunder for all purposes. The Register shall be available for
inspection by Borrower or any Bank Party at any reasonable time and from time to
time upon reasonable prior notice.
Section 10.6. Confidentiality. Each Bank Party agrees that it will take
all reasonable steps to keep confidential any proprietary information given to
it by any Restricted Person, provided, however, that this restriction shall not
apply to information which (i) has at the time in question entered the public
domain, (ii) is required to be disclosed by Law (whether valid or invalid) of
any Tribunal, (iii) is disclosed to any Bank Party's Affiliates, auditors,
attorneys, or agents, (iv) is furnished to any other Bank Party or to any
purchaser or prospective purchaser of participations or other interests in any
Loan or Loan Document, or (v) is disclosed in the course of enforcing its rights
and remedies during the existence of an Event of Default.
Section 10.7. Governing Law; Submission to Process. EXCEPT TO THE EXTENT
THAT THE LAW OF ANOTHER JURISDICTION IS EXPRESSLY ELECTED IN A LOAN DOCUMENT,
THE LOAN DOCUMENTS SHALL BE DEEMED CONTRACTS AND INSTRUMENTS MADE UNDER THE LAWS
OF THE STATE OF TEXAS AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND
GOVERNED BY THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF THE UNITED STATES OF
AMERICA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. CHAPTER 15 OF TEXAS
REVISED CIVIL STATUTES ANNOTATED ARTICLE 5069 (WHICH REGULATES CERTAIN REVOLVING
CREDIT LOAN ACCOUNTS AND REVOLVING TRI-PARTY ACCOUNTS) DOES NOT APPLY TO THIS
AGREEMENT OR TO THE NOTES. BORROWER HEREBY IRREVOCABLY SUBMITS ITSELF AND EACH
OTHER RESTRICTED PERSON TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND
FEDERAL COURTS SITTING IN THE STATE OF TEXAS AND AGREES AND CONSENTS THAT
SERVICE OF PROCESS MAY BE MADE UPON IT OR ANY RESTRICTED PERSON IN ANY LEGAL
PROCEEDING RELATING TO THE LOAN DOCUMENTS OR THE OBLIGATIONS BY ANY MEANS
ALLOWED UNDER TEXAS OR FEDERAL LAW. ANY LEGAL PROCEEDING ARISING OUT OF OR IN
ANY WAY RELATED TO ANY OF THE LOAN DOCUMENTS SHALL BE BROUGHT AND LITIGATED
EXCLUSIVELY IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF
TEXAS, DALLAS DIVISION, TO THE EXTENT IT HAS SUBJECT MATTER JURISDICTION, AND
OTHERWISE IN THE TEXAS
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<PAGE> 55
DISTRICT COURTS SITTING IN DALLAS COUNTY, TEXAS. THE PARTIES HERETO HEREBY WAIVE
AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE, THAT ANY
SUCH PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER, AND FURTHER AGREE TO A TRANSFER OF ANY SUCH PROCEEDING TO A FEDERAL
COURT SITTING IN THE STATE OF TEXAS TO THE EXTENT THAT IT HAS SUBJECT MATTER
JURISDICTION, AND OTHERWISE TO A STATE COURT IN DALLAS, TEXAS. IN FURTHERANCE
THEREOF, BORROWER AND BANK PARTIES EACH HEREBY ACKNOWLEDGE AND AGREE THAT IT WAS
NOT INCONVENIENT FOR THEM TO NEGOTIATE AND RECEIVE FUNDING OF THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT IN SUCH COUNTY AND THAT IT WILL BE NEITHER
INCONVENIENT NOR UNFAIR TO LITIGATE OR OTHERWISE RESOLVE ANY DISPUTES OR CLAIMS
IN A COURT SITTING IN SUCH COUNTY.
Section 10.8. Limitation on Interest. Bank Parties, Restricted Persons
and any other parties to the Loan Documents intend to contract in strict
compliance with applicable usury law from time to time in effect. In furtherance
thereof such Persons stipulate and agree that none of the terms and provisions
contained in the Loan Documents shall ever be construed to create a contract to
pay, for the use, forbearance or detention of money, interest in excess of the
maximum amount of interest permitted to be charged by applicable law from time
to time in effect. Neither any Restricted Person nor any present or future
guarantors, endorsers, or other Persons hereafter becoming liable for payment of
any Obligation shall ever be liable for unearned interest thereon or shall ever
be required to pay interest thereon in excess of the maximum amount that may be
lawfully charged under applicable law from time to time in effect, and the
provisions of this section shall control over all other provisions of the Loan
Documents which may be in conflict or apparent conflict herewith. Bank Parties
expressly disavow any intention to charge or collect excessive unearned interest
or finance charges in the event the maturity of any Obligation is accelerated.
If (a) the maturity of any Obligation is accelerated for any reason, (b) any
Obligation is prepaid and as a result any amounts held to constitute interest
are determined to be in excess of the legal maximum, or (c) any Bank Party or
any other holder of any or all of the Obligations shall otherwise collect moneys
which are determined to constitute interest which would otherwise increase the
interest on any or all of the Obligations to an amount in excess of that
permitted to be charged by applicable law then in effect, then all sums
determined to constitute interest in excess of such legal limit shall, without
penalty, be promptly applied to reduce the then outstanding principal of the
related Obligations or, at such Bank Party's or holder's option, promptly
returned to Borrower or the other payor thereof upon such determination. In
determining whether or not the interest paid or payable, under any specific
circumstance, exceeds the maximum amount permitted under applicable law, Bank
Parties and Restricted Persons (and any other payors thereof) shall to the
greatest extent permitted under applicable law, (i) characterize any
non-principal payment as an expense, fee or premium rather than as interest,
(ii) exclude voluntary prepayments and the effects thereof, and (iii) amortize,
prorate, allocate, and spread the total amount of interest throughout the entire
contemplated term of the instruments evidencing the Obligations in accordance
with the amounts outstanding from
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time to time thereunder and the maximum legal rate of interest from time to time
in effect under applicable law in order to lawfully charge the maximum amount of
interest permitted under applicable law. In the event applicable law provides
for an interest ceiling, the ceiling shall be the "weekly ceiling" as defined in
Section 303 of the Texas Finance Code and Chapter 1D of Title 79, Tex. Rev. Civ.
Stats. 1925, as amended and shall be used when appropriate in determining the
Highest Lawful Rate. As used in this section the term "applicable Law" means the
Laws of the State of Texas or the Laws of the United States of America,
whichever Laws allow the greater interest, as such Laws now exist or may be
changed or amended or come into effect in the future.
Section 10.9. Termination; Limited Survival. In its sole and absolute
discretion Borrower may at any time that no Obligations are owing elect in a
written notice delivered to Agent to terminate this Agreement. Upon receipt by
Agent of such a notice, if no Obligations are then owing this Agreement and all
other Loan Documents shall thereupon be terminated and the parties thereto
released from all prospective obligations thereunder. Notwithstanding the
foregoing or anything herein to the contrary, any waivers or admissions made by
any Restricted Person in any Loan Document, any Obligations under Sections 3.2
through 3.6, and any obligations which any Person may have to indemnify or
compensate any Bank Party shall survive any termination of this Agreement or any
other Loan Document. At the request and expense of Borrower, Agent shall prepare
and execute all necessary instruments to reflect and effect such termination of
the Loan Documents. Agent is hereby authorized to execute all such instruments
on behalf of all Lenders, without the joinder of or further action by any
Lender.
Section 10.10. Severability. If any term or provision of any Loan
Document shall be determined to be illegal or unenforceable all other terms and
provisions of the Loan Documents shall nevertheless remain effective and shall
be enforced to the fullest extent permitted by applicable Law.
Section 10.11. Counterparts. This Agreement may be separately executed
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same agreement.
Section 10.12. Waiver of Jury Trial, Punitive Damages, etc.
BORROWER AND EACH BANK PARTY HEREBY KNOWINGLY, VOLUNTARILY,
INTENTIONALLY, AND IRREVOCABLY (A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED
BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
BASED HEREON, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THE LOAN DOCUMENTS OR ANY TRANSACTION CONTEMPLATED THEREBY OR
ASSOCIATED THEREWITH, BEFORE OR AFTER MATURITY; (B) WAIVES, TO THE MAXIMUM
EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY
SUCH LITIGATION ANY "SPECIAL DAMAGES", AS DEFINED BELOW, (C) CERTIFIES THAT NO
PARTY HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR
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<PAGE> 57
OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN THE EVENT OF LITIGATION,
SEEK TO ENFORCE THE FOREGOING WAIVERS, AND (D) ACKNOWLEDGES THAT IT HAS BEEN
INDUCED TO ENTER INTO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS AND THE
TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER THINGS, THE MUTUAL
WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION. AS USED IN THIS SECTION,
"SPECIAL DAMAGES" INCLUDES ALL SPECIAL, CONSEQUENTIAL, EXEMPLARY, OR PUNITIVE
DAMAGES (REGARDLESS OF HOW NAMED), BUT DOES NOT INCLUDE ANY PAYMENTS OR FUNDS
WHICH ANY PARTY HERETO HAS EXPRESSLY PROMISED TO PAY OR DELIVER TO ANY OTHER
PARTY HERETO.
Section 10.13. Ratification of Agreements. This Agreement amends and
restates in its entirety that certain Credit Agreement dated as of November 21,
1997, among Borrower, Agent and the lenders parties thereto, as supplemented or
amended to the date hereof, together with the promissory notes made by Borrower
thereunder (collectively, the "Existing Credit Agreement"). Borrower hereby
agrees that (i) the Indebtedness outstanding under the Existing Credit Agreement
and all accrued and unpaid interest thereon and (ii) all accrued and unpaid fees
under the Existing Credit Agreement shall be deemed to be outstanding under and
governed by this Agreement.
[The remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, this Agreement is executed as of the date first
written above.
STB SYSTEMS, INC.
Borrower
By: /s/ BRYAN F. KEYES
------------------------------------
Name: Bryan F. Keyes
Title: Vice President
Address:
STB Systems, Inc.
3400 Waterview
Richardson, TX 75080
Attention: Bryan F. Keyes
Telephone: (972) 234-8750
Telecopy: (972) 680-7153
3DFX INTERACTIVE, INC.
Guarantor
By: /s/ BRYAN F. KEYES
------------------------------------
Name: Bryan F. Keyes
Title: Vice President
Address:
3dfx Interactive, Inc.
c/o STB Systems, Inc.
3400 Waterview
Richardson, TX 75080
Attention: Bryan F. Keyes
Telephone: (972) 234-8750
Telecopy: (972) 680-7153
53
<PAGE> 59
BANK ONE, TEXAS, N.A.
Agent and Lender
By: /s/ RICK ROGERS
------------------------------------
Name: Rick Rogers
Title: Managing Director
Address:
1717 Main Street
Dallas, Texas 75201
Attention: Richard L. Rogers
Telephone: (214) 290-2305
Telecopy: (214) 290-2540
COMERICA BANK-TEXAS
Lender
By: /s/ ROBIN INGRAM
------------------------------------
Name: Robin Ingram
Title: Sr. Vice President
Address:
Comerica Bank - Texas
804 Congress Avenue, Suite 320
Austin, TX 78701
Attention: Robin Ingari
Telephone: (512) 427-7119
Telecopy: (512) 427-7120
54
<PAGE> 1
EXHIBIT 10.11.2
[EXECUTION]
FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (herein
called this "Amendment") is dated as of February 25, 2000, by and among STB
Systems, Inc., a Texas corporation (herein called "Borrower"), Bank One, Texas,
N.A., individually and as agent (herein called "Agent"), and the Lenders
referred to in the Original Agreement described below ("Lenders").
