-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F0rkdeXuWk1pZ9VU/PsGHdDvRlQ9HOOJ/Sd5IpOHqKMDiYc/rIJ5dz3qaUY90qb3 SZUVrsvNYHjKtwzfUFDmKA== 0000891618-97-001792.txt : 19970418 0000891618-97-001792.hdr.sgml : 19970418 ACCESSION NUMBER: 0000891618-97-001792 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 20 FILED AS OF DATE: 19970417 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3DFX INTERACTIVE INC CENTRAL INDEX KEY: 0001010026 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 770390421 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25365 FILM NUMBER: 97582928 BUSINESS ADDRESS: STREET 1: 4435 FORTRAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 BUSINESS PHONE: 4089354400 MAIL ADDRESS: STREET 1: 4435 FORTRAN DR CITY: SAN JOSE STATE: CA ZIP: 95134 S-1 1 FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ 3DFX INTERACTIVE, INC. (Exact name of Registrant as specified in its charter) ------------------------ CALIFORNIA 3674 77-0390421 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation or organization) Classification Code Number) Identification Number)
------------------------ 3DFX INTERACTIVE, INC. 4435 FORTRAN DRIVE SAN JOSE, CALIFORNIA 95134 (408) 935-4400 (Address and telephone number of Registrant's principal executive offices) ------------------------ GARY P. MARTIN VICE PRESIDENT, ADMINISTRATION AND CHIEF FINANCIAL OFFICER 3DFX INTERACTIVE, INC. 4435 FORTRAN DRIVE SAN JOSE, CALIFORNIA 95134 (408) 935-4400 (Name, address and telephone number of agent for service of process) ------------------------ Copies to: ROBERT P. LATTA, ESQ. THOMAS A. BEVILACQUA, ESQ. WILSON SONSINI GOODRICH & ROSATI BROBECK PHLEGER & HARRISON LLP PROFESSIONAL CORPORATION TWO EMBARCADERO PLACE 650 PAGE MILL ROAD 2200 GENG ROAD PALO ALTO, CA 94304 PALO ALTO, CA 94303 (415) 493-9300 (415) 424-0160
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ==============================================================================================
PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------- Common Stock, no par value.............................. $41,055,000 $12,441 ==============================================================================================
(1) Estimated solely for the purpose of computing the amount of the registration fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of 1933, as amended. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED APRIL 17, 1997 [L O G O] 4,200,000 SHARES COMMON STOCK All of the 4,200,000 shares of Common Stock offered hereby are being sold by 3Dfx Interactive, Inc. ("3Dfx" or the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. Of the 4,200,000 shares of Common Stock offered hereby, it is currently anticipated that 700,000 shares will be purchased by Sega Enterprises, Ltd. at the price per share set forth under "Proceeds to Company" below. See "Investment by Sega." It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for information relating to the method of determining the initial public offering price. ------------------------ THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING AT PAGE 6. ------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ================================================================================================
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS COMPANY(1) - ------------------------------------------------------------------------------------------------ Per Share.................................... $ $ $ - ------------------------------------------------------------------------------------------------ Total(2)..................................... $ $ $ ================================================================================================
(1) Before deducting expenses payable by the Company, estimated at $700,000. (2) The Company has granted the Underwriters a 30-day option to purchase up to an additional 630,000 shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ------------------------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens & Company"), San Francisco, California, on or about , 1997. ROBERTSON, STEPHENS & COMPANY MONTGOMERY SECURITIES UBS SECURITIES The date of this Prospectus is , 1997 3 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER ALLOT IN CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." 4 NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ----- Summary........................................................................... 4 Risk Factors...................................................................... 6 Investment by Sega................................................................ 20 Use of Proceeds................................................................... 20 Dividend Policy................................................................... 20 Capitalization.................................................................... 21 Dilution.......................................................................... 22 Selected Financial Data........................................................... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................... 24 Business.......................................................................... 31 Management........................................................................ 49 Certain Transactions.............................................................. 58 Principal Shareholders............................................................ 59 Description of Capital Stock...................................................... 61 Shares Eligible for Future Sale................................................... 63 Underwriting...................................................................... 65 Legal Matters..................................................................... 67 Experts........................................................................... 67 Additional Information............................................................ 67 Index to Financial Statements..................................................... F-1
------------------------ The Company intends to furnish its shareholders with annual reports containing audited financial statements examined by an independent public accounting firm and quarterly reports for the first three quarters of each year containing interim unaudited financial information. Glide, Obsidian, Voodoo Graphics and Voodoo Rush and the 3Dfx logo are trademarks of the Company. All other trademarks or tradenames referred to in this Prospectus are the property of their respective owners. The Company was incorporated in California in August 1994. The Company's executive offices are located at 4435 Fortran Drive, San Jose, California 95134 and its telephone number at that address is (408) 935-4400. 3 5 SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Prospective investors should consider carefully the information discussed under "Risk Factors." This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. THE COMPANY 3Dfx Interactive is a leading developer of high performance, cost-effective 3D media processors, software and related technology for the interactive electronic entertainment market. The Company has developed 3D technology that enables a highly immersive, interactive and realistic 3D experience across multiple hardware entertainment platforms. Furthermore, the Company's technology facilitates the virtually seamless portability of software content across the three primary interactive electronic entertainment platforms: the PC, the home game console and the coin-operated ("coin-op") arcade system. The Company's strategy is to provide a 3D media processor solution that will become the standard graphics engine for the interactive electronic entertainment market. The Company believes that the benefits of its technology, coupled with its software content strategy, provide powerful incentives for the leading PC original equipment manufacturers ("OEMs") and entertainment hardware manufacturers to utilize the 3Dfx solution. The growth of the interactive electronic entertainment market has been constrained by the absence of a high performance, cost-effective 3D solution, the lack of an architecture that facilitates virtually seamless porting across the three primary platforms and the limited number of high quality 3D software titles. The implementation of 3D graphics is extremely complex and mathematically intensive and requires significant computing power. Consequently, despite the desirability of 3D graphics, high quality 3D continues to remain a niche technology not prevalent outside of high-end engineering workstation and professional applications. To date, attempts to bring high quality, affordable 3D solutions to the entertainment market have required consumers to accept a trade-off between visual realism, or fill rate, and gaming performance, or frame rate. Today, the interactive electronic entertainment industry is demanding a no-compromise 3D solution that will deliver both visual realism and performance at a cost-effective price. The solution must also drive content development by enabling developers to create a new generation of high quality 3D software that delivers a realistic and immersive experience. The Company's technology is optimized to alleviate the traditional consumer trade-off between visual quality and gaming performance by providing a 3D solution with both high fill rates and frame rates. To that end, the Company's technology enables a highly immersive, interactive 3D experience with compelling graphics, realistic motion and complex character and scene interaction at real time frame rates. In addition, the Company's technology embodies a single hardware/software architecture that can be deployed as the graphics engine for each of the three primary interactive electronic entertainment platforms. To promote the rapid adoption of its products, the Company's architecture supports most industry standard 3D application programming interfaces ("APIs"), including Apple Computer's Rave3D, Argonaut's BRender, Criterion's Renderware, Intel's 3DR, Microsoft's Direct3D and Silicon Graphics' OpenGL. Additionally, the Company has developed Glide, its proprietary low-level 3D API, which facilitates the virtually seamless portability of software content across multiple entertainment platforms utilizing the Company's 3D media processor, thereby leveraging the significant development and marketing expenses associated with a given title. Voodoo Graphics, the Company's first product, and subsequent 3D media processors now under development are designed around a common architecture to be utilized as the graphics engine for PCs and coin-op arcade systems. For PC applications, Diamond Multimedia Systems, Inc. ("Diamond") and Orchid Technology ("Orchid") have each introduced consumer multimedia add-in cards incorporating the Company's 3D media processor for sale in the retail channel and for incorporation into PCs manufactured by, among others, Apricot/Mitsubishi, Falcon Northwest, Hewlett-Packard and NEC. In the coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized by Acclaim, Kaneko, Midway Games and Taito, among others. Voodoo Graphics technology is also the graphics architecture for the 3D media processor chipset that the Company is developing for license to Sega Enterprises, Ltd. ("Sega") for use in Sega's next generation consumer home game console. The Company's second product, Voodoo Rush, is designed to incorporate a 3D/2D solution into a single personal computer interface ("PCI") board. Voodoo Rush began sampling in November 1996 and limited commercial shipments are expected in the second quarter of 1997. The Company has commenced development of Banshee, which is intended to be a high performance, fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade markets. The Company expects to begin commercial shipments of Banshee in the first quarter of 1998. All of the Company's products are manufactured, assembled, tested and packaged by third-party suppliers. 4 6 THE OFFERING Common stock offered by the Company............................. 4,200,000 shares Common stock outstanding after the offering.......................... 22,395,199 shares(1) Use of proceeds..................... For working capital and other general corporate purposes, including expansion of sales and marketing and research and product development efforts and financing of accounts receivable and inventories, and for capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market symbol.............................. TDFX SUMMARY FINANCIAL DATA (in thousands, except per share data)
YEAR ENDED DECEMBER THREE MONTHS 31, ENDED MARCH 31, -------------------- ------------------- 1995 1996 1996 1997 ------- -------- ------- ------- STATEMENT OF OPERATIONS DATA: Total revenues(2).................................................... $ -- $ 6,390 $ -- $ 5,247 Loss from operations................................................. (5,106) (14,810) (2,687) (1,134) Net loss............................................................. (5,039) (14,751) (2,652) (1,161) Pro forma net loss per share(3)...................................... $ (0.75) $ (0.06) Shares used in pro forma net loss per share calculations(3).......... 19,661 20,621
MARCH 31, 1997 --------------------------------------------- ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5) -------- ------------ ----------------- BALANCE SHEET DATA: Cash and cash equivalents............................................ $ 4,141 $ 4,369 $ Working capital...................................................... 6,049 6,277 Total assets......................................................... 15,586 15,814 Capitalized lease obligations, less current portion.................. 468 468 468 Accumulated deficit.................................................. (20,951) (20,951) (20,951) Total shareholders' equity........................................... 9,146 9,374
- ------------ (1) Based on shares outstanding as of March 31, 1997. Excludes (i) 3,750,943 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1997, with a weighted average exercise price of $1.36 per share, (ii) 154,317 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1997, with a weighted average exercise price of $1.62 per share and (iii) 2,248,607 shares of Common Stock reserved for future issuance under the Company's stock plans. See "Management -- Stock Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to Financial Statements. (2) Total revenues for the three months ended March 31, 1997 include $750,000 of development contract revenues. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (3) See Note 1 of Notes to Financial Statements for an explanation of shares used in pro forma net loss per share calculations. (4) Pro forma information gives effect to the issuance of 212,900 shares of Common Stock upon the exercise of warrants that expire automatically upon the closing of this offering. (5) Adjusted to give effect to the sale of 4,200,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." ------------------------ Except as set forth in the financial statements or as otherwise indicated herein, all information in this Prospectus (i) reflects an increase in the authorized shares of Common Stock to 50,000,000 shares effected in April 1997, (ii) reflects the conversion of all of the Company's outstanding shares of Preferred Stock into shares of Common Stock, which will occur automatically upon the closing of this offering, (iii) reflects the filing, upon the closing of this offering, of Restated Articles of Incorporation authorizing 5,000,000 shares of undesignated Preferred Stock, (iv) assumes that warrants to purchase 212,900 shares of Common Stock that expire automatically upon the closing of this offering are exercised and (v) assumes that the Underwriters' over-allotment option is not exercised. See "Description of Capital Stock," "Underwriting" and Notes 1 and 5 of Notes to Financial Statements. 5 7 RISK FACTORS An investment in the shares of Common Stock offered by this Prospectus involves a high degree of risk. Prospective purchasers of the Common Stock offered hereby should carefully review the following risk factors as well as the other information set forth in this Prospectus. This Prospectus contains forward-looking statements based upon current expectations that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. LIMITED OPERATING HISTORY; ANTICIPATION OF CONTINUED LOSSES The Company has had a limited operating history, has been engaged primarily in research and product development with only limited revenues to date and has incurred net losses in every quarter. The Company was founded in August 1994 and was a development stage company until its first commercial product shipments in the third quarter of 1996. The Company has been primarily dependent on private equity financings to provide cash for operations. The Company's limited operating history makes the assessment of future operating results difficult. The Company incurred net losses of approximately $5.0 million, $14.8 million and $1.2 million in 1995, 1996 and for the three months ended March 31, 1997, respectively, and had an accumulated deficit of $21.0 million at March 31, 1997. These net losses were attributable to the lack of substantial revenue and continuing significant costs incurred in the research and development of the Company's 3D media processor products and product testing. The Company expects to incur additional net losses at least in the near term as it continues to incur substantial research and development and sales and marketing expenses to commercialize its products. There can be no assurance that significant revenues or profitability will ever be achieved or, if they are achieved, that they can be sustained or increased on a quarterly or annual basis in the future. See "-- Dependence on Emerging 3D Interactive Electronic Entertainment Market," "-- Future Capital Needs; Uncertainty of Additional Funding" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON RELATIONSHIP WITH SEGA In March 1997, the Company entered into a Technology Development and License Agreement with Sega (the "Sega Agreement"), under which the Company will develop and license to Sega the technology for a 3D media processor chipset (the "Sega/3Dfx Chipset") for use in Sega's next generation home game console product (the "New Sega Game Console"). The Sega Agreement grants Sega the exclusive right for three years to the Company's architecture solely for use in home game consoles. Through the end of 1998, the Company expects to earn development contract revenues and certain development bonuses provided that certain milestones set forth in the Sega Agreement are met. The Company will derive royalty revenue for each Sega/3Dfx Chipset incorporated into products sold by Sega. Therefore, the timely development of the Sega/3Dfx Chipset by the Company and the successful introduction and sale of the New Sega Game Console by Sega will be critical factors affecting the Company's future business, financial condition and results of operations. The Company has not yet completed development of the Sega/3Dfx Chipset, and there can be no assurance that the Company will successfully complete such development or, if such development is completed, that the Sega/3Dfx Chipset will perform as expected. Despite pre-release testing of the Sega/3Dfx chipset by the Company, there can be no assurance that, once the Sega/3Dfx Chipset is made available to Sega, performance errors and deficiencies will not be found, or if discovered, that the Company will be able to successfully correct such performance errors and deficiencies in a timely manner, if at all. If the Company is unable to complete the development of the Sega/3Dfx Chipset or successfully deliver it to Sega, the Company's business, financial condition and results of operations would be materially adversely affected. There can be no assurance that Sega will ever introduce the New Sega Game Console. Published reports in the financial press have indicated that Sega may discontinue the manufacture and marketing 6 8 of its home game console hardware. The Company's business, financial condition and results of operations would be materially adversely affected if Sega does not introduce the New Sega Game Console. If introduced, there can be no assurance that the New Sega Game Console will achieve market acceptance. The home game console industry has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, by severe price competition and by frequent introductions of new technology and new products. Only a small number of products have achieved broad market acceptance. Such market acceptance has often followed intense competition between competing formats, such as those of Nintendo Company, Ltd. ("Nintendo") and Sony Corporation ("Sony"). Any competitive, technological or other factor adversely affecting the introduction or sales of the New Sega Game Console or related software titles would have a material adverse effect on the Company. Further, there can be no assurance that Sega will successfully manage the introduction of the New Sega Game Console. As is typical with any new product introduction, quality and reliability problems may arise and any such problems may result in reduced orders, manufacturing rework costs, delays in collecting accounts receivable, additional service and warranty costs and a decline in Sega's competitive position. Further, Sega will not manufacture all major subassemblies and will be dependent on several vendors as manufacturers of such subassemblies. There can be no assurance that such vendors will manufacture such subassemblies on a timely basis and with acceptable quality, or, if demand for the New Sega Game Console increases, that such vendors will be able to accelerate production of the subassemblies to meet demand for such increases. Even if the New Sega Game Console is successfully introduced and does gain initial market acceptance, competitive products with comparable price and performance characteristics are likely to be introduced by competitors. This competition may reduce future market acceptance for the New Sega Game Console and result in decreased royalty revenues arising from the Sega/3Dfx Chipset. The failure of the Company to successfully develop and deliver the Sega/3Dfx Chipset or Sega's failure to successfully introduce and market the New Sega Game Console or its failure to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Result of Operations -- Overview" and "Business -- Products, Products Under Development and Technology License -- Strategic Relationship with Sega." POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS The Company believes that, even if it does achieve significant sales of its products, quarterly and annual results of operations will be affected by a variety of factors that could materially adversely affect revenues, gross profit and income from operations. These factors include, among others, demand and market acceptance for the Company's products; changes in product or customer mix; the successful development of the Sega/3Dfx Chipset; the success of the New Sega Game Console; unanticipated delays or problems in the introduction or performance of the Company's next generation of products; unanticipated delays or problems experienced by the Company's product development partners; fluctuations in the level and timing of royalty revenues and development contract revenues under the Sega Agreement; market acceptance of the products of the Company's customers; new product announcements or product introductions by the Company's competitors; the Company's ability to introduce new products in accordance with OEM design requirements and design cycles; changes in the timing of product orders due to unexpected delays in the introduction of products of the Company's customers or due to the life cycles of such customers' products ending earlier than anticipated; fluctuations in manufacturing capacity; competitive pressures resulting in lower average selling prices; the volume of orders that are received and can be fulfilled in a quarter; the rescheduling or cancellation of customer orders; supply constraints for the other components incorporated into its customers' products; the unanticipated loss of any strategic relationship; seasonal fluctuations associated with the tendency of PC sales to increase in the second half of each calendar year; seasonal fluctuations associated with sales of home game consoles; the level of expenditures for research and development and sales, general and administrative functions of the Company; costs associated with protecting the Company's intellectual property; and foreign exchange rate fluctuations. Any one or 7 9 more of these factors could result in the Company failing to achieve its expectations as to future revenues. Because most operating expenses are relatively fixed in the short term, the Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations. The Company may be required to reduce prices or increase spending in response to competition or to pursue new market opportunities which could result in inventory write-offs. If new competitors, technological advances by existing competitors or other competitive factors require the Company to invest significantly greater resources in research and development efforts, the Company's results of operations in the future could be materially adversely affected. Accordingly, the Company believes that period-to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. In certain future quarters, the Company's results of operations may be below the expectations of public market analysts or investors. In such event, the market price of the Common Stock could be materially adversely affected. DEPENDENCE ON EMERGING 3D INTERACTIVE ELECTRONIC ENTERTAINMENT MARKET The market for 3D interactive electronic entertainment for use in PCs, home game consoles and coin-op arcade systems has only recently begun to emerge. The Company's ability to achieve sustained revenue growth and profitability in the future will depend to a large extent upon the demand for 3D multimedia functionality in PCs, home