W I T N E S S E T H:
WHEREAS, Borrower, Agent, and Lenders have entered into that certain
Amended and Restated Credit Agreement dated as of December 21, 1999 (as amended,
supplemented, or restated to the date hereof, the "Original Agreement"), for the
purposes and consideration therein expressed, pursuant to which Lenders became
obligated to make loans to Borrower as therein provided; and
WHEREAS, Borrower, Agent, and Lenders desire to amend the Original
Agreement for the purposes described herein;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Agreement, in
consideration of the loans which may hereafter be made by Lenders to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
Section 1.1. Terms Defined in the Original Agreement. Unless the context
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment.
Section 1.2. Other Defined Terms. Unless the context otherwise requires,
the following terms when used in this Amendment shall have the meanings assigned
to them in this Section 1.2.
"Amendment" means this First Amendment to Amended and Restated
Credit Agreement.
"Credit Agreement" means the Original Agreement as amended hereby.
<PAGE> 2
ARTICLE II.
Consent
Section 2.1. Consent. Borrower has informed Agent and Lenders that
Borrower proposes to sell all of the assets (including but not limited to the
assets described in Exhibit A attached hereto and made a part hereof) of the
Specialized Technology Group, which is currently a division of Borrower (the
"STG Division") to The Ogle Group, Inc. (the "Sale") and has requested that each
Lender consent to the Sale. Subject to the terms and conditions set forth
herein, each undersigned Lender hereby (i) consents to the Sale, (ii) waives the
prohibition concerning the sale of the assets of the STG Division under Section
7.5 of the Agreement as it may apply to the Sale, and (iii) waives the
prohibition concerning the limitation on investments in The Ogle Group, Inc.,
under Section 7.7 of the Agreement as it may apply to the Sale, so long as no
Default or Event of Default exists or will occur as a result thereof.
ARTICLE III.
Amendments to Original Agreement
Section 3.1. Limitations on Credit Extensions. Section 7.8 of the
Original Agreement is hereby amended in its entirety to read:
"Section 7.8. Limitation on Credit Extensions. Except for Permitted
Investments, no Restricted Person will extend credit, make advances or
make loans other than (i) normal and prudent extensions of credit to
customers buying goods and services in the ordinary course of business,
which extensions shall not be for longer periods than those extended by
similar businesses operated in a normal and prudent manner, (ii) loans
to Parent in an aggregate amount not to exceed $25,000,000, which shall
be evidenced by a promissory note in form and substance acceptable to
Agent, (iii) purchase money financing by Borrower to The Ogle Group,
Inc., for the sale of all assets of the Specialized Technology Group
(formerly a division of Borrower) to The Ogle Group, Inc., which
financing shall be evidenced by a promissory note, which (A) shall not
exceed $3,000,000 in principal amount, (B) shall mature in five years or
less from the date of such sale, (C) shall be in form and substance
acceptable to Lenders, and (D) shall be subordinate to the obligations
of The Ogle Group, Inc. to its lenders, on terms acceptable to Lenders,
and (iv) working capital financing by Borrower to The Ogle Group, Inc.
(in connection with the sale referenced in (iii) above), which financing
shall be evidenced by a promissory note which (A) shall not exceed
$200,000 in principal amount, (B) shall mature in ninety (90) days or
less from the date of such sale, (C) shall be in form and substance
acceptable to Lenders, and (D) shall be subordinate to the obligations
of The Ogle Group, Inc. to its lenders, on terms acceptable to Lenders."
2
<PAGE> 3
ARTICLE IV.
Conditions of Effectiveness
Section 4.1. Effective Date. This Amendment shall become effective as of
the Effective Date, when, and only when Agent shall have received, at Agent's
office, and executed by, if applicable, Lenders, Borrower and/or Guarantors, all
of the following documents in form and substance satisfactory to Agent:
(a) this Amendment;
(b) a certificate of the Vice President and/or Secretary or
Assistant Secretary of Borrower dated the date of this Amendment
certifying: (i) that resolutions adopted by the Board of Directors of
the Borrower authorize the execution, delivery and performance of this
Amendment by Borrower; (ii) the names and true signatures of the
officers of the Borrower authorized to sign this Amendment; and (iii)
that all of the representations and warranties set forth in Article V
hereof are true and correct at and as of the time of such effectiveness;
(c) Consents of existing Guarantors in a form satisfactory to
Agent; and
(d) such other supporting documents as Agent may reasonably
request.
ARTICLE V.
Representations and Warranties
Section 5.1. Representations and Warranties of Borrower. In order to
induce each Lender to enter into this Amendment, Borrower represents and
warrants as to itself and each Restricted Person, to Lenders that:
(a) Except as otherwise provided herein, all representations and
warranties contained in Article V of the Original Agreement are true on
and as of the date hereof (except to the extent that the facts upon
which such representations are based have been changed by transactions
and events expressly permitted by the Credit Agreement).
(b) Borrower is duly authorized to execute and deliver this
Amendment and is and will continue to be duly authorized to borrow
monies and to perform its obligations under the Credit Agreement. Each
Restricted Person has duly taken all corporate action necessary to
authorize the execution and delivery of this Amendment and to authorize
the performance of the obligations hereunder.
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(c) The execution and delivery by Borrower of this Amendment, the
performance by Borrower of its obligations hereunder and the
consummation of the transactions contemplated hereby do not and will not
conflict with any provision of law, statute, rule or regulation or of
the articles of incorporation and bylaws of Borrower, or of any material
agreement, judgment, license, order or permit applicable to or binding
upon Borrower, or result in the creation of any lien, charge or
encumbrance upon any assets or properties of Borrower. Except for those
which have been obtained, no consent, approval, authorization or order
of any court or governmental authority or third party is required in
connection with the execution and delivery by Borrower of this Amendment
or to consummate the transactions contemplated hereby.
(d) When duly executed and delivered, each of this Amendment and
the Credit Agreement will be a legal and binding obligation of Borrower,
enforceable in accordance with its terms, except as limited by
bankruptcy, insolvency and similar laws applying to creditors' rights
generally and by principles of equity applying to creditors' rights
generally.
(e) The Consolidated financial statements of Consolidated Borrower
dated as of October 31, 1999, fairly present the Consolidated financial
position at such dates and the Consolidated statement of operations and
the changes in Consolidated financial position for the periods ending on
such dates for Consolidated Borrower. Copies of such financial
statements have heretofore been delivered to Agent. Since October 31,
1999, no material adverse change has occurred in the financial condition
or businesses or in the Consolidated financial condition or businesses
of Consolidated Borrower. Borrower has furnished to Agent reasonable
good faith estimates of Consolidated Borrower's January 31, 2000,
quarter-end financial results and the projected financial results by
quarter for the January 31, 2001, fiscal year of Consolidated Borrower.
ARTICLE VI.
Miscellaneous
Section 6.1. Ratification of Agreements. The Original Agreement as
hereby amended is hereby ratified and confirmed in all respects. The Loan
Documents, as they may be amended or affected by the Amendment, are hereby
ratified and confirmed in all respects. Any reference to the Credit Agreement in
any Loan Document shall be deemed to be a reference to the Original Agreement as
hereby amended. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of Lenders under the Credit Agreement, the Notes, or any
other Loan Document nor constitute a waiver of any provision of the Credit
Agreement, the Notes or any other Loan Document.
Section 6.2. Survival of Agreements. All representations, warranties,
covenants and agreements of Borrower herein shall survive the execution and
delivery of this Amendment and
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the performance hereof, including without limitation the making or granting of
the Loans and shall further survive until all of the Obligations are paid in
full. All statements and agreements contained in any certificate or instrument
delivered by Borrower or any Restricted Person hereunder or under the Credit
Agreement to any Lender shall be deemed to constitute representations and
warranties by, and/or agreements and covenants of, Borrower under this Amendment
and under the Credit Agreement.
Section 6.3. Partial Release. Upon consummation of the Sale, Agent
agrees to deliver to Borrower executed Statements of Partial Release of
Financing Statement in the form attached hereto as Exhibit B.
Section 6.4. Loan Documents. This Amendment is a Loan Document, and all
provisions in the Credit Agreement pertaining to Loan Documents apply hereto.
Section 6.5. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and any applicable
laws of the United States of America in all respects, including construction,
validity and performance.
Section 6.6. Counterparts. This Amendment may be separately executed in
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment. This Amendment may be validly executed and delivered by facsimile or
other electronic transmission.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
[The remainder of this page is intentionally left blank]
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IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
STB SYSTEMS, INC.
Borrower
By: /s/ BRYAN F. KEYES
------------------------------------
Name:
Title: Vice President
BANK ONE, TEXAS, N.A.
Agent and Lender
By: /s/ RICHARD L. ROGERS
------------------------------------
Name:
Title: Managing Director
COMERICA BANK-TEXAS, Lender
By: /s/ ROBIN INGRAM
------------------------------------
Name:
Title:
6
<PAGE> 1
EXHIBIT 10.11.3
[3Dfx Interactive, Inc.]
GUARANTY
THIS GUARANTY is made as of November 23, 1999, by 3Dfx INTERACTIVE, INC.
("Guarantor"), in favor of BANK ONE, TEXAS, N.A., a national banking
association, as agent for Lenders, as such term is defined in the Credit
Agreement described below (in such capacity "Agent").
RECITALS:
1. STB System, Inc., a Texas corporation ("Borrower") executed: (i) in
favor of Bank One, Texas, N.A. that certain promissory note dated as of January
30, 1998, payable to the order of Bank One, Texas, N.A. in the aggregate
principal amount of $15,000,000; (ii) in favor of Sanwa Business Credit
Corporation that certain promissory note dated as of January 30, 1998, payable
to the order of Sanwa Business Credit Corporation in the aggregate principal
amount of $15,000,000; and (iii) in favor of Comerica Bank - California, that
certain promissory note dated as of January 30, 1998, payable to the order of
Comerica Bank - California in the aggregate principal amount of $10,000,000
(such promissory notes, as from time to time amended, and all promissory notes
given in substitution, renewal or extension therefore or thereof, in whole or in
part, being herein collectively called the "Note").
2. The Note was executed pursuant to a Credit Agreement dated as of
November 21, 1997, (herein, as from time to time amended, supplemented or
restated, called the "Credit Agreement"), by and between Borrower, Agent and
Lenders, pursuant to which Lenders have agreed to advance funds to Borrower
under the Note.
3. It is a condition precedent to Lenders' obligations to advance
funds pursuant to the Credit Agreement that Guarantor shall execute and deliver
to Agent a satisfactory guaranty of Borrower's obligations under the Note and
the Credit Agreement.
4. Guarantor owns directly, or indirectly through one or more
subsidiaries, one hundred percent (100%) of the outstanding shares of capital
stock of Borrower.
5. Borrower, Guarantor, and the other direct and indirect subsidiaries
of Guarantor are mutually dependent on each other in the conduct of their
respective businesses, with the credit needed from time to time by each often
being provided by another or by means of financing obtained by one such
affiliate with the support of the others for their mutual benefit and the
ability of each to obtain such financing being dependent on the successful
operations of the others.
6. The board of directors of Guarantor has determined that Guarantor's
execution, delivery and performance of this Guaranty may reasonably be expected
to benefit Guarantor, directly or indirectly, and are in the best interests of
Guarantor.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises, of the benefits which
will inure to Guarantor from Lenders' advances of funds to Borrower under the
Credit Agreement, and of Ten Dollars and other good and valuable consideration,
the receipt and sufficiency of all of which are hereby acknowledged, and in
order to induce Lenders to advance funds under the Credit Agreement, Guarantor
hereby agrees with Agent, for the benefit of Agent and Lenders as follows:
AGREEMENTS
Section 1. Definitions. Reference is hereby made to the Credit Agreement
for all purposes. All terms used in this Guaranty which are defined in the
Credit Agreement and not otherwise defined herein shall have the same meanings
when used herein. All references herein to any Obligation Document, Loan
Document, or other document or instrument refer to the same as from time to time
amended, supplemented or restated. As used herein the following terms shall have
the following meanings:
"Agent" means the Person who, at the time in question, is the "Agent"
under the Credit Agreement. Whenever there is only one Lender under the Credit
Agreement, "Agent" shall also refer to such Lender in such capacity as the only
Lender.
"Lenders" means Bank One, Texas, N.A. and all other Persons who at any
time are "Lenders" under the Credit Agreement.
"Obligations" means collectively all of the indebtedness, obligations,
and undertakings which are guaranteed by Guarantor and described in subsections
(a) and (b) of Section 2.
"Obligation Documents" means this Guaranty, the Note, the Credit
Agreement, the Loan Documents, all other documents and instruments under, by
reason of which, or pursuant to which any or all of the Obligations are
evidenced, governed, secured, or otherwise dealt with, and all other documents,
instruments, agreements, certificates, legal opinions and other writings
heretofore or hereafter delivered in connection herewith or therewith.
"Obligors" means Borrower, Guarantor and any other endorsers, guarantors
or obligors, primary or secondary, of any or all of the Obligations.
"Security" means any rights, properties, or interests of Agent or
Lenders, under the Obligation Documents or otherwise, which provide recourse or
other benefits to Agent or Lenders in connection with the Obligations or the
non-payment or non-performance thereof, including collateral (whether real or
personal, tangible or intangible) in which Agent or Lenders have rights under or
pursuant to any Obligation Documents, guaranties of the payment or performance
of any Obligation, bonds, surety agreements, keep-well agreements, letters of
credit, rights of subrogation, rights of offset, and rights pursuant to which
other claims are subordinated to the Obligations.
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Section 2. Guaranty.
(a) Guarantor hereby irrevocably, absolutely, and unconditionally
guarantees to Agent and each Lender the prompt, complete, and full payment when
due, and no matter how the same shall become due, of:
(i) the Note, including all principal, all interest thereon and all
other sums payable thereunder; and
(ii) All other sums payable under the other Obligation Documents,
whether for principal, interest, fees or otherwise; and
(iii) Any and all other indebtedness or liabilities which Borrower
may at any time owe to Agent or any Lender, whether incurred heretofore
or hereafter or concurrently herewith, voluntarily or involuntarily,
whether owed alone or with others, whether fixed, contingent, absolute,
inchoate, liquidated or unliquidated, whether such indebtedness or
liability arises by notes, discounts, overdrafts, open account
indebtedness or in any other manner whatsoever, and including interest,
attorneys' fees and collection costs as may be provided by law or in any
instrument evidencing any such indebtedness or liability.
Without limiting the generality of the foregoing, Guarantor's liability
hereunder shall extend to and include all post-petition interest, expenses, and
other duties and liabilities of Borrower described above in this subsection (a),
or below in the following subsection (b), which would be owed by Borrower but
for the fact that they are unenforceable or not allowable due to the existence
of a bankruptcy, reorganization, or similar proceeding involving Borrower.
(b) Guarantor hereby irrevocably, absolutely, and unconditionally
guarantees to Agent and each Lender the prompt, complete and full performance,
when due, and no matter how the same shall become due, of all obligations and
undertakings of Borrower to Agent or such Lender under, by reason of, or
pursuant to any of the Obligation Documents.
(c) If Borrower shall for any reason fail to pay any Obligation, as and
when such Obligation shall become due and payable, whether at its stated
maturity, as a result of the exercise of any power to accelerate, or otherwise,
Guarantor will, forthwith upon demand by Agent, pay such Obligation in full to
Agent for the benefit of Agent or the Lender to whom such Obligation is owed. If
Borrower shall for any reason fail to perform promptly any Obligation, Guarantor
will, forthwith upon demand by Agent, cause such Obligation to be performed or,
if specified by Agent, provide sufficient funds, in such amount and manner as
Agent shall in good faith determine, for the prompt, full and faithful
performance of such Obligation by Agent or such other Person as Agent shall
designate.
(d) If either Borrower or Guarantor fails to pay or perform any
Obligation as described in the immediately preceding subsections (a), (b), or
(c) Guarantor will incur the
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additional obligation to pay to Agent, and Guarantor will forthwith upon demand
by Agent pay to Agent, the amount of any and all reasonable expenses, including
fees and disbursements of Agent's counsel and of any experts or agents retained
by Agent, which Agent may incur as a result of such failure.
(e) As between Guarantor and Agent or Lenders, this Guaranty shall be
considered a primary and liquidated liability of Guarantor.
Section 3. Unconditional Guaranty.
(a) No action which Agent or any Lender may take or omit to take in
connection with any of the Obligation Documents, any of the Obligations (or any
other indebtedness owing by Borrower to Agent or any Lender), or any Security,
and no course of dealing of Agent or any Lender with any Obligor or any other
Person, shall release or diminish Guarantor's obligations, liabilities,
agreements or duties hereunder, affect this Guaranty in any way, or afford
Guarantor any recourse against Agent or any Lender, regardless of whether any
such action or inaction may increase any risks to or liabilities of Agent or any
Lender or any Obligor or increase any risk to or diminish any safeguard of any
Security. Without limiting the foregoing, Guarantor hereby expressly agrees that
Agent and Lenders may, from time to time, without notice to or the consent of
Guarantor, do any or all of the following:
(i) Amend, change or modify, in whole or in part, any one or more
of the Obligation Documents and give or refuse to give any waivers or
other indulgences with respect thereto.
(ii) Neglect, delay, fail, or refuse to take or prosecute any
action for the collection or enforcement of any of the Obligations, to
foreclose or take or prosecute any action in connection with any
Security or Obligation Document, to bring suit against any Obligor or
any other Person, or to take any other action concerning the Obligations
or the Obligation Documents.
(iii) Accelerate, change, rearrange, extend, or renew the time,
rate, terms, or manner for payment or performance of any one or more of
the Obligations (whether for principal, interest, fees, expenses,
indemnifications, affirmative or negative covenants, or otherwise).
(iv) Compromise or settle any unpaid or unperformed Obligation or
any other obligation or amount due or owing, or claimed to be due or
owing, under any one or more of the Obligation Documents.
(v) Take, exchange, amend, eliminate, surrender, release, or
subordinate any or all Security for any or all of the Obligations,
accept additional or substituted Security therefor, and perfect or fail
to perfect Agent's or Lenders' rights in any or all Security.
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(vi) Discharge, release, substitute or add Obligors.
(vii) Apply all monies received from Obligors or others, or from
any Security for any of the Obligations, as Agent or Lenders may
determine to be in their best interest, without in any way being
required to marshal Security or assets or to apply all or any part of
such monies upon any particular Obligations.
(b) No action or inaction of any Obligor or any other Person, and no
change of law or circumstances, shall release or diminish Guarantor's
obligations, liabilities, agreements, or duties hereunder, affect this Guaranty
in any way, or afford Guarantor any recourse against Agent or any Lender.
Without limiting the foregoing, the obligations, liabilities, agreements, and
duties of Guarantor under this Guaranty shall not be released, diminished,
impaired, reduced, or affected by the occurrence of any or all of the following
from time to time, even if occurring without notice to or without the consent of
Guarantor:
(i) Any voluntary or involuntary liquidation, dissolution, sale of
all or substantially all assets, marshaling of assets or liabilities,
receivership, conservatorship, assignment for the benefit of creditors,
insolvency, bankruptcy, reorganization, arrangement, or composition of
any Obligor or any other proceedings involving any Obligor or any of the
assets of any Obligor under laws for the protection of debtors, or any
discharge, impairment, modification, release, or limitation of the
liability of, or stay of actions or lien enforcement proceedings
against, any Obligor, any properties of any Obligor, or the estate in
bankruptcy of any Obligor in the course of or resulting from any such
proceedings.
(ii) The failure by Agent or any Lender to file or enforce a claim
in any proceeding described in the immediately preceding subsection (I)
or to take any other action in any proceeding to which any Obligor is a
party.
(iii) The release by operation of law of any Obligor from any of
the Obligations or any other obligations to Agent or any Lender.
(iv) The invalidity, deficiency, illegality, or unenforceability of
any of the Obligations or the Obligation Documents, in whole or in part,
any bar by any statute of limitations or other law of recovery on any of
the Obligations, or any defense or excuse for failure to perform on
account of force majeure, act of God, casualty, impossibility,
impracticability, or other defense or excuse whatsoever.
(v) The failure of any Obligor or any other Person to sign any
guaranty or other instrument or agreement within the contemplation of
any Obligor, Agent or any Lender.
(vi) The fact that Guarantor may have incurred directly part of the
Obligations or is otherwise primarily liable therefor.
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(vii) Without limiting any of the foregoing, any fact or event
(whether or not similar to any of the foregoing) which in the absence of
this provision would or might constitute or afford a legal or equitable
discharge or release of or defense to a guarantor or surety other than
the actual payment and performance by Guarantor under this Guaranty.
(c) Agent and Lenders may invoke the benefits of this Guaranty before
pursuing any remedies against any Obligor or any other Person and before
proceeding against any Security now or hereafter existing for the payment or
performance of any of the Obligations. Agent and Lenders may maintain an action
against Guarantor on this Guaranty without joining any other Obligor therein and
without bringing a separate action against any other Obligor.
(d) If any payment to Agent or any Lender by any Obligor is held to
constitute a preference or a voidable transfer under applicable state or federal
laws, or if for any other reason Agent or any Lender is required to refund such
payment to the payor thereof or to pay the amount thereof to any other Person,
such payment to Agent or such Lender shall not constitute a release of Guarantor
from any liability hereunder, and Guarantor agrees to pay such amount to Agent
or such Lender on demand and agrees and acknowledges that this Guaranty shall
continue to be effective or shall be reinstated, as the case may be, to the
extent of any such payment or payments. Any transfer by subrogation which is
made as contemplated in [Section 6] prior to any such payment or payments shall
(regardless of the terms of such transfer) be automatically voided upon the
making of any such payment or payments, and all rights so transferred shall
thereupon revert to and be vested in Agent and Lenders.
(e) This is a continuing guaranty and shall apply to and cover all
Obligations and renewals and extensions thereof and substitutions therefor from
time to time.