game consoles and coin-op arcade systems. There can be no assurance that the market for 3D interactive electronic entertainment will continue to develop or grow at a rate sufficient to support the Company's business. If the market for 3D interactive electronic entertainment fails to develop, or develops more slowly than expected, or if the Company's products do not achieve market acceptance, even if such market does develop, the Company's business, financial condition and results of operations could be materially adversely affected. Demand for the Company's products is also dependent upon the widespread development of 3D interactive electronic entertainment applications by independent software vendors ("ISVs"), the success of the Company's customers in effectively implementing the Company's technology and developing a market for the Company's products and the willingness of end users to pay for full function 3D capabilities in PCs, home game consoles and coin-op arcade systems. Currently, there is not a sufficient quantity or breadth of software game applications that support or take advantage of 3D functionality in PCs, home game consoles and coin-op arcade systems. There can be no assurance that such a base of software game applications will develop in the near term or at all. Consequently, there can be no assurance that a broad market for 3D multimedia functionality in PCs, home game consoles and coin-op arcade systems will develop, or that the Company will successfully sell 3D media processor products if such a market does develop. DEPENDENCE ON THE PC MARKET For 1996 and the three months ended March 31, 1997, the Company derived 82% and 76%, respectively, of its revenues from products sold for use in PCs. The Company expects to continue to derive a significant portion of revenues from the sale of its products for use in PCs. The PC market is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions and significant price competition, resulting in short product life cycles and regular reductions of average selling prices over the life of a specific product. Although the PC market has grown substantially in recent years, there can be no assurance that such growth will continue. A reduction in sales of PCs, or a reduction in the growth rate of such sales, would likely reduce demand for the Company's products. Moreover, such changes in demand could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they have incorrectly forecast product transitions. In such cases, the PC manufacturers may abruptly suspend substantially all purchases of additional inventory from suppliers such as the Company until the excess inventory has been absorbed. Any reduction in the demand for PCs generally, or for a particular product that incorporates the Company's 3D media 8 10 processors, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to compete in the future will depend on its ability to identify and ensure compliance with evolving industry standards. Unanticipated changes in industry standards could render the Company's products incompatible with products developed by major hardware manufacturers and software developers, including Intel Corporation ("Intel") and Microsoft Corporation ("Microsoft"). The Company could be required, as a result, to invest significant time and resources to redesign the Company's products to ensure compliance with relevant standards. If the Company's products are not in compliance with prevailing industry standards for a significant period of time, the Company could miss opportunities to achieve crucial design wins, which could have a material adverse effect on the Company's business, financial condition and results of operations. To the extent that future developments in other PC components or subassemblies incorporate one or more of the advantages offered by the Company's products, the market demand for the Company's products may be negatively impacted, which could have a material adverse effect on the Company's business, financial condition and results of operations. ACCEPTANCE OF THE COMPANY'S 3D/2D SOLUTION FOR THE PC MARKET; DEPENDENCE ON DEVELOPMENT OF A SINGLE CHIP SOLUTION The Company's success depends upon market acceptance of its 3D media processor products as a broadly accepted standard for high performance 3D interactive electronic entertainment in PC applications. Currently, the majority of multimedia PCs incorporate only 2D graphics acceleration technology. As a result, the majority of entertainment titles currently available for play on PCs are written for 2D acceleration technology. Because of the substantial installed base of 2D acceleration technology and related game content, the Company believes that for its 3D media processor products to gain wide market acceptance, such products must also offer 2D performance comparable or superior to existing 2D technology. To address this demand, the Company is working with Alliance Semiconductor Corporation ("Alliance"), Macronix International Co., Ltd ("Macronix"), Media Reality Technology, Inc. ("MRT") and Trident Semiconductor, Inc. ("Trident") to offer a 3D/2D chipset branded as the Company's Voodoo Rush product. Voodoo Rush will function with a partner's companion 2D or 2D/3D accelerator within a single PCI solution. There can be no assurance, however, that the Company's 3D/2D chipset will perform the desired functions, offer significant price/performance benefits or meet the technical or other requirements of potential buyers to realize market acceptance. Despite pre-release testing of the Company's 3D/2D product, there can be no assurance that performance errors and deficiencies will not be found, or if found, that the Company will be able to successfully correct such performance errors and deficiencies in a timely manner, if at all. Further, there can be no assurance that the Company's partners will manufacture their respective 2D or 2D/3D accelerators for use in the Company's 3D/2D chipset on a timely basis and with acceptable quality, or that, if demand for the Company's products increases, such vendors will be able to accelerate production of their respective chipsets to meet demand for such increases. The Company's 3D media processors for use in PC applications are currently designed as a two or three chip solution. Typically, as the functionality of a given semiconductor becomes technologically stable and widely accepted by users, the cost of providing the functionality is reduced by means of large scale integration of such functionality onto a single semiconductor chip. The Company expects that such integration onto a single chip will occur with respect to the functionality provided by the Company's current products used in PC applications. Therefore, the Company's success will be largely dependent on its ability to develop products on a timely basis that integrate the Company's 3D technology along with superior performance 2D technology. The Company is currently developing Banshee, a proprietary 3D/2D single chip solution which the Company expects will be available for commercial shipment in the first quarter of 1998. There can be no assurance that the Company will successfully complete such development on a timely basis or, if such development is completed, that the resulting single chip 3D/2D solution will perform the desired functions, offer sufficient price/ 9 11 performance benefits or meet the technical or other requirements of potential buyers to realize market acceptance. Furthermore, most PC OEMs have a lengthy evaluation process, and, in order for the Company's single chip product to be designed into the OEM's system, the Company must complete the development of its product to meet the deadline for the start of the OEM's evaluation cycle. If the Company is unable to complete the timely development of, and successfully manufacture and deliver, a single chip 3D/2D solution, the Company's business, financial condition and results of operations would be materially adversely affected. If successfully introduced, there can be no assurance that the Company's single chip 3D/2D solution will achieve market acceptance. The market for PC media processors has been characterized by unpredictable and sometimes rapid shifts in the popularity of products, by severe price competition and by frequent new technology and product introductions. Only a small number of products have achieved broad market acceptance. Such market acceptance has often been followed by intense competition between alternative solutions. Any competitive, technological or other factor adversely affecting the introduction or sales of the Company's single chip 3D/2D solution for PC applications would have a material adverse effect on the Company's business, financial condition and results of operations. Even if the Company's single chip 3D/2D solution is successfully introduced and does gain initial market acceptance, competitors are likely to introduce products with comparable price and performance characteristics. This competition may reduce future market acceptance for the Company's product and result in decreasing sales and lower gross margins. The failure of the Company to successfully develop and deliver a single chip 3D/2D solution for PC applications or its failure to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON THIRD PARTY DEVELOPERS AND PUBLISHERS The Company believes that the availability of a sufficient number of high quality, commercially successful software entertainment titles and applications will be a significant competitive factor in the sales of multimedia hardware for the interactive electronic entertainment market. The Company depends on third party software developers and publishers to create, produce and market software titles that will operate with the Company's 3D media processor products. Only a limited number of software developers are capable of creating high quality entertainment software. Competition for these resources is intense and is expected to increase. There can be no assurance that the Company will be able to attract the number and quality of software developers and publishers necessary to develop a sufficient number of high quality, commercially successful software titles compatible with the Company's 3D media processor products. Further, there can be no assurance that these third parties will publish a substantial number of software entertainment titles or, if software entertainment titles are available, that they will be of high quality or that they will achieve market acceptance. Further, the development and marketing of game titles that do not fully demonstrate the technical capabilities of the Company's 3D media processor products could create the impression that the Company's technology offers only marginal, if any, performance improvements over competing 3D media processors. Because the Company has no control over the content of the entertainment titles produced by software developers and publishers, the software entertainment titles developed may represent only a limited number of game categories and are likely to be of varying quality. See "Business -- Sales and Marketing." COMPETITION The Company's strategy of targeting the interactive electronic entertainment market across the PC, coin-op arcade systems and home game console platforms requires the Company to compete against different companies in each of these market segments, all of which are intensely competitive. See "Business -- Competition." Within the entertainment segment of the PC market, the Company competes primarily against companies that typically have operated in the PC 2D graphics market and that now offer 3D capability 10 12 as an enhancement to their 2D solutions, such as ATI Technologies, Inc. ("ATI"), Cirrus Logic, Inc. ("Cirrus"), Oak Technology Inc. ("Oak Technology"), S3 Incorporated ("S3") and Trident. Many of these competitors have introduced 3D functionality on new iterations of existing graphics chips. The Company also competes with companies that have recently entered the market with an integrated 3D/2D solution but which have not traditionally manufactured 2D solutions, such as Chromatic Research, Inc. ("Chromatic"), nVidia Corporation ("nVidia") and Rendition Inc. ("Rendition"). In addition, the Company competes with Videologic Group Plc which has partnered with NEC ("NEC/Videologic") to focus exclusively on developing a 3D solution for the interactive electronic entertainment market. In addition to competition from companies in the entertainment segment of the PC market, the Company also faces potential competition from companies that have focused on the high-end of the 3D market and the production of 3D systems targeted for the professional engineering market, such as 3Dlabs Inc., Ltd ("3Dlabs"), Integraph Corporation ("Integraph"), Real 3D ("Real 3D"), an operating unit of Lockheed Martin Corp. ("Lockheed"), and Silicon Graphics, Inc. ("SGI"). These companies are developing lower cost versions of their 3D technology to bring workstation-like 3D graphics to mainstream applications. There can be no assurance that these companies will not enter the interactive electronics entertainment market or that the Company would be able to compete successfully against them if they did. Furthermore, a substantial number of companies including Intel and Microsoft have announced plans to release 3D graphics chips in 1997 and 1998 that promise to provide low cost 3D functionality for PCs and workstations. If successful, products based on any of these initiatives would be directly competitive with the Company's 3D media processors and could materially adversely affect the Company's competitive position and results of operations. The market for interactive electronic arcade entertainment is comprised of a small number of companies, including Acclaim Entertainment Inc. ("Acclaim"), Namco, Ltd. ("Namco"), Sega, Taito Corporation, Ltd. ("Taito") and WMS Industries Inc. ("Williams"), and its subsidiary Midway Games, Inc. ("Midway"). The home game console segment is dominated by three companies, Nintendo, Sega and Sony. In each of the coin-op arcade and home game console segments, the Company primarily faces competition from in-house divisions of the companies which currently comprise such markets. In addition, there can be no assurance that any of the companies which currently compete in the 3D PC markets, will not enter the coin-op arcade market, or if they do, that the Company will be able to compete against them successfully. The Company expects competition to increase in the future from existing competitors and from new market entrants with products that may be less costly than the Company's 3D media processors or provide better performance or additional features not currently provided by the Company. The Company believes that the principal competitive factors for 3D graphics solutions are product performance, conformity to industry standard APIs, software support, access to customers and distribution channels, manufacturing capabilities and price. The Company seeks to use strategic relationships to augment its capabilities, but there can be no assurance that the benefits of these relationships will be realized or be sufficient to overcome the entrenched positions of the Company's largest competitors as incumbent suppliers to the large PC OEMs. Regardless of the relative qualities of the Company's products, the market power, product breadth and customer relationships of its larger competitors, including Intel and Microsoft, can be expected to provide such competitors with substantial competitive advantages. The Company does not seek to compete on the basis of price alone. Many of the Company's current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, certain of the Company's principal competitors offer a single vendor solution, since they maintain their own semiconductor foundries and may therefore 11 13 benefit from certain capacity, cost and technical advantages. The Company's ability to compete successfully in the rapidly evolving market for 3D interactive electronic entertainment will depend upon certain factors, many of which are beyond the Company's control, including, but not limited to, success in designing and subcontracting the manufacture of new products; implementing new technologies; access to adequate sources of raw materials and foundry capacity; the price, quality and timing of new product introductions by the Company and its competitors; the emergence of new multimedia and PC standards, the widespread development of 3D applications by ISVs; the ability of the Company to protect its intellectual property; market acceptance of the Company's 3D solution and API; success of the competitors' products; and industry and general economic conditions. There can be no assurance that the Company will be able to compete successfully in the emerging 3D interactive electronic entertainment market. ADOPTION OF GLIDE The Company's success will be substantially affected by the adoption by software developers of Glide, its proprietary, low-level 3D API. Although the Company's products support game titles developed for most industry standard APIs, the Company believes that Glide currently allows developers to fully exploit the technical capabilities of the Company's 3D media processor products. Glide competes with APIs developed or to be developed by other companies having significantly greater financial resources, marketing power, name recognition and experience than the Company. For example, certain industry standard APIs, such as Direct3D ("D3D") developed by Microsoft and OpenGL developed by SGI, have a much larger installed customer base and a much larger base of existing software titles. Developers may face additional costs to port games developed on other standard APIs to Glide for play on the Company's architecture. There can be no assurance that Glide will be adopted by a sufficient number of software developers or that developers who have utilized Glide will continue to do so in the future. Intel has entered into an agreement with the Company to license an early version of Glide. Intel also has an option to license future versions of Glide on terms no less favorable than licenses of Glide to other third party graphics hardware manufacturers. Intel has not implemented Glide nor has it announced any intention to do so. However, because of Intel's significant market penetration, marketing power and financial resources, if Intel were to implement this early version of Glide as a standard development tool for current or future Intel 3D chipsets, it could substantially reduce or even eliminate any competitive advantages that the Company's products may have. DEPENDENCE ON NEW PRODUCT DEVELOPMENT; RAPID TECHNOLOGICAL CHANGE The Company's business, financial condition and results of operations will depend to a significant extent on its ability to successfully develop new products for the 3D interactive electronic entertainment market. As a result, the Company believes that significant expenditures for research and development will continue to be required in the future. The PC, home game console and coin-op arcade system markets for which the Company's products are designed are intensely competitive and are characterized by rapidly changing technology, evolving industry standards and declining average selling prices. The Company must anticipate the features and functionality that consumers will demand, incorporate those features and functionality into products that meet the exacting design requirements of the PC, home game console and coin-op arcade system manufacturers, price its products competitively and introduce the products to the market within the limited window for OEM design cycles. The success of new product introductions is dependent on several factors, including proper new product definition, timely completion and introduction of new product designs, the ability of Taiwan Semiconductor Manufacturing Corporation ("TSMC") and any additional manufacturers to effectively design and implement the manufacture of new products, quality of new products, differentiation of new products from those of the Company's competitors and market acceptance of the Company's and its customers' products. There can be no assurance that the products the Company expects to introduce will incorporate the features and functionality demanded by PC, home game console and coin-op arcade system manufacturers and consumers of interactive electronic entertain- 12 14 ment, will be successfully developed or will be introduced within the appropriate window of market demand. The failure of the Company to successfully develop and introduce new products and achieve market acceptance for such products would have a material adverse effect on the Company's business, financial condition and results of operations. Because of the complexity of its technology, the Company has experienced delays from time to time in completing development and introduction of new products. In the event that there are delays in the completion of development of future products, including the products currently expected to be announced over the next year, the Company's business, financial condition and results of operations would be materially adversely affected. The time required for competitors to develop and introduce competing products may be shorter and manufacturing yields may be better than those experienced by the Company. As the markets for the Company's products continue to develop and competition increases, the Company anticipates that product life cycles will shorten and average selling prices will decline. In particular, average selling prices and, in some cases, gross margin for each of the Company's products will decline as such products mature. Thus, the Company will need to introduce new products to maintain average selling prices and gross margins. There can be no assurance that the Company will successfully identify new product opportunities or develop and bring new products to market in a timely manner, that products or technologies developed by others will not render the Company's products or technologies obsolete or uncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. The failure of the Company's new product development efforts would have a material adverse effect on the Company's business, financial condition and results of operations. CUSTOMER CONCENTRATION Because of the Company's limited operating history and early stage of development, it has only a limited number of customers. For these reasons, the Company's sales are highly concentrated. Revenues derived from sales to Orchid, Diamond and Williams accounted for 44%, 33% and 11%, respectively, of product revenues for 1996. Revenues derived from sales to Diamond and Williams accounted for 59% and 15%, respectively, of product revenues for the three months ended March 31, 1997. Development contract revenues recognized under the Sega Agreement represented 14.3% of total revenues during the three months ended March 31, 1997. The Company expects that a small number of customers will continue to account for a substantial portion of its revenues for the foreseeable future. Furthermore, substantially all of the Company's sales are made on the basis of purchase orders rather than long-term agreements. As a result, the Company's business, financial condition and results of operations could be materially adversely affected by the decision of a single customer to cease using the Company's products or by a decline in the number of PCs, home game consoles or coin-op arcade systems sold by a single customer or by a small number of customers. In addition, there can be no assurance that revenues from customers that have accounted for significant revenues in past periods, individually or as a group, will continue, or if continued, will reach or exceed historical levels in any future period. PRODUCT CONCENTRATION; RISKS ASSOCIATED WITH MULTIMEDIA PRODUCTS The Company's revenues are dependent on the markets for 3D media processors for PCs, coin-op arcade systems and home game consoles and on the Company's ability to compete in those markets. Since the Company has no other products, the Company's revenues and results of operations would be materially adversely affected if for any reason it were unsuccessful in selling 3D media processors. The PC, home game console and coin-op arcade system markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If the Company's products are unable at the beginning of each such transition to support the new feature sets or performance levels being required by PC, home game console and coin-op arcade system manufacturers, the Company would be likely to lose design wins and, moreover, not have the opportunity to compete for new design wins until the next product transition occurred. Thus, a failure to develop products with required feature sets or performance standards or a delay as short as a few 13 15 months in bringing a new product to market could significantly reduce the Company's revenues for a substantial period, which would have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON INDEPENDENT MANUFACTURERS AND OTHER THIRD PARTIES; ABSENCE OF MANUFACTURING CAPACITY; MANUFACTURING RISKS The Company does not manufacture the semiconductor wafers used for its products and does not own or operate a wafer fabrication facility. The Company's products require wafers manufactured with state-of-the-art fabrication equipment and techniques. All of the Company's products are currently manufactured by TSMC in Taiwan. The Company obtains manufacturing services from TSMC on a purchase order basis. Because the lead time needed to establish a strategic relationship with a new manufacturing partner could be several months, there is no readily available alternative source of supply for any specific product. A manufacturing disruption experienced by TSMC would impact the production of the Company's products for a substantial period of time, which would have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that long-term market acceptance for the Company's products will depend on reliable relationships between the Company and TSMC (and any other independent foundries qualified by the Company) to ensure adequate product supply responsive to customer demand. The Company's relationship with TSMC has only recently been established, and there can be no assurance that this relationship will meet the business objectives of the Company. In addition, TSMC fabricates wafers for other companies and could choose to prioritize capacity for other uses or reduce or eliminate deliveries to the Company on short notice. There are many other risks associated with the Company's dependence upon third party manufacturers, including: reduced control over delivery schedules, quality assurance, manufacturing yields and cost; the potential lack of adequate capacity during periods of excess demand; limited warranties on wafers supplied to the Company; and potential misappropriation of the Company's intellectual property. The Company is dependent on TSMC, and expects in the future to be dependent upon TSMC, to produce wafers of acceptable quality and with acceptable manufacturing yields, to deliver those wafers to the Company and its independent assembly and testing subcontractors on a timely basis and to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs. The Company's wafer requirements represent a very small portion of the total production of TSMC. Although the Company's products are designed using TSMC's process design rules, there can be no assurance that TSMC will be able to achieve or maintain acceptable yields or deliver sufficient quantities of wafers on a timely basis or at an acceptable cost. Additionally, there can be no assurance that TSMC will continue to devote resources to the production of the Company's products or continue to advance the process design technologies on which the manufacturing of the Company's products are based. Any such difficulties would have a material adverse effect on the Company's business, financial condition and results of operations. The Company's products are assembled and tested by a third party subcontractor, Advanced Semiconductor Engineering Group ("ASE"). Such assembly and testing is conducted on a purchase order basis rather than under a long-term agreement. As a result of its reliance on ASE to assemble and test its products, the Company cannot directly control product delivery schedules, which could lead to product shortages or quality assurance problems that could increase the costs of manufacturing or assembly of the Company's products. Due to the amount of time normally required to qualify assembly and test subcontractors, product shipments could be delayed significantly if the Company is required to find alternative subcontractors. Any problems associated with the delivery, quality or cost of the assembly and test of the Company's products could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Manufacturing." 