Section 4. Waiver. Guarantor hereby waives, with respect to the
Obligations, this Guaranty, and the other Obligation Documents:
(a) notice of the incurrence of any Obligation by Borrower, and notice
of any kind concerning the assets, liabilities, financial condition,
creditworthiness, businesses, prospects, or other affairs of Borrower (it being
understood and agreed that: (I) Guarantor shall take full responsibility for
informing itself of such matters, (ii) neither Agent nor any Lender shall have
any responsibility of any kind to inform Guarantor of such matters, and (iii)
Agent and Lenders are hereby authorized to assume that Guarantor, by virtue of
its relationships with Borrower which are independent of this Guaranty, has full
and complete knowledge of such matters whenever Lenders extend credit to
Borrower or take any other action which may change or increase Guarantor's
liabilities or losses hereunder).
(b) notice that Agent, any Lender, any Obligor, or any other Person has
taken or omitted to take any action under any Obligation Document or any other
agreement or instrument relating thereto or relating to any Obligation.
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(c) notice of acceptance of this Guaranty and all rights of Guarantor
under Section 34.02 of the Texas Business and Commerce Code.
(d) demand, presentment for payment, and notice of demand, dishonor,
nonpayment, or nonperformance.
(e) notice of intention to accelerate, notice of acceleration, protest,
notice of protest, notice of any exercise of remedies (as described in the
following Section 5 or otherwise), and all other notices of any kind whatsoever.
Section 5. Exercise of Remedies. Agent and each Lender shall have the
right to enforce, from time to time, in any order and at Agent's or such
Lender's sole discretion, any rights, powers and remedies which Agent or such
Lender may have under the Obligation Documents or otherwise, including judicial
foreclosure, the exercise of rights of power of sale, the taking of a deed or
assignment in lieu of foreclosure, the appointment of a receiver to collect
rents, issues and profits, the exercise of remedies against personal property,
or the enforcement of any assignment of leases, rentals, oil or gas production,
or other properties or rights, whether real or personal, tangible or intangible;
and Guarantor shall be liable to Agent and each Lender hereunder for any
deficiency resulting from the exercise by Agent or any Lender of any such right
or remedy even though any rights which Guarantor may have against Borrower or
others may be destroyed or diminished by exercise of any such right or remedy.
No failure on the part of Agent or any Lender to exercise, and no delay in
exercising, any right hereunder or under any other Obligation Document shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right preclude any other or further exercise thereof or the exercise of any
other right. The rights, powers and remedies of Agent and each Lender provided
herein and in the other Obligation Documents are cumulative and are in addition
to, and not exclusive of, any other rights, powers or remedies provided by law
or in equity. The rights of Agent and each Lender hereunder are not conditional
or contingent on any attempt by Agent or any Lender to exercise any of its
rights under any other Obligation Document against any Obligor or any other
Person.
Section 6. Limited Subrogation. Until all of the Obligations have been
paid and performed in full Guarantor shall have no right to exercise any right
of subrogation, reimbursement, indemnity, exoneration, contribution or any other
claim which it may now or hereafter have against or to any Obligor or any
Security in connection with this Guaranty (including any right of subrogation
under Section 34.04 of the Texas Business and Commerce Code), and Guarantor
hereby waives any rights to enforce any remedy which Guarantor may have against
Borrower and any right to participate in any Security until such time. If any
amount shall be paid to Guarantor on account of any such subrogation or other
rights, any such other remedy, or any Security at any time when all of the
Obligations and all other expenses guaranteed pursuant hereto shall not have
been paid in full, such amount shall be held in trust for the benefit of Agent,
shall be segregated from the other funds of Guarantor and shall forthwith be
paid over to Agent to be held by Agent as collateral for, or then or at any time
thereafter applied in whole or in part by Agent against, all or any portion of
the Obligations, whether matured or unmatured, in such order as Agent shall
elect. If Guarantor shall make payment to Agent of all or any
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portion of the Obligations and if all of the Obligations shall be finally paid
in full, Agent will, at Guarantor's request and expense, execute and deliver to
Guarantor (without recourse, representation or warranty) appropriate documents
necessary to evidence the transfer by subrogation to Guarantor of an interest in
the Obligations resulting from such payment by Guarantor; provided that such
transfer shall be subject to Section 3(d) above and that without the consent of
Agent (which Agent may withhold in its reasonable discretion) Guarantor shall
not have the right to be subrogated to any claim or right against any Obligor
which has become owned by Agent or any Lender, whose ownership has otherwise
changed in the course of enforcement of the Obligation Documents, or which Agent
otherwise has released or wishes to release from its Obligations.
Section 7. Successors and Assigns. Guarantor's rights or obligations
hereunder may not be assigned or delegated, but this Guaranty and such
obligations shall pass to and be fully binding upon the successors of Guarantor,
as well as Guarantor. This Guaranty shall apply to and inure to the benefit of
Agent and Lenders and their successors or assigns. Without limiting the
generality of the immediately preceding sentence, Agent and each Lender may
assign, grant a participation in, or otherwise transfer any Obligation held by
it or any portion thereof, and Agent and each Lender may assign or otherwise
transfer its rights or any portion thereof under any Obligation Document, to any
other Person, and such other Person shall thereupon become vested with all of
the benefits in respect thereof granted to Agent or such Lender hereunder unless
otherwise expressly provided by Agent or such Lender in connection with such
assignment or transfer.
Section 8. Subordination and Offset. Guarantor hereby subordinates and
makes inferior to the Obligations any and all indebtedness now or at any time
hereafter owed by Borrower to Guarantor. Guarantor agrees that after the
occurrence of any Default or Event of Default it will neither permit Borrower to
repay such indebtedness or any part thereof nor accept payment from Borrower of
such indebtedness or any part thereof without the prior written consent of Agent
and Lenders. If Guarantor receives any such payment without the prior written
consent of Agent and Lenders, the amount so paid shall be held in trust for the
benefit of Lenders, shall be segregated from the other funds of Guarantor, and
shall forthwith be paid over to Agent to be held by Agent as collateral for, or
then or at any time thereafter applied in whole or in part by Agent against, all
or any portions of the Obligations, whether matured or unmatured, in such order
as Agent shall elect. Guarantor hereby grants to Lenders a right of offset to
secure the payment of the Obligations and Guarantor's obligations and
liabilities hereunder, which right of offset shall be upon any and all monies,
securities and other property (and the proceeds therefrom) of Guarantor now or
hereafter held or received by or in transit to Agent or any Lender from or for
the account of Guarantor, whether for safekeeping, custody, pledge,
transmission, collection or otherwise, and also upon any and all deposits
(general or special), credits and claims of Guarantor at any time existing
against Agent or any Lender. Upon the occurrence of any Default or Event of
Default Agent and each Lender is hereby authorized at any time and from time to
time, without notice to Guarantor, to offset, appropriate and apply any and all
items hereinabove referred to against the Obligations and Guarantor's
obligations and liabilities hereunder irrespective of whether or not Agent or
such Lender shall have made any demand
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under this Guaranty and although such obligations and liabilities may be
contingent or unmatured. Agent and each Lender agrees promptly to notify
Guarantor after any such offset and application made by Agent or such Lender,
provided that the failure to give such notice shall not affect the validity of
such offset and application. The rights of Agent and each Lender under this
section are in addition to, and shall not be limited by, any other rights and
remedies (including other rights of offset) which Agent and Lenders may have.
Section 9. Representations and Warranties. Guarantor hereby represents
and warrants to Agent and each Lender as follows:
(a) The Recitals at the beginning of this Guaranty are true and correct
in all respects.
(b) Guarantor is a corporation duly organized, validly existing and in
good standing under the laws of the state of its incorporation as set forth in
the Recitals to this Guaranty; and Guarantor has all requisite power and
authority to execute, deliver and perform this Guaranty.
(c) The execution, delivery and performance by Guarantor of this
Guaranty have been duly authorized by all necessary corporate action and do not
and will not contravene its certificate or articles of incorporation or bylaws.
(d) The execution, delivery and performance by Guarantor of this
Guaranty do not and will not contravene any law or governmental regulation or
any contractual restriction binding on or affecting Guarantor or any of its
Affiliates or properties, and do not and will not result in or require the
creation of any lien, security interest or other charge or encumbrance upon or
with respect to any of its properties.
(e) To the best of Guarantor's knowledge, no authorization or approval
or other action by, and no notice to or filing with, any governmental authority
or other regulatory body or third party is required for the due execution,
delivery and performance by Guarantor of this Guaranty.
(f) This Guaranty is a legal, valid and binding obligation of Guarantor,
enforceable against Guarantor in accordance with its terms except as limited by
bankruptcy, insolvency or similar laws of general application relating to the
enforcement of creditors' rights.
(g) There is no action, suit or proceeding pending or, to the knowledge
of Guarantor, threatened against or otherwise affecting Guarantor before any
court, arbitrator or governmental department, commission, board, bureau, agency
or instrumentality which may materially and adversely affect Guarantor's
financial condition or its ability to perform its obligations hereunder.
(h) The direct or indirect value of the consideration received and to be
received by Guarantor in connection herewith is reasonably worth at least as
much as the liability and obligations of Guarantor hereunder, and the incurrence
of such liability and obligations in return for such consideration may
reasonably be expected to benefit Guarantor, directly or indirectly.
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<PAGE> 10
(i) Guarantor's capital is adequate for the businesses in which
Guarantor is engaged and intends to be engaged. Guarantor has not incurred
(whether hereby or otherwise), nor does Guarantor intend to incur or believe
that it will incur, debts which will be beyond its ability to pay as such debts
mature.
(j) All balance sheets, earning statements, financial data and other
information concerning Guarantor which have been furnished to Agent and each
Lender to induce it to accept this Guaranty (or otherwise furnished to Agent and
each Lender in connection with the transactions contemplated hereby or
associated herewith) fairly represent the financial condition of Guarantor as of
the dates and the results of Guarantor's operations for the periods for which
the same are furnished. None of such balance sheets, earnings and cash flow
statements, financial data and other information contains any untrue statement
of a material fact or omits to state any material fact which is necessary to
make any statements contained therein not misleading.
Section 10. No Oral Change. No amendment of any provision of this
Guaranty shall be effective unless it is in writing and signed by Guarantor and
Lenders, and no waiver of any provision of this Guaranty, and no consent to any
departure by Guarantor therefrom, shall be effective unless it is in writing and
signed by Lenders, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given.
Section 11. Invalidity of Particular Provisions. If any term or
provision of this Guaranty shall be determined to be illegal or unenforceable
all other terms and provisions hereof shall nevertheless remain effective and
shall be enforced to the fullest extent permitted by applicable law.
Section 12. Headings and References. The headings used herein are for
purposes of convenience only and shall not be used in construing the provisions
hereof. The words "this Guaranty," "this instrument," "herein," "hereof,"
"hereby" and words of similar import refer to this Guaranty as a whole and not
to any particular subdivision unless expressly so limited. The phrases "this
section" and "this subsection" and similar phrases refer only to the
subdivisions hereof in which such phrases occur. The word "or" is not exclusive,
and the word "including" (in its various forms) means "including without
limitation". Pronouns in masculine, feminine and neuter genders shall be
construed to include any other gender, and words in the singular form shall be
construed to include the plural and vice versa, unless the context otherwise
requires.
Section 13. Term. This Guaranty shall be irrevocable until all of the
Obligations have been completely and finally paid and performed, no Lender has
any obligation to make any loans or other advances to Borrower, and all
obligations and undertakings of Borrower under, by reason of, or pursuant to the
Obligation Documents have been completely performed, and this Guaranty is
thereafter subject to reinstatement as provided in Section 3(d). All extensions
of credit and financial accommodations heretofore or hereafter made by Agent or
Lenders to Borrower shall be conclusively presumed to have been made in
acceptance hereof and in reliance hereon.