14 16 MANUFACTURING YIELDS The fabrication of semiconductors is a complex and precise process. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor companies often experience problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer. Once production yield for a particular product stabilizes, the Company pays an agreed price for wafers meeting certain acceptance criteria pursuant to a "good die" only pricing structure for that particular product. Until production yield for a particular product stabilizes, however, the Company must pay an agreed price for wafers regardless of yield. Accordingly, in this circumstance, the Company bears the risk of final yield of good die. Poor yields would materially adversely affect the Company's revenues, gross profit and results of operations. Semiconductor manufacturing yields are a function both of product design, which is developed largely by the Company, and process technology, which is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems would require cooperation by and communication between the Company and the manufacturer. This risk is compounded by the offshore location of the Company's manufacturer, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. As the Company's relationships with TSMC and any additional manufacturing partners develop, yields could be adversely affected due to difficulties associated with adapting the Company's technology and product design to the proprietary process technology and design rules of each manufacturer. Because of the Company's potentially limited access to wafer fabrication capacity from its manufacturers, any decrease in manufacturing yields could result in an increase in the Company's per unit costs and force the Company to allocate its available product supply among its customers, thus potentially adversely impacting customer relationships as well as revenues and gross profit. There can be no assurance that the Company's manufacturers will achieve or maintain acceptable manufacturing yields in the future. The inability of the Company to achieve planned yields from its manufacturers could have a material adverse effect on the Company's business, financial condition and results of operations. Furthermore, the Company also faces the risk of product recalls resulting from design or manufacturing defects which are not discovered during the manufacturing and testing process. In the event of a significant number of product returns due to a defect or recall, the Company's revenues and gross profit could be materially adversely affected. MANAGEMENT OF GROWTH The ability of the Company to successfully offer services and products and implement its business plan in a rapidly evolving market requires an effective planning and management process. The Company's rapid growth has placed, and is expected to continue to place, a significant strain on the Company's managerial, operational and financial resources. As of March 31, 1997, the Company had grown to 87 employees from 35 employees as of December 31, 1995. If the Company's products achieve market acceptance, the Company expects that the number of its employees will increase substantially over the next 12 months. The Company's financial and management controls, reporting systems and procedures are also very limited. Although some new controls, systems and procedures have been implemented, the Company's future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls, and any failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Further, the 15 17 Company will be required to manage multiple relationships with various customers and other third parties. There can be no assurance that the Company's systems, procedures or controls will be adequate to support the Company's operations or that the Company's management will be able to achieve the rapid execution necessary to successfully offer its services and products and implement its business plan. The Company's inability to effectively manage any future growth would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management". DEPENDENCE ON KEY PERSONNEL The Company's performance will be substantially dependent on the performance of its executive officers and key employees, most of whom have worked together for only a short period of time. None of the Company's officers or employees are bound by an employment agreement, and the relationships of such officers and employees with the Company are, therefore, at will. Given the Company's early stage of development, the Company will be dependent on its ability to attract, retain and motivate high quality personnel, especially its management and development teams. The Company does not have "key person" life insurance policies on any of its employees. The loss of the services of any of its executive officers, technical personnel or other key employees would have a material adverse effect on the business, financial condition and results of operations of the Company. The Company's success depends on its ability to identify, hire, train and retain highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company will be able to identify, attract, assimilate or retain highly qualified technical and managerial personnel in the future. The inability to attract and retain the necessary technical and managerial personnel would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management." CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY The semiconductor industry has historically been characterized by rapid technological change, cyclical market patterns, significant price erosion, fluctuating inventory levels, alternating periods of over-capacity and capacity constraints, variations in manufacturing costs and yields and significant expenditures for capital equipment and product development. In addition, the industry has experienced significant economic downturns at various times, characterized by diminished product demand and accelerated erosion of product prices. The Company may experience substantial period-to-period fluctuations in results of operations due to general semiconductor industry conditions. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING As the Company begins commercial production of its products in increasing volumes, it will be required to invest significant working capital in inventory and accounts receivable. The Company intends also to continue to invest heavily in research and development for its existing products and for new product development. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities, the extent to which the Company's existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, the level and timing of development contract revenues, royalty revenues associated with the Sega Agreement, available borrowings under line of credit arrangements and other factors. The Company believes that the proceeds from this offering together with the Company's current cash balances and cash generated from operations and from available or future debt financing will be sufficient to meet the Company's operating and capital requirements through December 1998. However, there can be no assurance that the Company will not require additional financing within this time frame. The Company's forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking 16 18 statement that involves risks and uncertainties, and actual results could vary. The factors described earlier in this paragraph will impact the Company's future capital requirements and the adequacy of its available funds. The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to the Company, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies or products. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See " -- Limited Operating History; Anticipation of Continued Losses," "-- Potential Fluctuations in Quarterly Results," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." RISKS RELATING TO INTELLECTUAL PROPERTY The Company relies primarily on a combination of patent, mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. The Company has five patent applications pending in the United States Patent and Trademark Office ("PTO"). There can be no assurance that the Company's pending patent applications or any future applications will be approved, or that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Patents and Proprietary Rights." The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There can be no assurance that infringement claims by third parties or claims for indemnification by other customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition and results of operations. Any limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products or payments of license fees to third parties, or any failure by the Company to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on the Company's business, financial condition and results of operations. Litigation by or against the Company could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses for the infringing technology. INTERNATIONAL OPERATIONS The Company's reliance on foreign third-party manufacturing, assembly and testing operations, all of which are located in Asia, and the Company's expectation of international sales subject it to a number of risks associated with conducting business outside of the United States. These risks include unexpected changes in, or impositions of, legislative or regulatory requirements, delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse taxes, the burdens of complying with a variety of foreign laws and other factors beyond the 17 19 Company's control. The Company is also subject to general political risks in connection with its international trade relationships. Although the Company has not to date experienced any material adverse effect on its business, financial condition or results of operations as a result of such regulatory, political and other factors, there can be no assurance that such factors will not have a material adverse effect on the Company's business, financial condition and results of operations in the future or require the Company to modify its current business practices. In addition, the laws of certain foreign countries in which the Company's products are or may be manufactured or sold, including various countries in Asia, may not protect the Company's products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of the Company's technology and products more likely. See "-- Risks Relating to Intellectual Property." Currently, all of the Company's product sales and its arrangements with its foundry and assembly and test vendor provide for pricing and payment in U.S. dollars. Although currency fluctuations have been insignificant to date, there can be no assurance that fluctuations in currency exchange rates will not have a material adverse effect on the Company's business, financial condition and results of operations in the future. In addition, to date the Company has not engaged in any currency hedging activities, although the Company may do so in the future. Further, there can be no assurance that one or more of the foregoing factors will not have a material adverse effect on the Company's business, financial condition and results of operations or require the Company to modify its current business practices. See "Business -- Sales and Marketing." NO PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock, and there can be no assurance that an active trading market will develop or, if one does develop, that it will be maintained. The initial public offering price, which will be determined through negotiations between the Company and the Underwriters, may not be indicative of prices that will prevail in the trading market. In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market prices of the common stock of many publicly held semiconductor companies have in the past been, and can in the future be expected to be, especially volatile. The market price of the Company's Common Stock is likely to be highly volatile and may be subject to wide fluctuations in response to announcements of technological innovations or new products by the Company, its customers or its competitors, release of reports by securities analysts, developments or disputes concerning patents or proprietary rights, economic and other external factors, as well as period-to-period fluctuations in the Company's financial results. See "Underwriting." CONTROL BY EXECUTIVE OFFICERS, DIRECTORS AND AFFILIATED ENTITIES The Company anticipates that the officers, directors and entities affiliated with them will, in the aggregate, beneficially own approximately 49% of the Company's outstanding Common Stock following the completion of this offering (48% if the Underwriters' over-allotment option is exercised). These shareholders, if acting together, would be able to elect a majority of the Company's board of directors and would have the ability to control the Company and influence its affairs and the conduct of its business. Such concentration of ownership may have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal Shareholders." EFFECT OF CERTAIN CHARTER PROVISIONS ON PRICE OF COMMON STOCK The Board of Directors of the Company has the authority to issue shares of Preferred Stock and to determine the rights, preferences, privileges and restrictions of such shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The possible issuance of Preferred Stock could have the effect of delaying, deferring or preventing a change in control of the Company. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. See "Description of Capital Stock -- Preferred Stock." 18 20 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock prevailing from time to time. The number of shares of Common Stock available for sale in the public market is limited by restrictions under the Securities Act of 1933, as amended (the "Securities Act"), and lock-up agreements executed by certain of the security holders of the Company under which such security holders have agreed not to sell or otherwise dispose of any of their shares until the later of 180 days after the date of this Prospectus or the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997, without the prior written consent of Robertson, Stephens & Company. In addition to the 4,200,000 shares of Common Stock offered hereby (assuming no exercise of the Underwriters' over-allotment option), there will be 18,195,199 shares of Common Stock outstanding as of the date of this Prospectus, all of which are "restricted" shares under the Securities Act. As a result of the lock-up agreements described above and the provisions of Rules 144(k), 144 and 701, the restricted shares will be available for sale in the public market as follows: (i) no shares will be eligible for immediate sale on the date of this Prospectus, (ii) no shares will be eligible for sale 90 days after the date of this Prospectus, (iii) approximately 6,600 shares will be eligible for sale 120 days after the date of this Prospectus upon expiration of lock-up agreements and (iv) approximately 17,975,699 shares will be eligible for sale on the later of 180 days after the date of this Prospectus or the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997 and (v) approximately 212,900 shares will be eligible for sale approximately one year from the date of this Prospectus. After this offering, the holders of approximately 14,043,697 shares of Common Stock and rights to acquire 154,317 shares of Common Stock will be entitled to certain demand and piggyback rights with respect to registration of such shares under the Securities Act. See "Description of Capital Stock -- Registration Rights." If such holders, by exercising their demand registration rights, cause a large number of securities to be registered and sold in the public market, such sales could have an adverse effect on the market price for the Company's Common Stock. If the Company were to initiate a registration and include shares held by such holders pursuant to the exercise of their piggyback registration rights, such sales may have an adverse effect on the Company's ability to raise capital. See "Shares Eligible for Future Sale" and "Underwriting." ABSENCE OF DIVIDENDS; DILUTION The Company does not anticipate paying any dividends in the foreseeable future. See "Dividend Policy." The initial public offering price will be substantially higher than the net tangible book value per share of Common Stock. Investors purchasing shares of Common Stock in this Offering will therefore incur immediate and substantial net tangible book value dilution. See "Dilution." 19 21 INVESTMENT BY SEGA It is currently anticipated that Sega will purchase a portion of the shares of Common Stock offered hereby upon the same terms and conditions as the other investors in this offering, except that the per share purchase price paid by Sega will equal the per share "Proceeds to Company" price as indicated on the cover page of this Prospectus. The total investment by Sega will be approximately $ million if Sega completes the purchase. Assuming a per share Proceeds to Company price of $ , Sega would purchase approximately 700,000 shares and would own approximately 3% of the outstanding Common Stock following the offering. USE OF PROCEEDS The net proceeds to the Company from the sale of the 4,200,000 shares of Common Stock offered by the Company hereby, are estimated to be approximately $ (approximately $ if the Underwriters' over-allotment option is exercised in full) at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The Company intends to use the net proceeds of the offering for working capital and other general corporate purposes, including expansion of sales and marketing and research and product development efforts and financing of accounts receivable and inventories. The Company also expects to use approximately $6.5 million of the net proceeds for capital expenditures through the end of 1998, primarily for the purchase of computer equipment and related software tools, furniture, fixtures and leasehold improvements. The foregoing represent estimates only, and the actual amounts expended by the Company for these purposes and the timing of such expenditures will depend on numerous factors, including the status of the Company's product development efforts, the extent to which the Company's products gain market acceptance and the competition the Company and its products encounter in the marketplace. The Company may also use a portion of the net proceeds for the acquisition of technologies, businesses or products that are complementary to those of the Company, although no such acquisitions are planned or are being negotiated as of the date of this Prospectus, and no portion of the net proceeds has been allocated for any specific acquisition. Pending such uses, the net proceeds of this offering will be invested in short-term, interest bearing, investment grade securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on its capital stock. The Company currently expects to retain any future earnings for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. 20 22 CAPITALIZATION The following table sets forth (i) the actual capitalization of the Company as of March 31, 1997, (ii) the capitalization of the Company on a pro forma basis giving effect to an increase in the authorized shares of Common Stock to 50,000,000 shares effected in April 1997, the conversion of all outstanding Preferred Stock into Common Stock and the authorization of 5,000,000 shares of undesignated Preferred Stock upon the closing of this offering, and the issuance of 212,900 shares of Common Stock upon the exercise of warrants that expire automatically upon the closing of this offering and the application of the net proceeds therefrom, and (iii) the pro forma capitalization of the Company as adjusted to give effect to the sale of the 4,200,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The capitalization information set forth below should be read in conjunction with Financial Statements and Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1997 --------------------------------- PRO ACTUAL FORMA AS ADJUSTED -------- -------- ----------- (IN THOUSANDS) Capitalized lease obligations, less current portion(1)........ $ 468 $ 468 $ 468 -------- -------- ---- Shareholders' equity: Preferred Stock, no par value; 14,633,000 shares authorized, 14,043,697 shares issued and outstanding actual; 5,000,000 shares authorized, none issued and outstanding pro forma and as adjusted................................ 29,222 -- -- Common Stock, no par value; 25,033,000 shares authorized, 3,938,602 shares issued and outstanding actual; 50,000,000 shares authorized, 18,195,199 shares issued and outstanding pro forma and 22,395,199 shares issued and outstanding as adjusted(2)........................... 2,078 31,861 Warrants.................................................... 353 20 20 Notes receivable............................................ (12) (12) (12) Deferred compensation....................................... (1,544) (1,544) (1,544) Accumulated deficit......................................... (20,951) (20,951) (20,951) -------- -------- ---- Total shareholders' equity............................. 9,146 9,374 -------- -------- ---- Total capitalization................................ $ 9,614 $ 9,842 $ ======== ======== ====
- ------------ (1) See Note 8 of Notes to Financial Statements. (2) Excludes (i) 3,750,943 shares of Common Stock issuable upon exercise of options outstanding as of March 31, 1997, with a weighted average exercise price of $1.36 per share, (ii) 154,317 shares of Common Stock issuable upon exercise of warrants outstanding as of March 31, 1997, with a weighted average exercise price of $1.62 per share and (iii) 2,248,607 shares of Common Stock reserved for future issuance under the Company's stock plans. See "Management -- Stock Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to Financial Statements. 21 23 DILUTION The pro forma net tangible book value of the Company as of March 31, 1997 was approximately $9,374,000, or $0.52 per share of Common Stock. "Pro forma net tangible book value" per share represents the amount of total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding (assuming the conversion of all then outstanding Preferred Stock into Common Stock). After giving effect to the receipt of the net proceeds from the sale of the 4,200,000 shares of Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share (after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company), the Company's net tangible book value as of March 31, 1997 would have been $ , or $ per share of Common Stock. This represents an immediate increase in net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price................................ $ Pro forma net tangible book value as of March 31, 1997............. $0.52 Increase attributable to new investors............................. ----- Pro forma net tangible book value after offering..................... ----- Dilution to new investors............................................ =====
The following table summarizes, on a pro forma basis as of March 31, 1997, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing shareholders and by new public investors purchasing shares in this offering at an assumed initial public offering price of $ per share (before deducting estimated underwriting discounts and commissions and offering expenses payable by the Company).
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- --------- Existing shareholders..... 18,195,199 81.0% $31,957,000 % $1.76 New investors............. 4,200,000 19.0 ---------- ----- ----------- ----- Total........... 22,395,199 100.0% $ 100.0% ========== ===== =========== =====
The foregoing computations assume no exercise of stock options or warrants after March 31, 1997. As of March 31, 1997, there were outstanding options to purchase 3,750,943 shares of Common Stock, with a weighted average exercise price of $1.36 per share, and outstanding warrants to purchase 154,317 shares of Common Stock, with a weighted average exercise price of $1.62 per share. In addition, as of March 31, 1997, 2,248,607 shares of Common Stock were reserved for future issuance under the Company's stock plans. To the extent that any shares available for issuance upon exercise of outstanding options, warrants or reserved for future issuance under the Company's stock plans are issued, there will be further dilution to new public investors. See "Management -- Stock Plans," "Description of Capital Stock" and Notes 5 and 6 of Notes to Financial Statements. 22 24 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and the Notes thereto included elsewhere in this Prospectus. The statement of operations data for the years ended December 31, 1995 and 1996 and the three month period ended March 31, 1997 and the balance sheet data as of December 31, 1995 and 1996 and March 31, 1997 are derived from financial statements of the Company that have been audited by Price Waterhouse LLP, independent accountants, and are included elsewhere in this Prospectus. The statement of operations data for the three month period ended March 31, 1996 is derived from unaudited financial statements included elsewhere in this Prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's operating results for such period. The operating results for the three month period ended March 31, 1997 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEAR ENDED DECEMBER THREE MONTHS 31, ENDED MARCH 31, -------------------- -------------------- 1995 1996 1996 1997 ------- -------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Revenues: Product.................................................. $ -- $ 6,390 $ -- $ 4,497 Development contract..................................... -- -- -- 750 ------- -------- ------- -------- Total revenues................................... -- 6,390 -- 5,247 Cost of product revenues................................... -- 5,123 -- 2,582 ------- -------- ------- -------- Gross profit............................................... -- 1,267 -- 2,665 ------- -------- ------- -------- Operating expenses: Research and development(1).............................. 2,940 9,435 1,659 1,953 Selling, general and administrative(1)................... 2,166 6,642 1,028 1,846 ------- -------- ------- -------- Total operating expenses......................... 5,106 16,077 2,687 3,799 ------- -------- ------- -------- Loss from operations....................................... (5,106) (14,810) (2,687) (1,134) Interest and other income (expense), net................... 67 59 35 (27) ------- -------- ------- -------- Net loss................................................... $(5,039) $(14,751) $(2,652) $ (1,161) ======= ======== ======= ======== Pro forma net loss per share(2)............................ $ (0.75) $ (0.06) ======== ======== Shares used in pro forma net loss per share calculations(2).......................................... 19,661 20,621
DECEMBER 31, -------------------- MARCH 31, 1995 1996 1997 ------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.................................. $ 865 $ 5,291 $ 4,141 Working capital (deficit).................................. (307) 6,637 6,049 Total assets............................................... 2,440 15,581 15,586 Capitalized lease obligations, less current portion(3)..... 544 632 468 Accumulated deficit........................................ (5,039) (19,790) (20,951) Total shareholders' equity................................. 552 9,621 9,146
- ------------ (1) Research and development expenses include amortization of deferred compensation of $22,000, $50,000, $6,000 and $48,000 for 1995, 1996 and the three month periods ended March 31, 1996 and 1997, respectively. Selling, general and administrative expenses include amortization of deferred compensation of $34,000, $146,000, $8,000 and $73,000 for 1995, 1996 and the three month periods ended March 31, 1996 and 1997, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." (2) See Note 1 of Notes to Financial Statements for an explanation of shares used in pro forma net loss per share calculations. (3) See Note 8 of Notes to Financial Statements. 23 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements based upon current expectations that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company was founded in August 1994 to design, develop, market and support 3D media processors, subsystems and API software for the interactive electronic entertainment market. The Company had no operations during the period from inception (August 24, 1994) through December 31, 1994. The Company was considered a development stage enterprise and was primarily engaged in product development and product testing until its first commercial product shipments in the third quarter of 1996. The Company incurred losses in 1995, 1996 and the three months ended March 31, 1997 and as of March 31, 1997 had an accumulated deficit of $21.0 million. These net losses were attributable to the lack of substantial revenue and continuing significant costs incurred in the research and development of the Company's 3D media processor products and product testing. The Company expects to incur additional net losses at least in the near term as it continues to incur substantial research and development and sales and marketing expenses to commercialize its products. There can be no assurance that significant revenues or profitability will ever be achieved or, if they are achieved, that they can be sustained or increased on a quarterly or annual basis in the future The Company derives revenue from the sale of 3D media processors and subsystems and from development contracts. The Company's products are designed for use in PCs, home game consoles and coin-op arcade systems. The Company began commercial shipments of its first 3D graphics product, the Voodoo Graphics chipset, in September 1996. The Company's second product, the Voodoo Rush chipset, is currently in the later stages of development, with limited commercial shipments expected to begin in the second quarter of 1997. The Company has also commenced development of Banshee, which is intended to be a high performance, full-featured single chip 3D/2D media processor for the PC and coin-op arcade markets. Historically, the Company has also marketed and sold limited quantities of its Obsidian products, a line of Voodoo Graphics-based 3D processor boards. The Company currently intends to sell the Obsidian product on an opportunistic basis in the future. As a result of the Company's limited operating history and early stage of development, it has only a limited number of customers. Revenues derived from sales to Orchid, Diamond and Williams accounted for 44%, 33% and 11%, respectively, of product revenues in 1996. Revenues derived from sales to Diamond and Williams accounted for 59% and 15%, respectively, of product revenues for the three months ended March 31, 1997. The Company expects that a small number of customers will continue to account for a substantial portion of its total revenues for the foreseeable future. The Company is developing a 3D media processor chipset for Sega's next generation home game console pursuant to the Sega Agreement. During the three months ended March 31, 1997, the Company recognized development contract revenues of $750,000 under the Sega Agreement representing a non-refundable amount due for the delivery of certain engineering designs to Sega. Future development contract revenues under the Sega Agreement will be recognized by the Company under the percentage of completion method of accounting based upon costs incurred relative to total contract costs. Development contract revenues recognized under the Sega Agreement represented 14.3% of total revenues during the three months ended March 31, 1997. The Company may earn additional development contract revenue and certain development bonuses provided that milestones set forth in the Sega Agreement are met. Under the Sega Agreement, the Company will also derive royalty revenue for each Sega/3Dfx Chipset incorporated into products sold by Sega. The timely development and availability for shipment of the Sega/3Dfx Chipset by the Company and the successful introduction and sale of the New Sega Game Console will be critical factors affecting the 24 26 Company's future results of operations and financial condition. See "Risk Factors -- Dependence on Relationship with Sega" and "Business -- Products, Products Under Development and Technology License -- Strategic Relationship with Sega" for a description of the Sega Agreement. As part of its manufacturing strategy, the Company leverages the expertise of third party suppliers in the areas of wafer fabrication, assembly, quality control and assurance, reliability and testing. This strategy allows the Company to devote its resources to research and development and sales and marketing activities while avoiding the significant costs and risks associated with owning and operating a wafer fabrication facility and related operations. The Company does not manufacture the semiconductor wafers used for its products and does not own or operate a wafer fabrication facility. All of the Company's semiconductor products are currently manufactured by TSMC in Taiwan. The Company obtains manufacturing services from TSMC on a purchase order basis. The Company provides TSMC with a rolling six month forecast of its supply needs and TSMC builds to the Company's forecast. The Company purchases wafers and die from TSMC and pays an agreed upon price per wafer and die meeting certain acceptance criteria. Such wafer and die purchases constitute a substantial portion of cost of products revenues once products are sold. See "Risk Factors -- Dependence on Independent Manufacturers and Other Third Parties; Absence of Manufacturing Capacity; Manufacturing Risks." In connection with the grant of stock options to employees since inception (August 1994), the Company recorded aggregate deferred compensation of approximately $1.9 million, representing the difference between the deemed fair value of the Common Stock for accounting purposes and the option exercise price at the date of grant. This amount is presented as a reduction of shareholders' equity and is amortized ratably over the vesting period of the applicable options. These valuations resulted in charges to operations of $56,000 ($22,000 of which was recorded in research and development expenses and $34,000 of which was recorded in selling, general and administrative expenses), $196,000 (of which $50,000 and $146,000 were recorded in research and development expenses and selling, general and administrative expenses, respectively) and $121,000 (of which $48,000 and $73,000 were recorded in research and development expenses and selling, general and administrative expenses, respectively) in 1995, 1996 and the three months ended March 31, 1997, respectively, and will result in charges over the next 15 quarters aggregating approximately $121,000 per quarter (of which $48,000 and $73,000 will be recorded in research and development expenses and selling, general and administrative expenses, respectively). RESULTS OF OPERATIONS Three Months Ended March 31, 1997 and 1996 Revenues. Revenues from product sales are recognized upon product shipment. Revenue resulting from development contracts is recognized by the Company under the percentage of completion method of accounting based upon costs incurred relative to total contract costs. The Company's total revenues were $5.2 million in the three months ended March 31, 1997. No revenues were generated in the three months ended March 31, 1996. Product revenues were $4.5 million in the three months ended March 31, 1997. Product revenues in the three months ended March 31, 1997 were principally attributable to sales of the Company's Voodoo Graphics chipset and, to a lesser extent, sales of the Company's Obsidian graphics subsystems. The Company currently plans to sell the Obsidian product on an opportunistic basis in the future. Development contract revenues of $750,000 were recognized in the three months ended March 31, 1997 representing a non-refundable amount due for the delivery of certain engineering designs to Sega. Development contract revenues are billable by the Company to Sega based on a schedule of set forth in the Sega Agreement. Development contract revenues in future quarters will be recognized under the percentage of completion method of accounting as costs are incurred relative to total contract costs and will fluctuate from quarter to quarter. These fluctuations in development contract revenues will cause fluctuations in the Company's total revenues, gross margins and results of operations. See "Risk Factors -- Potential Fluctuations in Operating Results," "-- Overview" and 25 27 "Business -- Products, Products Under Development and Technology License -- Strategic Relationship with Sega." Gross Profit. Gross profit consists of total revenues less cost of product revenues. Cost of product revenues consists primarily of costs associated with the purchase of components, the procurement of semiconductors and printed circuit board assemblies from the Company's contract manufacturers, labor and overhead associated with such procurement and warehousing, shipping and warranty costs. Cost of product revenues does not include expenses related to development contract revenues. Gross profit was $2.7 million in the three months ended March 31, 1997. Cost of product revenues was $2.6 million in the three months ended March 31, 1997. Gross profit as a percentage of total revenues was 50.8% in the three months ended March 31, 1997. However, given the Company's limited operating history and limited history of product shipments, the Company believes that analysis of gross profit as a percentage of total revenues is not meaningful. The Company's future gross profit will be affected by the overall level of sales; the mix of products sold in a period; the mix of revenues between product revenues, development contract revenues associated with the Sega Agreement and licensing revenues in a period; manufacturing yields; and the Company's ability to reduce product procurement costs. Research and Development. Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, occupancy costs of research and development facilities, depreciation of capital equipment used in product development and engineering costs paid to the Company's foundries in connection with manufacturing start-up of new products. In addition, costs associated with development contracts are included in research and development. Research and development expenses increased 17.7% from $1.7 million in the three months ended March 31, 1996 to $2.0 million in the three months ended March 31, 1997. Research and development expenses include costs associated with development contract revenues of approximately $80,000. The increase reflects increased personnel costs associated with the general expansion of the Company's research and development activities and increased nonrecurring engineering costs incurred in connection with the commencement of manufacturing of the Voodoo Rush chipset. The market for the Company's products is characterized by frequent new product introductions and rapidly changing technology and industry standards. As a result, the Company's success will depend to a substantial degree upon its ability to rapidly develop and introduce new products and enhancements to existing products that meet changing customer requirements and emerging industry standards. Accordingly, the Company expects to continue to make substantial investments in research and development and anticipates that research and development expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate. Selling, General and Administrative. Selling, general and administrative expenses include compensation and benefits for sales, marketing, finance and administration personnel, commissions paid to independent sales representatives, tradeshow, advertising and other promotional expenses and facilities expenses. Selling, general and administrative expenses increased 79.6% from $1.0 million in the three months ended March 31, 1996 to $1.8 million in the three months ended March 31, 1997. The increase resulted from the addition of personnel in sales, marketing, finance and administration as the Company expanded operations, and increased commission expenses associated with the commencement of commercial sales. The Company expects that selling, general and administrative expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate. Interest and Other Income (Expense), Net. Interest and other income (expense), net decreased from net interest and other income of $35,000 in the three months ended March 31, 1996 to net interest and other expense of $27,000 in the three months ended March 31, 1997. The decrease resulted from higher interest expense as a result of outstanding balances under the equipment line of credit and capitalized lease obligations, partially offset by interest income earned on outstanding cash balances. Provision For Income Taxes. The Company recorded no provision for income taxes in the three months ended March 31, 1996 and 1997 as it incurred losses during such periods. As of March 31, 1997, 26 28 the Company had net operating loss carryforwards of approximately $19.1 million for federal income tax purposes. If not utilized, the net operating loss carryforwards will begin to expire in 2010. Under the Tax Reform Act of 1986, the amount of and the benefit from net operating losses that can be carried forward may be impaired in certain circumstances, including for example, a cumulative ownership change of more than 50% over a three-year period. As of March 31, 1997, the Company's net operating loss carryforwards were not subject to any material annual limitations on utilization. The offering will result in an annual limitation of the Company's ability to utilize net operating losses (from the effective date of this offering). At March 31, 1997, the Company had approximately $8.2 million of deferred tax assets, comprised primarily of net operating loss and expenses not currently deductible for tax purposes. The Company believes that available objective evidence creates sufficient uncertainty regarding the realizability of such deferred tax assets; therefore a full valuation allowance has been recorded. The factors considered include the Company's history of losses, the lack of carryback capacity to realize deferred tax assets, the uncertainty of the development of the products and markets in which the Company competes and the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology. The Company believes that based on the currently available evidence, it is more likely than not that the Company will not generate sufficient taxable income to realize the Company's deferred tax assets. Years Ended December 31, 1996 and 1995 Revenues. The Company's total revenues were $6.4 million in 1996. In 1995 the Company was still in the development stage and did not generate any revenues. Substantially all of the revenues in 1996 were derived from sale of the Company's Voodoo Graphic chipset, which began commercial shipments in September 1996 and, to a lesser extent, sale of Obsidian graphics subsystems. There were no development contract revenues in 1996. Gross Profit. Gross profit and cost of product revenues were $1.3 million and $5.1 million, respectively, in 1996. Gross profit as a percentage of total revenues was 19.8% in 1996. Cost of product revenues in 1996 reflected significant prototype and manufacturing start-up expenses incurred in connection with the initial commercial shipment of the Voodoo Graphics chipset. Research and Development. Research and development expenses increased 220.9% from $2.9 million in 1995 to $9.4 million in 1996, as the Company significantly increased research and product development activities and incurred increased nonrecurring engineering costs in connection with beginning manufacturing of the Voodoo Graphics chipset. The increased research and development expenditures primarily related to compensation and related personnel expenditures as the Company expanded its research and development operations. Selling, General and Administrative. Selling, general and administrative expenses increased 206.6% from $2.2 million in 1995 to $6.6 million in 1996, as the Company (i) increased finance and administration staffing and related costs necessary to support higher levels of operations, (ii) established sales and marketing operations to support the commencement of commercial product shipments and (iii) incurred commission expenses associated with product sales. Interest and Other Income (Expense), Net. Interest and other income (expense), net decreased from $67,000 in 1995 to $59,000 in 1996. The decrease resulted from higher levels of interest expense as a result of higher outstanding balances of capitalized lease obligations partially offset by higher interest income as a result of higher outstanding cash balances. Provision for Income Taxes. The Company recorded no provision for income taxes in 1995 and 1996 as it incurred losses during such periods. 27 29 Quarterly Results of Operations The following table sets forth unaudited quarterly results of operations data for each quarter during the year ended December 31, 1996 and for the three months ended March 31, 1997. This unaudited information has been prepared by the Company on a basis consistent with the Company's audited financial statements appearing elsewhere in this Prospectus and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. The unaudited quarterly information should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus. In light of the Company's limited operating history, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance.