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<PAGE> 11
Section 14. Notices. Any notice or communication required or permitted
hereunder shall be given in writing, sent by personal delivery, by telecopy, by
delivery service with proof of delivery, or by registered or certified United
States mail, postage prepaid, addressed to the appropriate party as follows:
To Guarantor: 3Dfx Interactive, Inc.
c/o: STB Systems, Inc.
Attention: Bryan F. Keyes
3400 Waterview
Richardson, TX 75080
Fax: (972) 680-7153
To Agent: 1717 Main Street
Dallas, Texas 75201
Attn: Richard L. Rogers
Fax: (214) 296-2492
or to such other address or to the attention of such other individual as
hereafter shall be designated in writing by the applicable party sent in
accordance herewith. Any such notice or communication shall be deemed to have
been given (a) in the case of personal delivery or delivery service, as of the
date of first attempted delivery at the address or in the manner provided
herein, (b) in the case of telecopy, upon receipt, or (b) in the case of
registered or certified United States mail, three days after deposit in the
mail.
Section 15. Limitation on Interest. Agent, Lenders and Guarantor intend
to contract in strict compliance with applicable usury law from time to time in
effect, and the provisions of the Credit Agreement limiting the interest for
which Guarantor is obligated are expressly incorporated herein by reference.
Section 16. Loan Document. This Guaranty is a Loan Document, as defined
in the Credit Agreement, and is subject to the provisions of the Credit
Agreement governing Loan Documents. Guarantor hereby ratifies, confirms and
approves the Credit Agreement and the other Loan Documents and, in particular,
any provisions thereof which relate to Guarantor.
Section 17. Counterparts. This Guaranty may be executed in any number of
counterparts, each of which when so executed shall be deemed to constitute one
and the same Guaranty.
SECTION 18. GOVERNING LAW. THIS GUARANTY IS TO BE PERFORMED IN THE STATE
OF TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF SUCH STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
GUARANTOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE EXCLUSIVE JURISDICTION OF THE
STATE AND FEDERAL COURTS OF TEXAS. IN FURTHERANCE OF THE
11
<PAGE> 12
FOREGOING, GUARANTOR HEREBY IRREVOCABLY DESIGNATES AND APPOINTS CT CORPORATION
SYSTEMS, AS AGENT OF GUARANTOR TO RECEIVE SERVICE OF ALL PROCESS BROUGHT AGAINST
GUARANTOR WITH RESPECT TO ANY SUCH PROCEEDING IN ANY SUCH COURT IN TEXAS, SUCH
SERVICE BEING HEREBY ACKNOWLEDGED BY GUARANTOR TO BE EFFECTIVE AND BINDING
SERVICE IN EVERY RESPECT. COPIES OF ANY SUCH PROCESS SO SERVED SHALL ALSO, IF
PERMITTED BY LAW, BE SENT BY REGISTERED MAIL TO GUARANTOR AT ITS ADDRESS SET
FORTH ABOVE, BUT THE FAILURE OF GUARANTOR TO RECEIVE SUCH COPIES SHALL NOT
AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS AS AFORESAID. NOTHING HEREIN SHALL
AFFECT THE RIGHT OF AGENT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
12
<PAGE> 13
IN WITNESS WHEREOF, Guarantor has executed and delivered this Guaranty
as of the date first written above.
3DFX INTERACTIVE, INC.
By: /s/ AUTHORIZED OFFICER
------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.11.4
FIRST AMENDMENT TO GUARANTY
THIS FIRST AMENDMENT TO GUARANTY (herein called the "Amendment") is made
as of December 21, 1999, by and among 3Dfx Interactive, Inc., a California
corporation ("Guarantor") and Bank One, Texas, N.A., as agent for the Lenders,
as such term is defined in the Credit Agreement described below (in such
capacity, "Agent").
W I T N E S S E T H:
WHEREAS, STB Systems, Inc., a Texas corporation ("Borrower"), Agent and
the lenders named therein entered into that certain Credit Agreement dated as of
November 21, 1997, (as heretofore amended, supplemented, or restated, the
"Original Credit Agreement"), for the purpose and consideration therein
expressed, pursuant to which Borrower executed (i) in favor of Bank One, Texas,
N.A. ("Bank One") that certain promissory note dated as of November 23, 1999,
payable to the order of Bank One in the aggregate principal amount of
$12,500,000 (the "Original Bank One Note") and (ii) in favor of Comerica
Bank-Texas ("Comerica") that certain promissory note dated as of November 23,
1999, payable to the order of Comerica in the aggregate principal amount of
$12,500,000; in each case which renewed and extended the promissory notes
described therein (the "Original Comerica Note"; the Original Bank One Note and
the Original Comerica Note are herein collectively referred to as the "Original
Notes"); and
WHEREAS, in connection with the transactions contemplated by the
Original Credit Agreement, Guarantor executed and delivered to Agent, for the
benefit of Lenders, that certain Guaranty dated as of November 3, 1999 (as
heretofore amended, supplemented or restated, the "Original Guaranty"), pursuant
to which Guarantor guaranteed the payment and performance of all obligations of
Borrower under the Original Credit Agreement; and
WHEREAS, Borrower, Agent and the lenders named therein are or are to
become parties to an Amended and Restated Credit Agreement of even date herewith
(as amended, supplemented, or restated, the "Credit Agreement"), amending and
restating the Original Credit Agreement for the purpose and consideration
therein expressed; and
WHEREAS, pursuant to the Credit Agreement, Borrower executed (i) in
favor of Bank One that certain promissory note of even date herewith, payable to
the order of Bank One in the aggregate principal amount of $12,500,000, renewing
and extending the Original Bank One Note (the "New Bank One Note") and (ii) in
favor of Comerica that certain promissory note of even date herewith, payable to
the order of Comerica in the aggregate principal amount of $12,500,000, renewing
and extending the Original Comerica Note (the "New Comerica Note"; the New Bank
One Note and the New Comerica Note, as from time to time amended, and all
promissory notes given in substitution, renewal or extension therefore or
thereof, in whole or in part, being herein collectively called the "Note"); and
<PAGE> 2
WHEREAS, as a condition precedent to the Credit Agreement, Guarantor is
required to execute and deliver this Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Original Guaranty, in
consideration of the loans which may hereafter be made by Lenders to Borrower,
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I.
Definitions and References
Section 1.1. Terms Defined in the Original Guaranty. Unless the context
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Credit Agreement shall have the same meanings whenever used in
this Amendment.
Section 1.2. Other Defined Terms. Unless the context otherwise requires,
the following terms when used in this Amendment shall have the meanings assigned
to them in this Section 1.2.
"Amendment" means this First Amendment to Guaranty.
"Guaranty" means the Original Guaranty as amended hereby.
ARTICLE II.
Amendments to Original Guaranty
Section 2.1. Terms. The Original Guaranty is hereby amended as follows:
(a) When used in the Original Guaranty, the term "Credit Agreement"
shall have the meaning assigned to such term in this Amendment.
(b) When used in the Original Guaranty, the term "Note" shall have the
meaning assigned to such term in this Amendment.
(c) When used in the Original Guaranty, the term "Loan Documents" shall
have the meaning assigned to such term in the Credit Agreement.
2
<PAGE> 3
ARTICLE III.
Conditions of Effectiveness
Section 3.1. Effective Date. This Amendment shall become effective when,
and only when, Agent shall have received, at Agent's office, a counterpart of
this Amendment executed and delivered by Guarantor.
ARTICLE IV.
Representations and Warranties
Section 4.1. Representations and Warranties of Guarantor. In order to
induce each Lender to enter into this Amendment, Guarantor represents and
warrants to each Lender that:
(a) The representations and warranties contained in Section 9 of the
Original Guaranty are true and correct at and as of the time of the
effectiveness hereof.
(b) Guarantor is duly authorized to execute and deliver this Amendment
and is and will continue to be duly authorized to perform its obligations under
the Guaranty. Guarantor has duly taken all corporate action necessary to
authorize the execution and delivery of this Amendment and to authorize the
performance of the obligations of Guarantor hereunder.
(c) The execution and delivery by Guarantor of this Amendment, the
performance by Guarantor of its obligations hereunder and the consummation of
the transactions contemplated hereby do not and will not conflict with any
provision of law, statute, rule or regulation or of the articles of
incorporation and bylaws of Guarantor, or of any material agreement, judgment,
license, order or permit applicable to or binding upon Guarantor, or result in
the creation of any lien, charge or encumbrance upon any assets or properties of
Guarantor. Except for those which have been obtained, no consent, approval,
authorization or order of any court or governmental authority or third party is
required in connection with the execution and delivery by Guarantor of this
Amendment or to consummate the transactions contemplated hereby.
(d) When duly executed and delivered, each of this Amendment and the
Guaranty will be a legal and binding obligation of Guarantor, enforceable in
accordance with its terms, except as limited by bankruptcy, insolvency or
similar laws of general application relating to the enforcement of creditors'
rights and by equitable principles of general application.
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<PAGE> 4
ARTICLE V.
Miscellaneous
Section 5.1. Ratification of Agreements. The Original Guaranty as hereby
amended is hereby ratified and confirmed in all respects. Any reference to the
Guaranty in any Loan Document shall be deemed to be a reference to the Original
Guaranty as hereby amended. The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of Lenders under the Credit Agreement, the Guaranty,
or any other Loan Document nor constitute a waiver of any provision of the
Credit Agreement, the Guaranty or any other Loan Document.
Section 5.2. Survival of Agreements. All representations, warranties,
covenants and agreements of Guarantor herein shall survive the execution and
delivery of this Amendment and the performance hereof, and shall further survive
until all of the Obligations are paid in full.
Section 5.3. Loan Documents. This Amendment is a Loan Document, and all
provisions in the Credit Agreement pertaining to Loan Documents apply hereto.
Section 5.4. GOVERNING LAW. THIS AMENDMENT IS TO BE PERFORMED IN THE
STATE OF TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE
WITH THE LAWS OF SUCH STATE WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
GUARANTOR HEREBY IRREVOCABLY SUBMITS ITSELF TO THE EXCLUSIVE JURISDICTION OF THE
STATE AND FEDERAL COURTS OF TEXAS.
Section 5.5. Counterparts; Fax. This Amendment may be separately
executed in counterparts and by the different parties hereto in separate
counterparts, each of which when so executed shall be deemed to constitute one
and the same Amendment. This Amendment may be validly executed by facsimile or
other electronic transmission.
THIS AMENDMENT AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS OF THE PARTIES.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
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<PAGE> 5
IN WITNESS WHEREOF, this Amendment is executed as of the date first
above written.
3DFX INTERACTIVE, INC.
By: /s/ AUTHORIZED OFFICER
------------------------------------
Name:
Title:
BANK ONE, TEXAS, N.A., AS AGENT AND
INDIVIDUALLY AS A LENDER
By: /s/ AUTHORIZED OFFICER
------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.11.5
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "AGREEMENT") is made as of November 21,
1997, by STB Systems, Inc., a Texas corporation ("DEBTOR"), in favor of Bank
One, Texas, N.A., a national banking association, as Agent for the Lenders under
the Credit Agreement described below ("SECURED PARTY"). Debtor hereby agrees as
follows:
Section 1. Definitions and Construction
Section 1.1. General Definitions. Among the terms used in this Agreement
are the following:
"COLLATERAL" means all property, of whatever type, which is described in
Section 2.1 as being at any time subject to a security interest hereunder to
Secured Party.