THREE MONTHS ENDED ----------------------------------------------------------- MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, 1996 1996 1996 1996 1997 --------- -------- --------- -------- --------- (IN THOUSANDS) Revenues: Product................................ $ -- $ -- $ 1,887 $ 4,503 $ 4,497 Development contract................... -- -- -- -- 750 ------- ------- ------- ------- ------- Total revenues................. -- -- 1,887 4,503 5,247 Cost of product revenues................. -- -- 1,719 3,404 2,582 ------- ------- ------- ------- ------- Gross profit............................. -- -- 168 1,099 2,665 ------- ------- ------- ------- ------- Operating expenses: Research and development............... 1,659 2,864 2,626 2,286 1,953 Selling, general and administrative.... 1,028 1,529 1,661 2,424 1,846 ------- ------- ------- ------- ------- Total operating expenses....... 2,687 4,393 4,287 4,710 3,799 ------- ------- ------- ------- ------- Loss from operations..................... (2,687) (4,393) (4,119) (3,611) (1,134) Interest and other income (expense), net.................................... 35 3 8 13 (27) ------- ------- ------- ------- ------- Net loss................................. $(2,652) $(4,390) $(4,111) $(3,598) $(1,161) ======= ======= ======= ======= =======
The Company was founded in August 1994 and was a development stage company until it began commercial shipments of its first product, Voodoo Graphics, in the third quarter of 1996. Product revenues were derived primarily from the sale of the Voodoo Graphics chipset in the three month periods ended September 30, 1996, December 31, 1996 and March 31, 1997. The Company's product revenues remained relatively flat in the three months ended March 31, 1997 as compared to the three months ended December 31, 1996 due to seasonality in the PC market. During the three months ended March 31, 1997, the Company recognized development contract revenues of $750,000 under the Sega Agreement representing a non-refundable amount due for delivery of certain engineering designs to Sega. Development contract revenues in future quarters derived pursuant to the Sega Agreement will fluctuate from quarter to quarter. See "-- Overview." The increase in cost of product revenues during the three months ended December 31, 1996 was primarily attributable to increased product revenues and manufacturing inefficiencies as the Company increased commercial product sales. Total operating expenses fluctuated from quarter to quarter as the Company expanded research and development and sales and marketing activities in 1996 to support the manufacture, development and marketing of Voodoo Graphics and Voodoo Rush, respectively. Operating expenses in the three month period ended March 31, 1997 decreased from the prior periods as the Company began cost containment measures and incurred lower manufacturing start-up expenses. The Company believes that, even if it does achieve significant sales of its products, quarterly and annual results of operations will be affected by a variety of factors that could materially adversely affect revenues, gross profit and income from operations. Accordingly, the Company believes that 28 30 period-to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. In certain future quarters, the Company's results of operations may be below the expectations of public market analysts or investors. In such event, the market price of the Common Stock could be materially adversely affected. See "Risk Factors -- Potential Fluctuations in Quarterly Results." Impact of Adoption of New Accounting Standards In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("FAS 123") which established a fair value based method of accounting for stock-based compensation plans and requires additional disclosures for those companies that elect not to adopt the new method of accounting. In January 1996, the Company adopted the disclosure requirements of FAS 123. The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The adoption of the disclosure requirements of FAS 123 did not have a material impact on the Company's financial condition or results of operations. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," ("FAS 121") which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset might not be recoverable. In certain situations, an impairment loss would be recognized. Effective January 1, 1996, the Company adopted FAS 121. The adoption of FAS 121 did not have a material impact on the Company's financial condition or results of operations. In February 1997, the Financial Accounting Standards Board Issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128") which adjusts the calculation of earnings per share under generally accepted accounting principles. FAS 128 is effective for the Company's fiscal year ending December 31, 1997. See Note 1 of Notes to Financial Statements for the effect of FAS 128 on the Company's pro forma net loss per share presentation. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private placements of equity securities yielding approximately $31.3 million. As of March 31, 1997, the Company had approximately $1.6 million of equipment line financing in place. As of March 31, 1997, the Company had approximately $4.1 million in cash and cash equivalents. Net cash used in operating activities was approximately $3.9 million, $17.2 million and $1.8 million in 1995, 1996 and the three months ended March 31, 1997, respectively. For 1995, net cash used in operating activities was due primarily to the net loss of $5.0 million, partially offset by increases in accounts payable and accrued liabilities. Net cash used in operating activities in 1996 was due primarily to the net loss of $14.8 million, a $4.9 million and $1.5 million increase in inventory and accounts receivable, respectively, associated with the generation of revenues which was partially offset by a $2.6 million increase in accounts payable and accrued liabilities. For the three months ended March 31, 1997, net cash used in operating activities was due primarily to the net loss of $1.2 million, a $2.6 million increase in accounts receivable, increases in other assets and decreases in accounts payable partially offset by a $2.0 million decrease in inventory and an $800,000 increase in deferred revenue. Net cash used in investing activities was approximately $589,000, $2.2 million and $334,000 in 1995, 1996 and the three months ended March 31, 1997, respectively, and was due, in each period, to the purchase of property and equipment. The Company does not have any significant capital spending or purchase commitments other than normal purchase commitments and commitments under leases. As of March 31, 1997, the Company had capital equipment of $5.1 million less accumulated depreciation 29 31 of $1.6 million to support its research and development and administrative activities. The Company has financed approximately $1.9 million from capital lease obligations through March 31, 1997. The Company has an equipment line of credit, which provides for the purchase of up to $2.0 million of property and equipment, of which approximately $1.6 million had been utilized as of March 31, 1997. Borrowings under this line are secured by all of the Company's owned assets and bear interest at the bank's prime rate plus 1.50% per annum (10.0% as of March 31, 1997). The agreement requires that the Company maintain certain financial ratios and levels of tangible net worth profitability and liquidity. The Company was in compliance with its covenants as of March 31, 1997. The lease line of credit expires in August 1998. The Company expects to use approximately $6.5 million of the net proceeds of this offering for capital expenditures through the end of 1998, primarily for the purchase of computer equipment and related software tools, furniture, fixtures and leasehold improvements. The Company expects capital expenditures to increase over the next several years as it expands facilities and acquires equipment to support the planned expansion of its operations. Net cash provided by financing activities was approximately $5.4 million, $23.8 million and $988,000 in 1995, 1996 and the three months ended March 31, 1997, respectively, due primarily to proceeds from the issuance of Preferred Stock. The Company has a line of credit agreement with Silicon Valley Bank, which provides for maximum borrowings in an amount up to the lesser of 75% of eligible accounts receivable plus 100% of cash and cash equivalents or $4.0 million. Borrowings under the line are secured by all of the Company's owned assets and bear interest at the bank's prime rate plus 1.50% per annum. The agreement requires that the Company maintain certain financial ratios and levels of tangible net worth, profitability and liquidity. The Company is in compliance with its covenants as of March 31, 1997. The line of credit expires in August 1997. At March 31, 1997, there were no borrowings outstanding under this line of credit. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities, the extent to which the Company's existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, the level and timing of development contract revenues and royalty revenues associated with the Sega Agreement and available borrowings under line of credit arrangements and other factors. The Company believes that the proceeds from this offering together with the Company's current cash balances and cash generated from operations and from available or future debt financing will be sufficient to meet the Company's operating and capital requirements through December 1998. However, there can be no assurance that the Company will not require additional financing within this time frame. The Company's forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described earlier in this paragraph will impact the Company's future capital requirements and the adequacy of its available funds. The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to the Company, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies or products. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Possible Future Capital Requirements." 30 32 BUSINESS 3Dfx Interactive is a leading developer of high performance, cost-effective 3D media processors, software and related technology for the interactive electronic entertainment market. The Company has developed 3D technology that enables a highly immersive, interactive and realistic 3D experience across multiple hardware entertainment platforms. Furthermore, the Company's technology facilitates the virtually seamless portability of software content across the three primary interactive electronic entertainment platforms: the PC, the home game console and the coin-operated arcade system. The Company's strategy is to provide a 3D media processor solution that will become the standard graphics engine for the interactive electronic entertainment market. The Company believes that the benefits of its technology, coupled with its software content strategy, provide powerful incentives for the leading PC OEMs and entertainment hardware manufacturers to utilize the 3Dfx solution. Voodoo Graphics, the Company's first product, and subsequent 3D media processors now under development are designed around a common architecture to be utilized as the graphics engine for PCs and coin-op arcade systems. For PC applications, Diamond and Orchid have each introduced consumer multimedia add-in cards incorporating the Company's 3D media processor for sale in the retail channel and for incorporation into PCs manufactured by, among others, Apricot/Mitsubishi Electronic PC Division ("Apricot/Mitsubishi"), Falcon Northwest Computer Systems ("Falcon Northwest"), Hewlett-Packard Company ("Hewlett-Packard") and NEC Corp. ("NEC"). In the coin-op arcade market, the Voodoo Graphics 3D media processor is being utilized by Acclaim, Kaneko, Ltd., Midway and Taito, among others. Voodoo Graphics technology is also the graphics architecture for the Sega/3Dfx Chipset that the Company is developing for license to Sega for use in the New Sega Game Console. The Company's second product, Voodoo Rush, is designed to incorporate a 3D/2D solution into a single PCI board. Voodoo Rush began sampling in November 1996 and limited commercial shipments are expected in the second quarter of 1997. The Company has commenced development of Banshee, which is intended to be a high performance, fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade markets. The Company expects to begin commercial shipments of Banshee in the first quarter of 1998. All of the Company's products are manufactured, assembled, tested and packaged by third-party suppliers. INDUSTRY BACKGROUND The goal of interactive electronic entertainment is to create a realistic and immersive environment in which users can actively participate. Interactive electronic entertainment began in the 1970s with Atari's introduction of Pong, a simplistic, 2D, black and white, coin-op arcade game resembling ping pong, and has evolved to realistic and engaging 3D action games such as Quake and Tomb Raider. While interactive electronic entertainment started in the arcade, it was brought to the mass market through the advent of inexpensive, dedicated home game consoles that attached to televisions. Over the past 15 years, Nintendo, Sega, Sony and other OEMs have introduced successive generations of these consoles that, combined with better quality games, have provided increasing realism and enhanced game play. The overall entertainment experience on these platforms has been improving as a result of the recent introduction of first generation 3D hardware and software in the arcade and console markets. Despite its desirability, high performance 3D technology continues to be prevalent only in high-end engineering workstations that typically cost tens of thousands of dollars. The ultimate goal of the use of 3D for entertainment applications is to create an interactive experience with video quality comparable to that of motion pictures. Interactive electronic entertainment applications employing 3D graphics create plausible illusions of reality and thus provide more engaging presentations of complex action and scenery than traditional 2D graphics. The Company believes that once consumers experience high quality 3D technology on any entertainment platform, they will demand it from all interactive entertainment experiences. Interactive electronic entertainment products today are generally played on three hardware platforms -- the coin-op arcade system, the home game console and increasingly the PC. Coin-op 31 33 arcade games have traditionally offered the most compelling and immersive experience for game players and, as a result, 3D gaming was first introduced in this high-end market. However, coin-op arcade games are based on high cost, proprietary hardware and, consequently, the coin-op arcade market has remained a relatively small segment of the overall 3D market. Like coin-op arcade systems, home game console hardware is typically proprietary. However, the attractive price point, traditionally $300 or less, continual technological improvements and convenience of home play that home game consoles offer have fueled the platform's substantial consumer adoption even though performance still trails that of the arcade. Although 3D interactive electronic entertainment has enjoyed success on both the coin-op arcade and home game console platforms, which are optimized for game play, to date 3D entertainment has had limited success in the PC market. In fact, in 1996, PC games accounted for less than 20% of the total video game market. Several recent developments, however, are enabling the PC to become a more suitable platform for interactive electronic entertainment. First, the emergence of more powerful microprocessors and dedicated graphics processors have provided the necessary computing power to handle the computationally intensive processing of 3D graphics at acceptable costs. Second, the PC industry has adopted wider data buses in the PC architecture that are capable of transmitting the vast streams of data needed for high quality 3D graphics. Third, cost reductions in memory and other components have allowed PC OEMs to offer lower cost, general purpose computing platforms that are ideal for 3D interactive electronic entertainment. Finally, the industry has developed and adopted industry standard 3D APIs, like Microsoft's D3D and SGI's OpenGL, which serve as software bridges between applications and the 3D graphics processor. In addition to the performance capabilities of the hardware, the success of any game platform ultimately depends on the quality and quantity of software titles developed for the platform and the ease with which developers can create new software for, or port existing software to, a platform. Porting is the adaptation of software code written for one platform for use on another. For example, software written for a coin-op arcade system must be ported so that it can be played on PCs or home game consoles. Historically, porting has been technically challenging, costly and time consuming. Even though the coin-op arcade market is the proving ground for new game titles with hits in the arcade market virtually guaranteeing success in the PC and home game console markets, software developers often opt not to pursue these opportunities because of the significant engineering effort required to port a title from one platform to another. As a result, game developers and publishers have not been able to fully capitalize on their investment in software content. Consumers have been frustrated by the long delays between their first experience with a game in an arcade and the availability of the game for home use and by the significant decrease in game quality typically experienced when software titles migrate from the arcade platform. Thus, content developers are demanding an entertainment solution that facilitates virtually seamless porting across platforms and consumers are demanding a cost-effective solution that enables a high quality gaming experience on their choice of platform. The 3D Dilemma The growth of the interactive electronic entertainment market has been constrained by the absence of a high performance, cost-effective 3D solution, the lack of an architecture that facilitates virtually seamless porting across the three primary platforms and the limited number of high quality 3D software titles. The implementation of 3D graphics is extremely complex and mathematically intensive and requires significant computing power. Consequently, despite the desirability of 3D graphics, high quality 3D continues to remain a niche technology not prevalent outside of high-end engineering workstation and professional applications. To date, attempts to bring high quality, affordable 3D solutions to the entertainment market have required consumers to accept a trade-off between visual realism, or fill rate, and gaming performance, or frame rate. Today, the interactive electronic entertainment industry is demanding a no-compromise 3D solution that will deliver both visual realism and performance at a cost-effective price. The solution must also drive content development by 32 34 enabling developers to create a new generation of high quality 3D software that delivers a realistic and immersive experience. THE 3DFX SOLUTION 3Dfx has developed hardware and software technology designed to deliver superior 3D performance across multiple interactive electronic entertainment platforms in a cost-effective manner. The Company's technology is optimized to alleviate the traditional consumer trade-off between visual quality and gaming performance by providing a 3D solution with both high fill rates and frame rates. To that end, the Company's technology enables a highly immersive, interactive 3D experience with compelling visual quality, realistic motion and complex character and scene interaction at real time frame rates. Voodoo Graphics, the Company's first product, and subsequent 3D media processors now under development, are designed around a common architecture to be utilized as the graphics engine for PCs and coin-op arcade systems. Voodoo Graphics technology is also the graphics architecture for the Sega/3Dfx Chipset that the Company is developing for license to Sega for use in the New Sega Game Console. To promote the rapid adoption of its products, the Company's architecture supports most industry standard APIs, including: Apple Computer Inc.'s Rave3D, Argonaut Technologies Incorporated's BRender, Criterion Software Ltd.'s Renderware, Intel's 3DR, Microsoft's D3D and SGI's OpenGL. The Company believes that game titles using any of these APIs in conjunction with its 3D media processor products offer compelling performance when compared to performance achieved by competing hardware solutions. Additionally, the Company has developed Glide, its proprietary, low-level 3D API. Glide was designed to optimize the performance of software designed for any entertainment platform powered by the Company's 3D media processors, and affords virtually seamless portability of game content across multiple entertainment platforms. The content provider's ability to rapidly port software titles to all three platforms reduces the developer's time to market from the arcade to the high volume platforms, significantly reduces the costs of porting across multiple platforms, provides a successful title with enormous exposure and allows both the game developer and the publisher to more effectively leverage their investment in a given title. The Company believes that these are powerful incentives for the leading PC OEMs, arcade and console hardware manufacturers, software content developers and publishers to utilize and design applications for the 3Dfx graphics engine. STRATEGY The Company's objective is to establish its products as the standard 3D media processors in the interactive electronic entertainment market. Key elements of the Company's business strategy include: Focus on Interactive Electronic Entertainment Market. The interactive electronic entertainment market is currently a multi-billion dollar industry that is growing rapidly. The Company believes that the compelling visual quality and high performance graphics enabled by its 3D media processors make its 3D solution ideal for use in this market where users demand a high quality 3D experience. The Company's strategy is to develop and introduce products that cost-effectively deliver 3D performance levels that meet the demanding requirements of the three major interactive electronic entertainment platforms. Moreover, given the technical challenge of offering a high quality 3D solution the Company believes that this market offers significant potential for continued innovation of cost-effective, high performance 3D media processors. Leverage Multi-Platform Architecture. The Company's 3D technology embodies a single hardware/software architecture that can be deployed in each of the three interactive electronic entertainment platforms. For PC applications, Diamond and Orchid have each introduced consumer multimedia add-in cards incorporating the Company's 3D media processor for sale in the retail channel and for incorporation into PCs manufactured by Apricot/Mitsubishi, Falcon Northwest, Hewlett-Packard and NEC, among others. In the coin-op arcade system market, Voodoo Graphics is being utilized by Acclaim, Kaneko, Midway, and Taito, among others. Voodoo Graphics technology is also the graphics 33 35 architecture for the Sega/3Dfx Chipset that the Company is developing for license to Sega for use in the New Sega Game Console. Promote Content Development. The Company believes that the availability of a sufficient number of high quality, commercially successful software game titles and applications drives hardware sales. Therefore, to become the standard in the 3D interactive electronic entertainment arena, the Company is collaborating with content developers to create software entertainment titles designed to work with the Company's hardware. The Company attracts these developers by providing the opportunity to differentiate their software products with high quality 3D graphics, feature rich special effects and real time frame rates. With a solution that enables game content to be easily ported across the major interactive entertainment platforms, the Company offers its software partners easy access to multiple outlets for their products. To encourage developers and publishers to develop content based on the Company's technology, the Company has devoted significant resources to its developer relations program which currently includes over 500 content developers, game publishers and ISVs. Pursue Branding Strategy. The Company continues to devote substantial marketing resources towards establishing 3Dfx as a recognizable brand. The Company is initially focusing on establishing its brand identity in the coin-op arcade market by promoting the use of a spinning version of the 3Dfx logo at the start of games utilizing the Company's hardware. In addition, the Company has been working with both software developers and publishers in the PC market to prominently display the 3Dfx logo on their software product boxes to indicate that the software is compatible with the Company's products. To further identify the Company in the marketplace, several software products display a spinning version of the 3Dfx logo on the screen while loading. The Company believes that this strategy creates market awareness because publishers first release games to arcades where consumers will first encounter the 3Dfx logo, and then port successful games to PCs and home game consoles. The Company further believes that consumer awareness of its products will speed adoption of the Company's architecture in the mass market, lead to increasing availability of 3Dfx enabled software content and help establish the Company as the standard 3D solution for the interactive electronic entertainment market. Extend Technical Leadership. The Company offers superior performance 3D media processors targeted toward the high-end of the interactive electronic entertainment market. The Company intends to continue to leverage its technology at the high-end of the 3D interactive electronic entertainment market in order to optimize and cost-reduce such solutions for applications in the volume market. The Company believes this strategy will create an effective barrier to entry to potential competitors. Leverage Core Technology to Address New Market Opportunities. The Company believes it can leverage its 3D processor technology in a variety of other 3D multimedia applications. Within the electronic entertainment market, the Company intends to extend its technology to location based entertainment ("LBE") applications, which would be enhanced by the Company's technology. LBE sites are typically dedicated to one type of game or experience and the environment includes mechanical or other environmental elements that add significantly to the immersion of the experience. The Company is investigating opportunities to apply its 3D technology to other product applications such as Internet/intranet exploration, including virtual reality mark-up language ("VRML") browsers, 3D graphical user interface ("GUI"), visual simulation, education and training applications and other 3D visualization applications. PRODUCTS, PRODUCTS UNDER DEVELOPMENT AND TECHNOLOGY LICENSE The Company's product strategy is to offer a complete high performance solution. Voodoo Graphics, the Company's first product, began commercial shipment in September 1996. Voodoo Rush, the Company's second product, began sampling in November 1996 and limited commercial shipment is expected for the second quarter of 1997. Both Voodoo Graphics and Voodoo Rush are being targeted at price and performance points for the PC and coin-op arcade markets. Voodoo Graphics and 34 36 subsequent 3D media processors under development are based on a common architecture which offers developers a clear, compatible upgrade path. This architecture is designed to scale with the PC's microprocessor. As a result, as the processing power of the CPU increases, the Company's products will use that additional processing power to improve the overall quality of the 3D. In addition, Voodoo Graphics technology is the graphics architecture for the Sega/3Dfx Chipset that the Company is developing for license to Sega for use in the New Sega Game Console. Voodoo Graphics. The Company believes that Voodoo Graphics offers a cost-effective, high performance solution for 3D interactive electronic entertainment applications. Voodoo Graphics is a stand-alone 3D media processor designed to function as the primary display device in embedded applications, such as coin-op arcade systems, or to work in conjunction with most standard 2D processors in PC applications. Voodoo Graphics has seen initial acceptance in both the PC and coin-op arcade markets. Diamond and Orchid have each introduced multimedia add-in boards for PCs, Monster 3D and Righteous 3D, respectively, that are currently supplied through retail, OEM and mail order channels in the US, Europe and Asia. See "-- Sales and Marketing." Voodoo Graphics is being utilized by Acclaim, Kaneko, Midway and Taito among others for coin-op arcade systems and game applications. In addition, Voodoo Graphics is the basis for the technology that the Company is developing and has licensed to Sega for use in Sega's new home game console. See "-- Strategic Relationship with Sega." The technological features found in the existing Voodoo Graphics product will be incorporated into the Sega/3Dfx Chipset. There can be no assurance that the Sega/3Dfx Chipset will be developed as anticipated, perform as required or be incorporated into Sega's New Sega Game Console as planned. See "Risk Factors -- Dependence on Relationship with Sega" and "-- Strategic Relationship with Sega." Voodoo Graphics is a two chip solution and has a 128-bit "dedicated texture memory" architecture that provides over 800 megabytes per second of memory bandwidth to deliver both the interactivity and the visual realism necessary for the new generation of 3D games. Because Voodoo Graphics dedicates at least one megabyte of memory to texture maps, interactive 3D games can now attain a level of realism that was previously limited to pre-rendered games with limited interactivity. Voodoo Graphics has scalable performance of 45 megapixels per second sustained fill rate for bilinear or advanced filtered textures and one million textured triangles per second polygon performance for filtered, level of detail ("LOD") MIP-mapped, Z-buffered, alpha-blended, fogged, textured 50-pixel triangles rendered on a Pentium-200 MMX system. Voodoo Rush. Voodoo Rush began sampling in November 1996 and limited commercial shipment is expected for the second quarter of 1997. There can be no assurance that Voodoo Rush will be commercially shipped or will be accepted by the market. Voodoo Rush is designed to offer a cost-effective solution for implementing 3D graphics with 3D performance similar to that of Voodoo Graphics. Based on the core 3D technology in Voodoo Graphics, Voodoo Rush was designed to function with a partner's companion 2D or 2D/3D accelerator. Unlike Voodoo Graphics, however, which requires independent 2D and 3D solutions, Voodoo Rush is designed to incorporate a 3D/2D solution into a single PCI board. Alliance, Macronix, MRT and Trident are the Company's partners for this program. The Voodoo Rush solution is designed to increase system flexibility for the OEM, to require less memory and to reduce the graphics system cost when compared to Voodoo Graphics and stand-alone 2D graphics. Voodoo Rush is designed to provide both full screen rendering and 3D in a window, which permits the user to move easily between the 3D enabled application, the desktop and other applications. Voodoo Rush has a sustained fill rate of 45 megapixels per second for bilinear filtered textures with LOD MIP-mapping, Z-buffering, alpha-blending and fogging enabled. The triangle rate is one million triangles per second for filtered, LOD MIP-mapped, Z-buffered, alpha-blended, fogged, textured triangles on a Pentium-200 MMX system. Future Product Development. In connection with the Company's strategy of developing a single-chip solution, the Company has commenced development of Banshee, which is intended to be a high performance, fully-featured single chip 3D/2D media processor for the PC and coin-op arcade 35 37 markets. See "-- Strategy." The Company expects to begin commercial shipment of Banshee by the first quarter of 1998. The Company is developing Banshee with the intent of delivering quality 3D/2D to a broader portion of the interactive electronic entertainment market. In addition, Banshee is designed to reduce graphics system costs and to be compatible with applications designed for use with Voodoo Graphics and Voodoo Rush. There can be no assurance that the Company will be able to introduce Banshee as scheduled or, that if introduced, it will perform as intended or be accepted by OEMs, coin-op board manufacturers and coin-op arcade system manufacturers. In addition, the Company is in the early stages of development of the second generation of its existing product. There can be no assurance, however, that these second generation solutions will be developed, or, if developed, that they will perform as expected or be accepted by the market. See "Risk Factors -- Acceptance of the Company's 3D/2D Solution for the PC Market; Dependence on the Development of a Single-Chip Solution" and "-- Dependence on New Product Development; Rapid Technological Change." Strategic Relationship with Sega In March 1997, the Company entered into the Sega Agreement, under which the Company will develop and license to Sega the Sega/3Dfx Chipset for use in the New Sega Game Console. During the three months ended March 31, 1997, the Company recognized development contract revenues of $750,000 under the Sega Agreement representing a non-refundable amount due for the delivery of certain engineering designs to Sega. Development contract revenues recognized under the Sega Agreement represented 14.3% of total revenues, during the three months ended March 31, 1997. Through the end of 1998, the Company may earn additional development contract revenues and certain development bonuses provided that certain milestones set forth in the Sega Agreement are met. The Company will also derive royalty revenue for each Sega/3Dfx Chipset incorporated into products sold by Sega. Pursuant to the Sega Agreement, the Company shall maintain ownership of the Sega/3Dfx Chipset intellectual property. The Company granted Sega a royalty-bearing, worldwide license (i) to use the technology covered by the Sega Agreement for the manufacture of the Sega/3Dfx Chipset, to perform engineering, development, testing and integration of the Sega/3Dfx Chipset within the console and to distribute the Sega/3Dfx Chipset as integrated into such console; and (ii) to use the Sega/3Dfx Chipset solely for Sega's internal engineering, development, testing, support and other purposes in connection with the incorporation of the Sega/3Dfx Chipset into other potential Sega products. The license rights to manufacture and distribute the Sega/3Dfx Chipset are exclusive to Sega, solely with respect to home game consoles, for a period of three years commencing on Sega's acceptance of the version of the Sega/3Dfx Chipset intended for production in commercial volume. In addition to the chipset license, the Company granted Sega a royalty-free license for certain software, including Glide, subject to limitation. The Sega Agreement will remain in full force and effect unless terminated in accordance with its terms. Sega may terminate the Sega Agreement during the development phase, if the Company defaults on the development schedule. Either party may terminate the Sega Agreement, with limitations, upon the material breach by the other party or in the event of the other party's bankruptcy, dissolution or liquidation, assignment for the benefit of creditors, or the appointment of a receiver or trustee or custodian for all or part of the assets of such party. 36 38 - ---------------------------------------------------------------------------------------------------------- 3DFX PRODUCT DEVELOPMENT - ---------------------------------------------------------------------------------------------------------- PRODUCT/LICENSE COMMERCIAL AVAILABILITY TARGET MARKET KEY FEATURES(1) - ---------------------------------------------------------------------------------------------------------- Voodoo Graphics September 1996 PCs, coin-op arcade Add-on 3D solution; systems scalability; consistent sustained performance with all features enabled; fill rate of 45 Mpixel/sec; fully featured triangle rate of 1.0M/sec; texture streaming; fully featured architecture - ---------------------------------------------------------------------------------------------------------- Voodoo Rush Expected second PCs Single-board 3D/2D solution; quarter 1997 consistent sustained performance with all features enabled; fill rate of 45 Mpixel/sec; fully featured triangle rate of 1.0M/sec; texture streaming; fully featured architecture; 3D in a window - ---------------------------------------------------------------------------------------------------------- Banshee Expected first PCs, coin-op arcade Single chip 3D/2D solution; quarter 1998 systems large feature set; fully integrated architecture; high sustained fill rate and triangle rate with all features enabled; compatible 3D architecture with Voodoo Graphics - ---------------------------------------------------------------------------------------------------------- Sega/3Dfx Chipset License To be announced Home game Key features based on Voodoo consoles Graphics architecture - ----------------------------------------------------------------------------------------------------------
- ------------ (1) "Fully featured" means textured, bilinear filtered with LOD MIP-mapping, Z-buffered and fogged. Graphics Subsystems and Development Boards. To address the coin-op arcade market and to offer PC OEM customers development boards, the Company commenced the design and manufacture of graphics boards immediately upon availability of Voodoo Graphics. Branded "Obsidian," the Company also targeted these products to address opportunities in the visual simulation, digital content creation and LBE markets. Because many of the Company's coin-op arcade OEM customers have implemented embedded coin-op arcade systems as opposed to PC-based coin-op systems, the principal demand for the Company's products in the coin-op arcade market is in the form of components, rather than graphics boards or subsystems. Because the graphics board business for the visual simulation, digital content creation and LBE markets collectively comprise a significantly smaller volume market than the embedded coin-op market, the Company does not intend to devote significant resources to support the Obsidian product line. To maintain a presence in these markets, while minimizing the associated support burdens, the Company has recently entered into an agreement with Quantum3D, Inc. ("Quantum3D") pursuant to which the Company will supply Obsidian graphics boards to Quantum3D for resale into these and other markets. The Company anticipates that Quantum3D will transition into a component customer in late 1997, and intends to support the Obsidian product line on an opportunistic basis after such time. CUSTOMERS The Company markets its products to PC and graphics board OEMs and manufacturers of coin-op arcade systems and home game consoles. The Company works closely with its customers and software developers during the design process of entertainment platforms and the development phase of 37 39 software titles and applications. The Company believes that this close technical collaboration facilitates the integration of the Company's products into its customers' entertainment platforms. There can be no assurance, however, that design wins will ultimately result in orders or that the Company will retain such customers through the ongoing and recurring design-in process. The following is a list of the companies which are either direct or indirect customers of the Company or companies with which the Company has design wins:
PCS COIN-OP ARCADE SYSTEMS ---------------------------------------- ---------------------------------------- Apricot/Mitsubishi Electric PC Division(1) Acclaim Entertainment Inc.(2) Deltron Precision, Inc. Eolith Co., Ltd.(2) Diamond Multimedia Systems, Inc. IGS Taiwan(2) Falcon Northwest Computer Systems(1) Interactive Light Hercules Computer Technology, Inc. Kaneko Ltd.(2) Hewlett-Packard Company(1) Konami Co. Ltd. Intel Corporation LBE Technologies, Inc. Micron Technology, Inc.(1) RealVision Corporation(2) NEC Corp.(1) Taito Corporation(2) Orchid Technology WMS Industries, Inc. (Williams) Quantum3D, Inc.