"CREDIT AGREEMENT" means that certain Credit Agreement dated of even
date herewith among Debtor, Secured Party and certain lenders ("LENDERS"), as
from time to time amended, supplemented or restated.
"SECURED OBLIGATIONS" has the meaning given it in Section 2.2.
Section 1.2. Construction. All capitalized terms used in this Agreement
which are defined in the Credit Agreement and not otherwise defined herein shall
have the same meanings herein as set forth therein. All terms used in this
Agreement which are defined in the Uniform Commercial Code currently in effect
in the State of Texas (the "CODE") and not otherwise defined herein or in the
Credit Agreement shall have the same meanings herein as set forth therein,
except where the context otherwise requires. Unless the context otherwise
requires or unless otherwise provided herein, references in this Agreement to a
particular agreement, instrument or document (including, but not limited to,
references in Section 2.1) also refer to and include all renewals, extensions,
amendments, modifications, supplements or restatements of any such agreement,
instrument or document, provided that nothing contained in this Section shall be
construed to allow, without written consent of Secured Party, any Person to
execute or enter into any such renewal, extension, amendment, modification,
supplement or restatement.
Section 2. Security Interest
Section 2.1. Grant of Security Interest. As collateral security for all
of the Secured Obligations, Debtor hereby pledges and assigns to Secured Party
and grants to Secured Party a continuing security interest, for the benefit of
Lenders, in all of the following (the "COLLATERAL"):
Accounts. All accounts (as defined in the Code) of any kind and all
other rights to payment for goods sold or leased or for services which
have been (or are to be) rendered, regardless
<PAGE> 2
of whether such accounts or other rights to payment have been earned by
performance, all chattel paper, documents and instruments of any kind,
relating to such accounts and all rights in, to or under all security
agreements, leases and other contracts securing or otherwise relating to
any such accounts, chattel paper, documents, or instruments (the
"RECEIVABLES").
Copyrights. All copyrights, and all copyrights of works based on,
incorporated in, derived from or relating to works covered by such
copyrights, and all right, title and interest to make and exploit all
derivative works based on or adopted from works covered by such
copyrights, all registrations with respect thereto, all applications
with respect thereto, and all extensions and renewals with respect to
any of the foregoing, together with all rights and interests associated
with the foregoing.
Equipment. All equipment in all of its forms, wherever located
(including without limitation the foregoing in any respect, equipment
used in farming or a profession, if any) (the "EQUIPMENT").
Instruments. All instruments in all forms (other than securities) and
all interest, cash and other instruments or other writings or property
from time to time received, receivable or otherwise distributed in
respect of or in exchange for or in renewal or extension of any or all
of the foregoing instruments (the "INSTRUMENTS").
Inventory. All inventory in all of its forms, whether held for sale,
lease or otherwise, wherever located including, but not limited to, all
(i) raw materials and work in process therefor, finished goods thereof,
and materials used or consumed in the manufacture or production thereof,
(ii) goods in which Obligor has an interest in mass or a joint or other
interest or right of any kind, and (iii) goods which are returned to or
repossessed by Obligor (the "INVENTORY").
General Intangibles, etc. All general intangibles of any kind
(including, without limiting the foregoing in any respect, choses in
action, tax refunds, and insurance proceeds), all chattel paper,
documents, instruments, security agreements, leases, other contracts and
money, and all other rights of Obligor (except those constituting
Receivables to receive payments of money or the ownership of property)
(the "GENERAL INTANGIBLES").
Trademarks. All trademarks, trade names, corporate names, company names,
business names, fictitious business names, trade styles, service marks,
logos and any other designs or sources of business identifiers, indicia
of origin or similar devices, all registrations with respect thereto,
all applications with respect to the foregoing, and all extensions and
renewals with respect to any of the foregoing, together with all of the
goodwill associated therewith, in each case whether now or hereafter
existing, and all rights and interest associated with the foregoing.
Other Collateral. To the extent not otherwise covered by the foregoing
all chattel paper, documents, money and other types of personal
property.
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<PAGE> 3
Lockbox; Bank Accounts. The Lockbox, the Collateral Account, and all
funds and investments held in the Collateral Account from time to time
or purchased with proceeds thereof, and any and all other moneys,
securities or other property (and the proceeds therefrom) of the Debtor
now or hereafter held or received by or in transit to Secured Party or
any Lender from or for the account of Borrower, whether for safekeeping,
custody, pledge, transmission, collection or otherwise, any and all
deposits (general or special, time or demand, provisional or final) of
the Debtor with Secured Party or any Lender, and any other credits and
claims of the Debtor at any time existing against Secured Party or any
Lender, including claims under certificates of deposit.
Related Collateral and Proceeds. All books and records (including,
without limitation, customer lists, computer software, computer
hardware, computer disks and tapes and other materials and records) of
Debtor pertaining in any way to any or all of the foregoing; all parts
of, all accessions to, all replacements for, all products of, all
payments of any type in lieu of or in respect of, and all documents and
general intangibles covering or relating to any or all of the foregoing;
all proceeds of any and all of the foregoing Collateral and, to the
extent not otherwise included, all payments under insurance (whether or
not Secured Party is the payee thereof) or under any indemnity, warranty
or guaranty by reason of loss to or otherwise with respect to any of the
foregoing Collateral.
In each case, the foregoing shall be covered by this Agreement, whether now or
hereafter existing, and whether Debtor's ownership or other rights therein are
now held or hereafter acquired and howsoever Debtor's interest therein may arise
or appear (whether by ownership, security interest, claim or otherwise).
Section 2.2 Obligations Secured. The security interest created hereby in
the Collateral constitutes continuing collateral security for (i) the
"Obligations" as defined in the Credit Agreement, and of all amounts from time
to time owing by Debtor under the Credit Agreement, the Notes and the other Loan
Documents whether now existing or hereafter arising, (ii) all other loans and
future advances made by Lenders to Debtor and all other debts, obligations and
liabilities of every kind and character of Debtor now or hereafter existing in
favor of Secured Party or Lenders, whether such debts, obligations or
liabilities be direct or indirect, primary or secondary, joint or several, fixed
or contingent, and whether originally payable to Lenders or to a third party and
subsequently acquired by a Lender, and whether such debts, obligations or
liabilities are evidenced by notes, open account, overdraft, endorsement,
security agreement, guaranty, or otherwise (it being contemplated that Debtor
may hereafter become indebted to Lenders in further sum or sums but Lenders
shall have no obligation to extend further indebtedness by reason of this
Agreement) and (iii) the due performance and observance by Debtor of all of its
other obligations from time to time existing under or in respect of any of the
Loan Documents (collectively, the "SECURED OBLIGATIONS").
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<PAGE> 4
Section 3. Representations, Warranties and Covenants
Section 3.1 Representations and Warranties. Debtor represents and
warrants as follows:
(a) Ownership and Liens. Debtor has good and marketable title to the
Collateral free and clear of all liens, security interests, encumbrances
or adverse claims, except for the security interest created by this
Agreement. No dispute, right of setoff, counterclaim or defense exists
with respect to all or any part of the Collateral. No effective
financing statement or other instrument similar in effect covering all
or any part of the Collateral is on file in any recording office except
such as may have been filed in favor of Secured Party relating to this
Agreement.
(b) Security Interest. Debtor has and will have at all times full right,
power and authority to grant a security interest in the Collateral to
Secured Party in the manner provided herein, free and clear of any lien,
security interest or other charge or encumbrance. This Agreement creates
a valid and binding security interest in favor of Secured Party in the
Collateral securing the Secured Obligations.
(c) Location. Debtor's residence or chief executive office and principal
place of business, as the case may be, and the office where the records
concerning the Collateral are kept is located at its address set forth
next to Debtor's signature below. Unless disclosed to the Secured Party
in writing, all Collateral constituting Equipment and Inventory is
located in the State of Texas.
Section 3.2. Covenants. Unless Secured Party shall otherwise consent in
writing, Debtor will at all times comply with the covenants contained in this
Section 3.2.
(a) Further Assurances. Debtor will, at its expense and at any time and from
time to time, promptly execute and deliver all further instruments and
documents and take all further action that may be necessary or desirable
or that Secured Party may request in order (i) to perfect and protect
the security interest created or purported to be created hereby and the
first priority of such security interest; (ii) to enable Secured Party
to exercise and enforce its rights and remedies hereunder in respect of
the Collateral; or (iii) to otherwise effect the purposes of this
Agreement.
(b) Inspection of Collateral and Information. Debtor will keep adequate
records concerning the Collateral and will permit Secured Party and all
representatives appointed by Secured Party, including independent
accountants, agents, attorneys, appraisers and any other persons to
inspect any of the Collateral upon reasonable notice and the books and
records of or relating to the Collateral at any time during normal
business hours, and to make photocopies and photographs thereof, and to
write down and record any information as such representatives shall
obtain. Debtor will furnish to Secured Party any information which
Secured Party may from time to
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<PAGE> 5
time reasonably request concerning any covenant, provision or
representation contained herein or any other matter in connection with
the Collateral.
(c) Condition of Goods. Obligor will maintain, preserve, protect and keep
all Collateral which constitutes goods in good condition, repair and
working order (ordinary wear and tear excepted) and will cause such
Collateral to be used and operated in a good and workmanlike manner, in
accordance with applicable law and in a manner which will not make void
or cancelable any insurance with respect to such Collateral. Obligor
will promptly make or cause to be made all repairs, replacements and
other improvements to or in connection with the Collateral which are
necessary or desirable or that Secured Party may reasonably request to
such end.
(d) Insurance and Payment of Taxes, etc. Debtor will, at its own expense,
maintain insurance with respect to all Collateral which constitutes
goods in such amounts, against such risks, in such form and with such
insurers, as shall be satisfactory to Secured Party from time to time.
Debtor (i) will timely pay all property and other taxes, assessments and
governmental charges or levies imposed upon the Collateral or any part
thereof; (ii) will timely pay all lawful claims which, if unpaid, might
become a lien or charge upon the Collateral or any part thereof; and
(iii) will maintain appropriate accruals and reserves for all such
liabilities in a timely fashion in accordance with generally accepted
accounting principles. Debtor may, however, delay paying or discharging
any such taxes, assessments, charges, claims or liabilities so long as
the validity thereof is contested in good faith by proper proceedings
and it has set aside on its books adequate reserves therefor.
(e) Receivables and General Intangibles. Debtor will, except as otherwise
provided herein, collect, at its own expense, all amounts due or to
become due under each of the Receivables and General Intangibles. In
connection with such collections, Debtor may (and, at Secured Party's
direction, will) take such action as Debtor or Secured Party may deem
necessary or advisable to enforce collection or performance of each of
the Receivables and General Intangibles. Debtor will duly perform and
cause to be performed all of its obligations with respect to the goods
or services, the sale or lease or rendition of which gave rise or will
give rise to each Receivable and all of its obligations to be performed
under or with respect to the General Intangibles.
(f) Delivery of Pledged Collateral. All instruments and writings
constituting Instruments from time to time shall be delivered to Secured
Party promptly upon the receipt thereof by or on behalf of Obligor. All
such Instruments shall be held by or on behalf of Secured Party pursuant
hereto and shall be delivered in suitable form for transfer by delivery
with any necessary endorsement or shall be accompanied by fully executed
instruments of transfer or assignment in blank, all in form and
substance satisfactory to Secured Party.
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<PAGE> 6
(g) Transfer or Encumbrance. Debtor will not sell, assign (by operation of
law or otherwise), transfer, exchange, lease or otherwise dispose of any
of the Collateral, nor will Debtor grant a lien or security interest in
or execute, file or record any financing statement or other security
instrument with respect to the Collateral, nor will Debtor deliver
actual or constructive possession of the Collateral to any other Person,
other than: (i) sales or leases of Inventory in the ordinary course of
business, and (ii) sale or other disposal, other than during the
continuance of an Event of Default, of any item of Equipment which is
worn out or obsolete and which has been replaced by an item of equal
suitability and value, owned by Debtor and made subject to the security
interest under this Agreement, but which is otherwise free and clear of
any liens, security interest, encumbrance or adverse claim.
(h) Possession and Compromise of Collateral. Debtor will not cause or permit
the removal of any item of the Collateral from its possession, control
and risk of loss. Debtor will not adjust, settle, compromise, amend or
modify any of the Collateral, other than an adjustment, settlement,
compromise, amendment or modification in good faith and in the ordinary
course of business, other than during the continuance of an Event of
Default, of any Receivable or General Intangible.
(I) Financing Statement Filings. Debtor will not cause or permit any change
to be made in its name, identity or corporate structure, or any change
to be made to a jurisdiction other than as represented in Section 3.1
hereof (i) in the location of any Collateral, (ii) the location of any
records concerning any Collateral or (iii) in the location of Debtor's
residence or chief executive office or chief place of business, as the
case may be, unless Debtor shall have notified Secured Party of such
change at lease thirty (30) days prior to the effective date of such
change, and shall have first taken all action required by Secured Party
for the purpose of further perfecting or protecting the security
interest in favor of Secured Party in the Collateral.
(j) Lockbox and Collateral Account. There is hereby established with Secured
Party a cash collateral account (the "COLLATERAL ACCOUNT") in the name
and under the control of Secured Party into which there shall be
deposited from time to time the cash proceeds of the Collateral required
to be delivered to Secured Party pursuant to the following subsections
of this Section 3.2 or pursuant to any other provision of this Agreement
or any other Loan Document. Secured Party shall have the right, at any
time and from time to time, to notify (or to require Debtor to notify)
any and all obligors under any Receivables, General Intangibles,
Instruments, or other rights to payment included among the Collateral of
the assignment thereof to Secured Party under this Agreement and to
direct such obligors to make payment of all amounts due or to become due
to Debtor thereunder directly to Secured Party and, upon such
notification and at the expense of Debtor and to the extent permitted by
law, to enforce collection of any such Receivables, General Intangibles,
Instruments, or other rights to payment and to adjust, settle or
compromise the amount or payment thereof,
-6-
<PAGE> 7
in the same manner and to the same extent as Debtor could have done.
Debtor and Secured Party shall deal with the Collateral Account as
follows:
(i) Debtor shall instruct all account debtors and other Persons
obligated to make payments to Debtor on any Receivables,
General Intangibles, Instruments, or other rights to payment
included within the Collateral to make such payments
directly to a post office box (the "Lock Box") which shall
be in the name and under the control of Secured Party. So
long as no Default or Event of Default shall have occurred
and be continuing, all such payments received through the
Lock Box shall be deposited into an operating account of
Debtor. Upon the occurrence and during the continuance of a
Default or Event of Default, (i) all such payments made
through the Lock Box shall be deposited in the Collateral
Account and (ii) if the proceeds of any Collateral
(including any payments with respect to which instructions
have been given as provided above) shall be received by it,
Debtor shall as promptly as possible deposit such proceeds
into the Collateral Account. Until so deposited, all such
proceeds shall be held in trust by Debtor for Secured Party
and shall not be commingled with any other funds or property
of Debtor, and Debtor will not adjust, settle or compromise
the amount or payment of any such Receivable, General
Intangible, Instrument, or other right to payment or release
wholly or partly any account debtor or obligor thereof or
allow any credit or discount thereon if the amount thereof
exceeds $100,000 in the aggregate during each calendar month
(y) unless a Receivable in an amount at least equal to the
amount of the reduction of the Receivable so adjusted,
settled or compromised is substituted therefor in the
Borrowing Base, or (z) as a result thereof the Borrowing
Base, as redetermined immediately after such adjustment,
settlement or compromise, would equal or exceed the
outstanding principal balance of the Loans at such time.
Upon any such adjustment, settlement or compromise described
in the immediately preceding clause (z) a new Borrowing Base
Report shall be delivered to Agent and the Borrowing Base
shall be redetermined.
(ii) Amounts on deposit in the Collateral Account shall either
remain on deposit therein or be invested and re-invested
from time to time in such Liquid Investments as Secured
Party shall determine, which Liquid Investments shall be
held in the name and be under the control of Secured Party
until liquidated and applied as provided in the following
subsection (iii). Any income received by Secured Party with
respect to the balance from time to time standing to the
credit of the Collateral Account, including any interest on
or proceeds of Liquid Investments, shall also remain, or be
deposited, in the Collateral Account. All right, title and
interest in and to the amounts on deposit from time to time
in the Collateral Account, together with any Liquid
Investments from time to time made pursuant to this section
shall vest in Secured Party, shall constitute part of the
Collateral hereunder, and shall not
-7-
<PAGE> 8
constitute payment of the Secured Obligations until applied
thereto as herein provided.
(iii) Secured Party shall, at Secured Party's discretion, either
(A) continue to hold the balance of the Cash Collateral
Account and all Liquid Investments as Collateral, or (B)
apply any or all of the balance from time to time standing
to the credit of the Collateral Account (subject to
collection) as specified in Section 4.3 and liquidate any or
all Liquid Investments and apply the proceeds thereof as
specified in Section 4.3.
(iV) As used in this section, "LIQUID INVESTMENT" means any
investment in the name of Secured Party (and, in the opinion
of counsel to Secured Party, appropriately subject to a
perfected security interest in favor of Secured Party) which
matures within one month after it is acquired by Secured
Party and is either (A) a certificate of deposit or time
deposit issued by Secured Party or (B) an obligation
entitled to the full faith and credit of the United States
which is in book-entry form and subject to pledge under
applicable state law and Treasury regulations.
Section 4. Remedies, Powers and Authorizations
Section 4.1. Provisions Concerning the Collateral
(a) Power of Attorney. If Default or Potential Default Exists,
Debtor hereby irrevocably appoints Secured Party as Debtor's
attorney-in-fact and proxy, with full authority in the place
and stead of Debtor and in the name of Debtor or otherwise,
from time to time in Secured Party's reasonable discretion,
to take any action and to execute any instrument which
Secured Party may reasonably deem necessary or advisable to
accomplish the purposes of this Agreement.
(b) Performance by Secured Party. If Debtor fails to perform any
agreement or obligation contained herein, Secured Party may
itself perform, or cause performance of, such agreement or
obligation, and the expenses of Secured Party incurred in
connection therewith shall be payable by Debtor under
Section 4.5.
Section 4.2. Event of Default - Remedies. If an Event of Default shall
have occurred and be continuing, and without limiting other rights and remedies
provided herein, under the Loan Documents or otherwise available to Secured
Party, Secured Party may from time to time in its discretion, without limitation
and without notice (a) exercise in respect of the Collateral all the rights and
remedies of a secured party on default under the Code (whether or not the Code
applies to the affected Collateral); (b) require Debtor to, and Debtor hereby
agrees that it will at its expense and upon request of Secured Party forthwith,
assemble all or part of the Collateral as directed by Secured Party and make it
available to Secured Party at a place to be designated by Secured Party which is
reasonably convenient to both parties; (c) reduce its claim to judgment or
foreclose or otherwise
-8-
<PAGE> 9
enforce, in whole or in part, the security interest created hereby by any
available judicial procedure; or (d) apply by appropriate judicial proceedings
for appointment of a receiver for the Collateral, or any part thereof, and
Debtor hereby consents to any such appointment. Debtor agrees that, to the
extent notice of sale shall be required by law, at least ten (10) days' notice
to Debtor of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification. Secured
Party shall not be obligated to make any sale of Collateral regardless of notice
of sale having been given. Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned.
Section 4.3. Application of Proceeds. If any Default or Event of Default
shall have occurred and be continuing, Secured Party may in its discretion apply
any cash held by Secured Party as Collateral, and any cash proceeds received by
Secured Party in respect of any sale of, collection from, or other realization
upon all or any part of the Collateral, to any or all of the following in such
order as Secured Party may elect: (a) to the repayment of the reasonable costs
and expenses, including reasonable attorneys' fees and legal expenses, incurred
by Secured Party in connection with (i) the administration of this Agreement,
(ii) the custody, preservation, use or operation of, or the sale of, collection
from, or other realization upon, any Collateral, (iii) the exercise or
enforcement of any of the rights of Secured Party hereunder, or (iv) the failure
of Debtor to perform or observe any of the provisions hereof; (b) to the payment
or other satisfaction of any liens and other encumbrances upon any of the
Collateral; (c) to the satisfaction of any other Secured Obligations; (d) by
holding the same as Collateral; (e) to the payment of any other amounts required
by applicable law (including, without limitation, Section 9.504(a)(3) of the
Code or any successor or similar, applicable statutory provision); and (f) by
delivery to Debtor or to whomsoever shall be lawfully entitled to receive the
same or as a court of competent jurisdiction shall direct.
Section 4.4. Deficiency. In the event that the proceeds of any sale,
collection or realization of or upon Collateral by Secured Party are
insufficient to pay all amounts to which Secured Party is legally entitled,
Debtor shall be liable for the deficiency, together with interest thereon at
such other rate as shall be fixed by applicable law, together with the costs of
collection and the reasonable fees of any attorneys employed by Secured Party to
collect such deficiency.
Section 4.5. Indemnity and Expenses.
(a) Debtor hereby indemnifies and agrees to hold harmless
Secured Party and each Lender and their respective officers,
directors, employees, agents and counsel (each an
"INDEMNIFIED PERSON") from and against any and all
liabilities, obligations, claims, losses, damages,
penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind or nature whatsoever ("CLAIMS AND
LIABILITIES") which may be imposed on, incurred by, or
asserted against any Indemnified Person growing out of or
resulting from this Agreement and the transactions and
events at any time associated therewith. THE FOREGOING
INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH CLAIMS AND
LIABILITIES ARE IN ANY WAY OR TO ANY EXTENT OWED, IN WHOLE
OR IN PART,
-9-
<PAGE> 10
UNDER ANY CLAIM OR THEORY OF STRICT LIABILITY, OR ARE CAUSED
IN WHOLE OR IN PART BY ANY NEGLIGENT ACT OR OMISSION BY ANY
INDEMNIFIED PERSON, except to the limited extent any Claims
and Liabilities of an Indemnified Person are proximately
caused by such Indemnified Person's gross negligence or
willful misconduct. The indemnification provided for in this
section shall survive the termination of this Agreement.
(b) Debtor will upon demand pay to Secured Party the amount of
any and all reasonable costs and expenses, including the
fees and disbursements of Secured Party's counsel and of any
experts and agents, which Secured Party may incur in
connection with (i) the transaction which give rise to this
Agreement; (ii) the preparation of this Agreement and the
perfection and preservation of this security interest
created under this Agreement; (iii) the administration of
this Agreement; (iv) the custody, preservation, use or
operation of, or the sale of, collection from, or other
realization upon, any Collateral; (v) the exercise or
enforcement of any of the rights of Secured Party hereunder;
or (vi) the failure by Debtor to perform or observe any of
the provisions hereof, except expenses resulting from
Secured Party's gross negligence or willful misconduct.
Section 5. Miscellaneous
Section 5.1. Waiver and Amendment. No failure or delay by Secured Party
in exercising any right, power or remedy which Secured Party may have under this
Agreement shall operate as a waiver thereof or of any other right, power of
remedy, nor shall any single or partial exercise by Secured Party of any such
right, power or remedy preclude any other or future exercise thereof or of any
other right, power or remedy. No waiver of any provision of this Agreement and
no consent to any departure therefrom shall ever be effective unless it is in
writing and signed by Secured Party, and then such waiver or consent shall be
effective only in the specific instances and for the purposes for which given
and to the extent specified in such writing. No modification or amendment of or
supplement to this Agreement shall be valid or effective unless the same is in
writing and signed by the party against whom it is sought to be enforced. In
addition, all such amendments and waivers shall be effective only if given with
the necessary approvals of Lenders as required in the Credit Agreement.
Section 5.2. Notices. Any notice or communication required or permitted
hereunder shall be given as provided in the Credit Agreement.
Section 5.3. Preservation of Rights. No failure on the part of Secured
Party to exercise, and no delay in exercising, any right hereunder or under any
other Loan Document shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right. The rights and remedies of Secured
Party provided herein are cumulative and are in addition to, and not exclusive
of, any rights or remedies provided by law.
-10-
<PAGE> 11
Section 5.4. Binding Effect and Assignment. This Agreement creates a
continuing security interest in the Collateral and (a) shall be binding on
Debtor and its successors and permitted assigns and (b) shall inure, together
with all rights and remedies of Secured Party hereunder, to the benefit of
Secured Party and Lenders and their respective successors, transferees and
assigns. None of the rights or obligations of Debtor hereunder may be assigned
or otherwise transferred without the prior written consent of Secured Party.
Section 5.5. Termination. It is contemplated by the parties hereto that
there may be times when no Secured Obligations are outstanding, but
notwithstanding such occurrences, this Agreement shall remain valid and shall be
in full force and effect as to subsequent outstanding Secured Obligations. Upon
written request for the termination hereof delivered by Debtor to Secured Party,
if no Secured Obligations are outstanding, and the Credit Agreement and the
commitment of Lenders to extend credit to Debtor have terminated or expired,
this Agreement and the security interest created hereby shall terminate and
Secured Party will at Debtor's expense, (a) return to Debtor such of the
Collateral as shall not have been sold or otherwise disposed of or applied
pursuant to the terms hereof; and (b) execute and deliver to Debtor such
documents as Debtor shall reasonably request to evidence such termination.
SECTION 5.8. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE
LAWS OF THE UNITED STATES OF AMERICA; EXCEPT TO THE EXTENT THAT THE PERFECTION
AND THE EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST CREATED
HEREBY ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS.
-11-
<PAGE> 12
IN WITNESS WHEREOF, Debtor has caused this Agreement to be executed and
delivered by its officer thereunto duly authorized, as of the date first above
written.
Address: STB SYSTEMS, INC.
P.O. Box 850957
1651 N. Glenville
Richardson TX 75085-0957
By: /s/ AUTHORIZED OFFICER
------------------------------------
Name:
Title:
-12-
<PAGE> 1
EXHIBIT 10.11.6
FIRST AMENDMENT TO SECURITY AGREEMENT
THIS FIRST AMENDMENT TO SECURITY AGREEMENT (this "Amendment") dated as
of December 21, 1999, is made by STB Systems, Inc., a Texas corporation
("Debtor") and Bank One, Texas, N.A., individually and as Agent for the Lenders
under the Credit Agreement described below ("Secured Party").
BACKGROUND
1. Debtor, Secured Party and the lenders named therein entered into
that certain Credit Agreement dated as of November 21, 1997, (as heretofore
amended, supplemented, or restated, the "Original Credit Agreement"), for the
purpose and consideration therein expressed, pursuant to which Debtor executed
(i) in favor of Bank One, Texas, N.A. ("Bank One") that certain promissory note
dated as of November 23, 1999, payable to the order of Bank One in the aggregate
principal amount of $12,500,000 (the "Original Bank One Note") and (ii) in favor
of Comerica Bank-Texas ("Comerica") that certain promissory note dated as of
November 23, 1999, payable to the order of Comerica in the aggregate principal
amount of $12,500,000; in each case which renewed and extended the promissory
notes described therein (the "Original Comerica Note"; the Original Bank One
Note and the Original Comerica Note are herein collectively referred to as the
"Original Notes").
2. Pursuant to the Original Credit Agreement, Debtor executed in favor
of Secured Party that certain Security Agreement dated as of November 21, 1997
(the "Original Security Agreement");
3. Debtor, Secured Party and the lenders named therein are or are to
become parties to an Amended and Restated Credit Agreement of even date herewith
(as amended, supplemented, or restated, the "Credit Agreement"), amending and
restating the Original Credit Agreement for the purpose and consideration
therein expressed.
4. Pursuant to the Credit Agreement, Debtor executed (i) in favor of
Bank One that certain promissory note of even date herewith, payable to the
order of Bank One in the aggregate principal amount of $12,500,000, renewing and
extending the Original Bank One Note (the "New Bank One Note") and (ii) in favor
of Comerica that certain promissory note of even date herewith, payable to the
order of Comerica in the aggregate principal amount of $12,500,000, renewing and
extending the Original Comerica Note (the "New Comerica Note"; the New Bank One
Note and the New Comerica Note, as from time to time amended, and all promissory
notes given in substitution, renewal or extension therefore or thereof, in whole
or in part, being herein collectively called the "Notes"); and
4. Pursuant to the Credit Agreement, Lenders have agreed to extend
credit to Debtor.
5. In order to induce Lenders to extend such credit pursuant to the
Credit Agreement, Debtor has agreed to enter into this Amendment for the
purposes as stated herein.
<PAGE> 2
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Debtor and Secured Party hereby agree as follows:
AGREEMENT
1. DEFINED TERMS. Capitalized terms used but not defined herein shall
have the meanings given them in the Credit Agreement.
2. OTHER DEFINED TERMS. Unless the context otherwise requires, the
following terms when used in this Amendment shall have the meanings assigned to
them in this Section 2.
"Amendment" means this First Amendment to Security Agreement.
"Security Agreement" means the Original Security Agreement as
amended hereby.
3. AMENDMENTS TO ORIGINAL SECURITY AGREEMENT.
A. General Definitions. The definition of "Credit Agreement" in
Section 1.1 of the Original Security Agreement is hereby amended in its
entirety to read as follows:
"CREDIT AGREEMENT" means that certain Amended and Restated Credit
Agreement dated as of December 21, 1999, among Debtor, Secured Party and
certain lenders (the "LENDERS"), as from time to time amended,
supplemented or restated."
B. Terms. Secured Party and Debtor hereby agree that (i) all
references to the "Notes" in the Original Security Agreement shall be
deemed to refer to the Notes as defined herein and (ii) all references
to the "Loan Documents" in the Original Security Agreement shall be
deemed to refer to the Loan Documents as defined in the Credit
Agreement.
C. Address. Debtor's address on the signature page of the Original
Security Agreement is hereby amended in its entirety to read as follows:
"3400 Waterview
Richardson, TX 75080"
3. RATIFICATION OF ORIGINAL SECURITY AGREEMENT. Debtor acknowledges
that its obligations and covenants under the Original Security Agreement are not
impaired by the execution and delivery of the Notes or the Credit Agreement and
shall remain in full force and effect. The Original Security Agreement as hereby
amended is hereby ratified and confirmed in all respects. Any reference to the
Security Agreement in any Loan Document shall be deemed to refer to this
Amendment also. The execution, delivery and effectiveness of this
2
<PAGE> 3
Amendment shall not, except as expressly provided herein, operate as a wavier of
any right, power or remedy of Secured Party or Lenders under the Original
Security Agreement or any other Loan Document nor constitute a waiver of any
provision of the Original Security Agreement or any other Loan Document. This
Amendment is a Loan Document, and all provisions in the Credit Agreement
pertaining to Loan Documents apply hereto.
4. FURTHER ASSURANCES. Debtor will, at its expense and at any time and
from time to time, promptly execute and deliver all further instruments and
documents and take all further action that may be necessary or desirable or that
Secured Party may request in order (i) to perfect, continue the perfection of,
and protect the security interest created or purported to be created by the
Security Agreement and the first priority of such security interest; (ii) to
enable Secured Party to exercise and enforce its rights and remedies thereunder
in respect of the Collateral; or (iii) to otherwise effect the purposes of the
Security Agreement, including but not limited to: (A) executing and filing such
financing or continuation statements, or amendments thereto, as may be necessary
or desirable or that Secured Party may request in order to perfect, continue the
perfection of, and preserve the security interest created or purported to be
created thereby; (B) delivering to Secured Party (upon request, to the extent
not otherwise required hereunder to be delivered without request) all originals
of chattel paper, documents or instruments which are from time to time included
in the Collateral; and (C) furnishing to Secured Party from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as Secured Party may
reasonably request, all in reasonable detail.
5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND THE LAWS OF
THE UNITED STATES OF AMERICA; EXCEPT TO THE EXTENT THAT THE PERFECTION AND THE
EFFECT OF PERFECTION OR NON-PERFECTION OF THE SECURITY INTEREST CREATED HEREBY
ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF TEXAS.
6. COUNTERPARTS. This Amendment may be separately executed in
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment. This Amendment may be validly executed by facsimile or other
electronic transmission.
[The remainder of this page is intentionally left blank]
3
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first above written.
DEBTOR:
STB SYSTEMS, INC.
By: /s/ BRYAN F. KEYES
------------------------------------
Name:
Title: Vice President
SECURED PARTY:
BANK ONE, TEXAS, N.A., as Agent
By: /s/ RICK ROGERS
------------------------------------
Name:
Title: Managing Director
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-39109, 333-58207, 333-78905, 333-79037 and
333-86661) of 3dfx Interactive, Inc. of our report dated February 29, 2000
appearing in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
May 1, 2000
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<ARTICLE> 5
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-31-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 41,818
<SECURITIES> 24,012
<RECEIVABLES> 72,841
<ALLOWANCES> 6,681
<INVENTORY> 45,065
<CURRENT-ASSETS> 205,462
<PP&E> 73,256
<DEPRECIATION> 32,987
<TOTAL-ASSETS> 296,111
<CURRENT-LIABILITIES> 106,996
<BONDS> 0
0
0
<COMMON> 251,883
<OTHER-SE> (64,649)
<TOTAL-LIABILITY-AND-EQUITY> 296,111
<SALES> 360,523
<TOTAL-REVENUES> 360,523
<CGS> 287,872
<TOTAL-COSTS> 287,872
<OTHER-EXPENSES> 148,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (73,611)
<INCOME-TAX> (10,324)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,287)
<EPS-BASIC> (2.81)
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