- --------------- (1) Indirect customer that purchases products from the Company's board level customers. (2) Indicates design win only. In addition to the design wins above, the Company has a design win with Sega for the Sega/3Dfx Chipset which is being developed for use in the New Sega Game Console. See "-- Products, Products Under Development and Technology License -- Strategic Relationship with Sega." Because of the Company's limited operating history and early stage of development, it has only a limited number of customers. For these reasons, the Company's sales are highly concentrated. Revenues derived from sales to Orchid, Diamond and Williams accounted for 44%, 33% and 11% respectively, of product revenues for 1996. Revenues derived from sales to Diamond and Williams accounted for 59% and 15%, respectively of product revenues for the three months ended March 31, 1997. Development contract revenues recognized under the Sega Agreement represented 14.3% of total revenues during the three months ended March 31, 1997. The Company expects that a small number of customers will continue to account for a substantial portion of its revenues for the foreseeable future. See "Risk Factors -- Customer Concentration." SALES AND MARKETING The Company sells its products to manufacturers of graphics and multimedia accelerator subsystems for PCs and coin-op arcade systems and to PC OEMs through a network of domestic and international independent sales representatives and distributors. In the United States and Canada, the Company has 11 sales representatives. The Company also sells its products directly to certain OEM customers in each of the Company's target markets. Outside the United States and Canada, primarily in the Far East and Europe, the Company's products are sold through nine sales representatives. Sales outside of the United States were insignificant during 1996 and the three months ended March 31, 1997. The Company maintains a sales management organization which is primarily responsible for supporting independent sales representatives and distributors and making direct sales to customers that prefer to transact directly with the Company. As of March 31, 1997, the Company employed 18 individuals in its sales, marketing and customer support organization. To meet customer requirements and achieve design wins, the Company's sales and marketing personnel work closely with customers, potential customers and leading industry software and hardware developers to define product features, performance, price and market timing of new products. The Company provides customers with early access to technical design information and 38 40 specifications, documentation, in-house engineering support, first chip product samples and product development plans. This effort is coordinated by the Company's sales management organization and is supported by in-house applications engineers and marketing personnel. The Company's applications engineers frequently work with existing and potential customers to assist them with their design projects. The Company believes that these efforts contribute to the Company's understanding of customer needs and assist the Company in developing products that meet customer requirements. To encourage software title developers and publishers to develop games optimized for platforms utilizing the Company's products, the Company seeks to establish and maintain strong relationships in the software development community. The Company has branded a marketing effort named the "Buddy Program" that employs the Company's expertise in software development to assist developers through an on-site assistance program, sample source code and electronic communication. As part of the Buddy Program, the Company has assigned a software engineer to each strategic developer to assist with product development. Generally the Company's assigned software engineer interacts with the developer both remotely and through on-site visits and, by working closely with the development team, attempts to ensure that the developer fully exploits the 3D graphics capabilities of the Company's products. Another key element of the Company's sales and marketing strategy has been the development of manufacturing qualified reference design kits for the Company's 3D media processors. The Company uses the reference design kits to seed important developers before the commercial introduction of the Company's products to ensure early software availability, and after commercial introduction to encourage on-going support of the Company's products. The Company believes that its close relationships with and attention to content developers encourages the development of software for the Company's hardware, provides the Company with information regarding the needs and concerns of the development community and enables the Company to continually assess opportunities for future software projects. 39 41 The following table lists game titles for use with platforms utilizing the Company's hardware that were commercially available as of March 31, 1997:
TITLE PUBLISHER DEVELOPER API PLATFORM - --------------------- ----------------------- ----------------------------- ---------- --------------- Agile Warrior Virgin Interactive Black Ops Entertainment Inc. D3D PC Entertainment Inc. Cyberdome Microleague Above the Garage Production D3D PC Multimedia, Inc. CyberGladiators Sierra On-Line, Inc. Dynamix Inc. Glide/D3D PC Descent 2: Interplay Productions Parallax Software Glide PC The Infinite Abyss Corporation Die Hard Trilogy Fox Interactive, Inc. Probe Entertainment D3D PC The Divide Virgin Interactive Radical Entertainment D3D PC Entertainment, Inc. EF2000 Ocean Entertainment, Digital Image Design Glide PC Inc. Hellbender Microsoft Terminal Reality, Inc. D3D PC Hyperblade Activision, Inc. Wizbang! Software D3D PC Productions Independence Day Fox Interactive, Inc. Radical Entertainment D3D PC Mech Warrior 2 Activision, Inc. Activision, Inc. Glide PC Monster Truck Madness Microsoft Terminal Reality D3D PC pod UbiSoft Entertainment UbiSoft Entertainment Glide PC Quake id Software, Inc. id Software OpenGL PC Scorched Planet Virgin Interactive Criterion Studios Glide PC Entertainment, Inc. Scourge of Armagon Activision, Inc. Hypnotic OpenGL PC (Quake Add On) Shrak (Quake Add On) Quantum Access Quantum Access OpenGL PC Starfighter The 3DO Company Krisalis Software Ltd. Glide PC Terracide Eidos Interactive Simis D3D PC TigerShark GT Interactive N-Space Glide PC Software Corporation Tomb Raider Eidos Interactive Core Design Glide PC Toshinden Playmates Interactive Digital Dialect Glide PC Entertainment Incorporated VR Soccer '96 Interplay Productions Gremlin Glide PC Whiplash Interplay Productions Gremlin Glide PC Home Run Derby Interactive Light Interactive Light Glide Coin-Op Arcade Mace Williams Atari Games Glide Coin-Op Arcade Entertainment, Inc. SF Rush Williams Atari Games Glide Coin-Op Arcade Entertainment, Inc. Wayne Gretzky Hockey Williams Atari Games Glide Coin-Op Arcade Entertainment, Inc.
To enhance awareness of the Company's 3D graphics solutions, the Company has created several proprietary demonstrations that showcase the performance and features made possible by the Company's products. These demonstrations, which are often bundled with an OEM's product, are shown to software developers, OEMs, VARs and tradeshow audiences. The Company believes that these demonstrations effectively demonstrate the immediate potential for high quality 3D graphics in interactive electronic entertainment and effectively differentiate the Company's product offerings from competing products. The Company continues to devote substantial marketing resources towards establishing 3Dfx as a recognizable brand. The Company is initially focusing on establishing its brand 40 42 identity in the coin-op arcade market by promoting the use of a spinning version of the 3Dfx logo at the start of games utilizing the Company's hardware. In addition, the Company has been working with both software developers and publishers in the PC market to prominently display the 3Dfx logo on their software product boxes to indicate that the software is compatible with the Company's products. To further identify the Company in the marketplace, several software products display a spinning version of the 3Dfx logo on the screen while loading. The Company believes that this strategy creates market awareness because publishers first release games to arcades where consumers will first encounter the 3Dfx logo, and then port successful games to PCs and home game consoles. The Company further believes that consumer awareness of its products will speed adoption of the Company's architecture in the mass market, lead to increasing availability of 3Dfx enabled software content and help establish the Company as the standard 3D solution for the interactive electronic entertainment market. The Company's marketing activities also consist of sponsorship of and participation in industry tradeshows, marketing communications and market development activities designed to generate awareness of the Company and its products. Such activities include ongoing contact with industry press and analysts and selective advertising in entertainment and game industry publications. The Company is also active in the promotion of its products through 3D graphics news groups on the Internet. The Company intends to promote the 3Dfx name and trademarks to create a recognizable industry standard for high quality 3D entertainment. The Company has implemented a customer support program that enables end users to contact the Company directly with questions or comments. The Company offers free telephone customer support during normal business hours. The Company also provides customer support via the Internet and maintains a page on the World Wide Web to provide technical information to customers. TECHNOLOGY 3D Technology The technology necessary to create interactive, realistic and visually engaging 3D in real time is extremely compute intensive, complex and technically challenging. Historically, such technology has been extremely expensive and thus 3D has been prevalent only in high-end 3D workstations. Today, 3D graphics companies face the challenge of designing affordable products that offer realistic 3D graphics with full screen resolution in real time for the mainstream PC market. The substantial complexity and technical demands of achieving this level of 3D graphic performance requires compute and pixel processing power and memory bandwidths well beyond what is available in typical general purpose CPUs, such as Intel's Pentium Pro. Specialized 3D graphics processors address this limitation by implementing all or part of what is referred to as the "3D Pipeline" by providing dedicated 3D graphics processing capability. The 3D Pipeline is a sequence of operations, which, starting with three dimensional model data, position and desired lighting models, results in 2D pixels displayed on a computer monitor or television display. The creation of a single 3D image from the numerical mode is comprised of three primary steps: tessellation, geometry and rendering. - Tessellation. Tessellation is the creation of a numerical description (the "three dimensional model data") of an object and the conversion of this model into a set of polygons. Polygons are often defined to be triangles because triangles are simple geometric shapes which can be easily defined by only a few data points and can be quickly modified by mathematical operations. Each triangle requires a separate set of calculations, which means that the more complex an object is, the more compute intensive it is. As a result, triangles-per-second is one of the essential performance metrics of 3D graphics. - Geometry. The geometry phase of the 3D Pipeline includes three stages: transformation, lighting and triangle setup, although triangle setup is often considered a separate stage. The 41 43 transformation stage converts the native three dimensional model data from its native numerical representation into a viewer-dependent model space by using 4x4 matrix operations. The triangle setup operation takes in the transformed, lighted triangles and calculates the edge and slope information required to paint each individual triangle on the screen. - Rendering or Rasterization. The third primary phase of the 3D Pipeline, called triangle rendering or triangle rasterization, is the most important phase for creating a quality 3D image. During this phase, a two-dimensional image, capable of being displayed on a PC monitor or television set, is created from the discrete, three-dimensional model that emerges from the geometry phase. Within each particular triangle, pixels are computed, rendered and displayed according to a complex set of rules. Final image quality depends on the number and types of techniques applied to each particular pixel. Various techniques are applied in the rendering phase to achieve photo-realistic images, including scan conversion, shading, texture-mapping and various perspective enhancements. More advanced techniques in rendering include MIP mapping, texture filtering, anti-aliasing, subpixel correction, fogging, alpha-blending, and depth cueing. The rasterization stage of the 3D Pipeline permits a significant level of quality improvements, which can be achieved by the application of many techniques. While these techniques can make a qualitative difference in the realism that a 3D image conveys to the viewer, many of these techniques are highly compute intensive. As a result, if performance is not sufficient given the number and type of techniques used, the overall experience of the user will diminish. In order for a 3D image to achieve realistic animation on a monitor screen in real-time and with excellent visual quality, as many as twenty billion operations per second might be necessary, a performance level which is roughly 80-100 times that of Intel's high-end microprocessor, the Pentium Pro. Most PC systems that are equipped with 3D hardware accelerators perform the tessellation, transformation, lighting, and clipping operations on the CPU and pass the results to the 3D acceleration hardware for triangle setup and rendering to complete the 3D pipeline. As a result, the rasterization stages of the 3D Pipeline is almost always handled by a graphics processor, which has a focused range of operation. 3Dfx Architecture and Technology The primary goal of Voodoo Graphics and the Company's subsequent 3D media processsors under development is to provide workstation-quality 3D performance at affordable price points. Furthermore, the scaleable nature of the 3Dfx solution is applicable across different markets and different price targets without re-engineering the core logic. The block diagram below is an outline of the Company's Voodoo Graphics product: [DIAGRAM] In the above diagram, the pixelfx chip is responsible for managing the frame buffer, while the texelfx chip accesses dedicated texture memory. The pixelfx chip performs triangle setup, Gouraud 42 44 shading, texture, fogging, alpha-blending and Z-buffering. The pixelfx chip is also responsible for sending information to a low-cost external digital to analog converter ("DAC") for display on a computer monitor or television set. The texelfx chip is responsible for triangle setup of the texture coordinates, texture address calculations, perspective-correction of the texture coordinates, MIP Mapping calculations to properly select the appropriate texture map and texture lookup. Subsequent to texture lookup, the texelfx chip formats the incoming texture and decompresses the texture element if the texture map is stored in a proprietary compressed format and performs bilinear blending. Finally, the processed texel is sent to the pixelfx chip for final storage into the frame buffer. The performance benefits of having separate, dedicated frame buffer memory distinct from texture memory is dramatic. While traditional consumer-oriented 3D media processors have utilized a common pool of memory for both frame buffer and texture storage, the 3Dfx solution allows for Z-buffering and alpha-blending operations, performed in the frame buffer memory, to operate independently from texture map lookup, performed in the dedicated texture memory. The result is an architecture which maintains full performance when all of the advanced 3D rendering features are enabled. And, since the memory technology utilized for both the frame buffer and the dedicated texture memory is standard extended data out dynamic random access memory instead of expensive video random access memory solutions, OEMs realize significant cost savings by utilizing the Company's 3D solution. Due to the design's scaleability, multiple texelfx chips may be chained together to form a "texture streaming" architecture, where multiple texture maps may be accessed independently and blended together, a technique known as "texture compositing" with no degradation in quality. In addition, multiple complete pixelfx/texelfx subsystems may be chained together to double the raw rendering capability for the high performance solutions. To further reduce the solution cost of its products and to specifically address PC motherboard designs, the Company has commenced development of Banshee, which is designed to be a high performance, fully-featured single chip, 3D/2D media processor for the PC and coin-op arcade markets. In addition, the Company offers Glide, its proprietary API, as a development tool to enable the optimal performance and easy, low cost cross platform portability of software content developed for the Company's 3D media processor products. Research and development expenses were $2.9 million, $9.4 million and $2.0 million in 1995, 1996 and the three months ended March 31, 1997, respectively. MANUFACTURING The Company has adopted a "fabless" manufacturing strategy for both semiconductors and printed circuit board assemblies ("PCBA") whereby the Company employs world class suppliers for all phases of the manufacturing process, including, manufacturing, assembly, testing, and packaging. This strategy leverages the expertise of its industry leading, ISO Certified, suppliers in such areas as fabrication, assembly, quality control and assurance, reliability, and testing, and allows the Company to avoid the significant costs and risks associated with owning and operating such operations. As a result, the Company can focus its resources on product design, quality assurance, marketing and customer support. The Company's Voodoo Graphics and Voodoo Rush semiconductor products are currently fabricated for the Company by TSMC, which is the largest independent foundry in the world. TSMC currently produces the semiconductor die for the Company using standard 0.5 micron Application Specific Integrated Circuit ("ASIC") Complimentary-symmetry Metal-Oxide Semiconductor ("CMOS") process technology. The Company expects that, commencing in the second half of 1997, TSMC will move to a 0.35 micron ASIC, CMOS process technology in connection with production for the Company. After the wafer production process is completed, the semiconductor die is shipped to ASE, which assembles and packages the semiconductor die, tests the finished product, and ships the finished product to the Company. Both suppliers have their manufacturing operations located in 43 45 Taiwan, R.O.C. The fabrication of semiconductors is a complex and precise process. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these problems are difficult to diagnose and time consuming or expensive to remedy. As a result, semiconductor companies often experience problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer. Once production yield for a particular product stabilizes, the Company pays an agreed price for wafers meeting certain acceptance criteria pursuant to a "good die" only pricing structure for that particular product. Until production yield for a particular product stabilizes, the Company must pay an agreed price for wafers regardless of yield. Accordingly, in this circumstance, the Company bears the risk of final yield of good die. Poor yields would materially adversely affect the Company's revenues, gross margin and results of operations. As the Company's relationships with TSMC and any additional manufacturing partners develop, yields could be adversely affected due to difficulties associated with adapting the Company's technology and product design to the proprietary process technology and design rules of each manufacturer. Because of the Company's potentially limited access to wafer fabrication capacity from its manufacturers, any decrease in manufacturing yields could result in an increase in the Company's per unit costs and force the Company to allocate its available product supply among its customers, thus potentially adversely impacting customer relationships as well as revenues and gross profit. In April 1996, the Company entered into a Warrant Purchase Agreement with TSMC pursuant to which TSMC purchased two warrants to purchase 100,000 and 180,000 shares of the Company's Series B Preferred Stock at $2.20 per share of which the warrant to purchase 100,000 shares is fully exercisable. The purchase right represented by the warrants was exercisable at a rate of 20 shares of Series B Preferred Stock for each wafer above 2,000 wafers delivered to the Company during 1996. TSMC delivered a total of 4,645 wafers in 1996, and consequently the warrant to purchase 180,000 shares of the Company's Series B Preferred Stock became exercisable with respect to 52,900 of such shares of Series B Preferred Stock. The Company's Obsidian PCBA products are assembled locally by ISIS Surface Mounting ("ISIS"), an ISO 9002 certified assembler. The Company consigns kits of the materials required for assembly of the PCBAs to ISIS, which performs all assembly and test operations and returns the board product to the Company. The Company receives both semiconductor and PCBA products from its subcontractors, performs incoming quality assurance, packages the products, and ships them to its customers from its location in San Jose. With the exception of the TSMC warrant discussed above, all of the Company's commerce is performed through purchase orders without additional or supplementary agreements. Whereas there can be no assurance that the Company will be able to secure sufficient manufacturing capacity to meet product demand in the future, which could have material adverse effects on the Company's business, the Company believes that it has developed strong relationships with its suppliers, and has experienced no material manufacturing concerns to date. Although the Company is confident in its suppliers' abilities to fulfill product requirements, the Company has initiated actions to select and to qualify additional suppliers in an effort to further diversify its supplier manufacturing base. In the event of production difficulties, shortages, or delays experienced by any one of its suppliers, the Company's business, financial condition, or results of operation may be adversely impacted. Furthermore, although quality assurance measures have been taken, there can be no guarantee against defects affecting the quality, performance or reliability of the Company's products. Any such defects could require costly product recalls or cessation of shipments, adversely affecting the Company's business, financial condition and results of operations, and resulting in a decline of revenues, increased costs (associated with return, repair, replacement and shrinkage associated with such defects), 44 46 cancellations or reschedulings of customer orders and shipments. See "Risk Factors -- Dependence on Independent Manufacturers and Other Third Parties, Absence of Manufacturing Capacity; Manufacturing Risks." COMPETITION The Company's strategy of targeting the electronic entertainment market across the PC, coin-op arcade and home game console platforms requires the Company to compete against different companies in each of these market segments, all of which are intensely competitive. PC Segment. The largest area of competition for the Company is in the PC market. Within the entertainment segment of this market, the Company competes primarily against companies that typically have operated in the PC 2D graphics market and that now offer 3D capability as an enhancement to their 2D solutions, such as ATI, Cirrus, Oak Technology, S3 and Trident. Many of these competitors have introduced 3D functionality on new iterations of existing graphics chips. The Company also competes with companies that have recently entered the market with an integrated 3D/2D solution, but which have not traditionally manufactured 2D solutions such as Chromatic, nVidia and Rendition. In addition, the Company competes with NEC/Videologic which has focused exclusively on developing a 3D solution for the 3D interactive electronic entertainment market. In addition to competition from companies in the entertainment segment of the PC market, the Company also faces potential competition from companies that have focused on the high-end of the 3D market and the production of 3D systems targeted for the professional market, such as 3Dlabs, Integraph, Real 3D and SGI. While these companies produce high-performance 3D systems, they do so at a significantly higher price point than the Company and have historically focused on the professional and engineering market. These companies are developing lower cost versions of their 3D technology to bring workstation-like 3D graphics to mainstream applications, but the Company believes that these companies are not focused on interactive electronic entertainment applications. There can be no assurance that these companies will not enter the interactive electronics entertainment market. The Company believes that it would have a strong competitive position against such high-end competitors due to the favorable price/performance ratio of its Voodoo Graphics architecture and its proprietary Glide API. However, there can be no assurance that the Company would be able to compete successfully against them. Recently, a substantial number of companies have announced plans to release 3D graphics chips in 1997 and 1998 that promise to provide low cost 3D functionality for PCs and workstations. Intel and Lockheed have recently formed a licensing and development arrangement under which Intel has indicated that it will exploit certain 3D technologies originally developed by Lockheed for use in flight simulators to provide 3D graphics functionality on the PC. In August 1996, Microsoft announced that it was developing Talisman, a reference architecture with an alternative method of providing high performance 3D functionality on the PC. Microsoft is working with certain third parties including Cirrus, Fujitsu, Inc., Philips N.V. and Samsung Electronics Co., Ltd., to implement this architecture. If successful, products based on either the Microsoft or Intel initiatives would be directly competitive with the Company's processors and could materially adversely affect the Company's competitive position and results of operations. Coin-op Arcade and Console Segments. The market for electronic arcade entertainment is comprised of a small number of companies, including Acclaim, Midway, Namco, Sega, Taito and Williams. The home game console segment is dominated by three companies, Nintendo, Sega and Sony. In each of the coin-op and home game console segments, the Company primarily faces competition from in-house divisions of the companies which currently comprise such markets. The Company has formed a strategic relationship with Sega in order to compete effectively in the console segment but there can be no assurance that Sega will manufacture its next generation of home game consoles or, that if it does, that it will be able to compete against Nintendo and Sony successfully. See "Products, Products Under Development and Technology License -- Strategic Relationship with 45 47 Sega." In addition, there can be no assurance that any of the companies which currently compete in the 3D PC market will not enter the coin-op arcade market, or if they do, that the Company will be able to compete against them successfully. The Company expects competition to increase in the future from existing competitors and from new market entrants with products that may be less costly than the Company's 3D media processors accelerators or provide better performance or additional features not currently provided by the Company. The Company believes that the principal competitive factors for 3D graphics solutions are product performance measured in terms of both processing power and image quality, conformity to industry standard APIs, software support, access to customers and distribution channels, manufacturing capabilities and price. The Company believes that it competes most favorably with respect to product price performance, support of industry standard APIs and software expertise. The Company seeks to use strategic relationships to augment its capabilities, but there can be no assurance that the benefits of these relationships will be realized or be sufficient to overcome the entrenched positions of the Company's largest competitors as incumbent suppliers to the large PC OEMs. Regardless of the relative qualities of the Company's products, the market power, product breadth and customer relationships of its larger competitors, including Intel and Microsoft, can be expected to provide such competitors with substantial competitive advantages. The Company does not seek to compete on the basis of price alone. Many of the Company's current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, certain of the Company's principal competitors offer a single vendor solution, since they maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. The Company's ability to compete successfully in the rapidly evolving market for 3D media processors will depend upon certain factors, many of which are beyond the Company's control, including, but not limited to, success in designing and subcontracting the manufacture of new products, implementing new technologies, access to adequate sources of raw materials and foundry capacity, the price, quality and timing of new product introductions by the Company and its competitors, the emergence of new multimedia and PC standards, the widespread development of 3D applications by ISVs, the ability of the Company to protect its intellectual property, market acceptance of the Company's 3D solution and API, success of the competitors' products and industry and general economic conditions. There can be no assurance that the Company will be able to compete successfully in the emerging 3D graphics market. See "Risk Factors -- Competition." PATENTS AND PROPRIETARY RIGHTS The Company relies primarily on a combination of patent, mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. The Company has five patent applications pending in the United States Patent and Trademark Office. There can be no assurance that the Company's pending patent application or any future applications will be approved, that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties, or that the patents of others will not have an adverse effect on the Company's ability to do business. In addition, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and results of operations. 46 48 The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There is currently no pending intellectual property litigation against the Company. However, the Company may from time to time receive notice of claims that the Company has infringed patents or other intellectual property rights owned by others. The Company may seek licenses under such patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company could cause the Company to incur substantial liabilities and to suspend the manufacture of products. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Litigation by or against the Company could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses for the infringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, or at all, and any such development or license could require expenditures by the Company of substantial time and other resources. Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, there can be no assurance that, in the event that any third party makes a successful claim against the Company or its customers, a cross-licensing arrangement could be reached. If a license is not made available to the Company on commercially reasonable terms, the Company's business, financial condition and results of operations could be materially adversely affected. See "Risk Factors -- Risks Relating to Intellectual Property." There can be no assurance that infringement claims by third parties or claims for indemnification by other customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition and results of operations. Any limitations on the Company's ability to market its products, or delays and costs associated with redesigning its products or payments of license fees to third parties, or any failure by the Company to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on the Company's business, financial condition and results of operations. EMPLOYEES As of March 31, 1997, the Company had 87 employees, 47 of whom were engaged in engineering, and 40 of whom were engaged in marketing, sales, operations and administrative positions. As of March 31, 1997, all of the Company's employees were located in the United States. No employee of the Company is covered by collective bargaining agreements, and the Company believes that its relationship with its employees is good. The Company's ability to operate successfully depends in significant part upon the continued service of certain key technical and managerial personnel, and its continuing ability to attract and retain additional highly qualified technical and managerial personnel. Competition for such personnel is intense, and there can be no assurance that the Company can retain such personnel or that it can attract or retain other highly qualified technical and managerial personnel in the future, including key sales and marketing personnel. The loss of key personnel or the inability to hire and retain qualified personnel could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Risk Factors -- Dependence Upon Key Personnel." 47 49 FACILITIES The Company sub-leases approximately 31,572 square feet in one building in San Jose, California pursuant to a lease that expires on April 30, 1997. Effective May 1, 1997, the Company will assume another additional 46,233 square feet in the same building under a lease that expires in 2007, with an option to extend the lease for an additional five-year term. Of the total 77,805 square feet subject to such new lease, the Company initially intends to sub-lease 37,261 square feet. The Company also leases approximately 900 square feet in Dresher, Pennsylvania for its regional sales office. The Company believes that in general its facilities are adequate for its current needs and that additional space will be available as needed. The Company believes that these facilities will be adequate to meet its needs for the foreseeable future. LEGAL PROCEEDINGS There are no material pending or threatened legal proceedings against the Company. 48 50 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the Company's executive officers and directors as of the date of this Prospectus:
NAME AGE POSITION - ------------------------------------------ --- -------------------------------------------- L. Gregory Ballard........................ 43 President, Chief Executive Officer and Director Gordon A. Campbell(1)..................... 53 Chairman of the Board of Directors Gary P. Martin............................ 49 Chief Financial Officer and Vice President, Administration David Bowman.............................. 53 Vice President, Sales Karl Chicca............................... 39 Vice President, Operations Andy Keane................................ 35 Vice President, Marketing Scott D. Sellers.......................... 28 Vice President, Research and Development and Director Gary Tarolli.............................. 40 Vice President and Chief Scientist George J. Still, Jr.(2)................... 39 Director Anthony Sun(1)............................ 44 Director Philip M. Young(1)........................ 57 Director James Whims(2)............................ 42 Director
- ------------ (1) Member of Audit Committee (2) Member of Compensation Committee. L. Gregory Ballard has served as President, Chief Executive Officer and a director of the Company since December 1996. Prior to joining the Company, Mr. Ballard was President at Capcom Entertainment, Inc., a video game and multimedia entertainment company, from June 1995 through November 1996. Prior to that, Mr. Ballard served as Chief Operating Officer and Chief Financial Officer of Digital Pictures, Inc., a video game company, from May 1994 to June 1995. Mr. Ballard was President and Chief Executive Officer of Warner Custom Music Corporation, a multimedia marketing division of Time Warner, Inc., from October 1992 to May 1994, and he was President and Chief Operating Officer of Personics Corporation, a predecessor to Warner Music, from January 1991 to October 1992. Mr. Ballard also worked for Boston Consulting Group and as a practicing attorney in Washington, D.C. Mr. Ballard received his BA in Political Science from the University of Redlands and his JD from Harvard Law School. Gordon A. Campbell has served as the Chairman of the Board of Directors of the Company since August 1994 when he co-founded the Company. Mr. Campbell also served as President and Chief Executive Officer of the Company from January 1995 to December 1996. Prior to joining the Company, Mr. Campbell founded Techfarm, Inc., a venture capital investment firm, and has served as President since September 1993. In 1985, Mr. Campbell founded Chips and Technologies, Inc. ("CHIPS"), a semiconductor and related device company, and served as Chairman, Chief Executive Officer and President of CHIPS until July 1993. Mr. Campbell founded SEEQ Technology, Inc. ("SEEQ"), a semiconductor and related device company, in 1981. He served as President and Chief Executive Officer of SEEQ from 1981 to 1985. Mr. Campbell currently serves as a director of 3Com Corporation and Bell Microproducts, Inc. He is also a director of several private companies. Gary P. Martin has served as Chief Financial Officer and Vice President, Administration of the Company since June 1995. Prior to joining the Company, Mr. Martin was Vice President, Finance and Corporate Secretary of MiniStor Peripherals International, Limited ("MiniStor"), a disk drive company, from October 1993 until May 1995. MiniStor filed a petition for relief under Chapter 11 of the Federal bankruptcy laws on April 14, 1995. From 1985 to April 1993, Mr. Martin served as Senior Vice 49 51 President of Finance and Administration and Corporate Secretary of CHIPS from 1985 to April 1993. Mr. Martin is a director of Essex Property Trust, Inc. Mr. Martin received a BS in Accounting from San Jose State University. David M. Bowman has served as Vice President, Sales of the Company since March 1996. Prior to joining the Company, he was Vice President of Worldwide Sales at CHIPS from September 1985 to March 1995. He was a director of North American Sales for Apple from October 1979 to September 1985. Karl Chicca has served as Vice President, Operations of the Company since June 1996. Prior to joining the Company, Mr. Chicca was Vice President of Strategic Commodity Management of Maxtor Corporation, a disk drive company, from May 1995 to May 1996. He was Vice President, Materials at MiniStor from March 1994 to April 1995. MiniStor filed a petition for relief under Chapter 11 of the Federal bankruptcy laws on April 14, 1995. From 1979 to March 1994, Mr. Chicca held various materials and manufacturing positions with International Business Machine Corporation ("IBM"), most recently as Manager of Worldwide Procurement of IBM's Storage Systems Division. Mr. Chicca received a BS in Business Administration from San Jose State University. Andy Keane has served as Vice President, Marketing of the Company since March 1996. Prior to joining the Company, he was Marketing Manager of Microprocessor Marketing for MIPS Computer Systems, Inc., subsequently SGI, each of which is a computer system and workstation company, from 1990 to September 1994. Mr. Keane was a Design Engineer at Intel from 1986 to 1988. He received his BS in Physics from Rensselaer Polytechnic Institute and an MBA from the University of California at Berkeley. Scott D. Sellers has served as Vice President, Research and Development of the Company since January 1995. He co-founded the Company in August 1994 and has served as a director of the Company since March 1995. Mr. Sellers was Principal Engineer at MediaVision Technology, Inc. ("MediaVision"), a multimedia computer products company, from June 1993 to June 1994. Prior to that, Mr. Sellers was a Microprocessor Engineer at Pellucid, Inc. ("Pellucid"), a developer of chip and board products, from January 1993 to June 1993. Mr. Sellers was also a Member of the Technical Staff at SGI from October 1990 to January 1993. Mr. Sellers received a BSEE from Princeton University. Gary Tarolli has served as Vice President and Chief Scientist of the Company since January 1995. Prior to co-founding the Company in August 1994, Mr. Tarolli was an Engineering Fellow at MediaVision from 1993 to 1994. Before joining MediaVision, Mr. Tarolli was a self-employed consultant to the 3D graphics industry from 1992 to 1993. Mr. Tarolli was a Principal Scientist at SGI from 1983 to 1992. Prior to joining SGI, he was a Principal Engineer at Digital Equipment Corp. for four years. Mr. Tarolli received a BS in Mathematics from Rensselaer Polytechnic Institute and an MS in computer science from California Institute of Technology. George J. Still, Jr. has served as a director of the Company since February 1996. Mr. Still is Vice President and Managing Partner of Norwest Venture Capital, Inc. ("Norwest"), a venture capital investment firm, where he has been employed since 1989. Prior to joining Norwest, Mr. Still was General Partner of The Centennial Funds, Ltd., a venture capital investment firm, from 1984 to 1989. He currently serves on the Board of Directors of PeopleSoft, Inc. Mr. Still is also a director of several private companies. Mr. Still has a BA from Pennsylvania State University and an MBA from the Amos Tuck School at Dartmouth College. Anthony Sun has served as a director of the Company since March 1995. Mr. Sun has been a General Partner at Venrock Associates, a venture capital investment firm, since 1979. He is currently director of Award Software International, Inc., Centura Software Corporation, Cognex Corporation, Conductus, Inc., Fractal Design Corporation, Inference Corporation, Komag, Inc. and Worldtalk Communications Corporation. He is also a director of several private companies. Mr. Sun received SBEE, SMEE and Engineering degrees from the Massachusetts Institute of Technology and an MBA from Harvard University. 50 52 Philip M. Young has served as a director of the Company since March 1995. Mr. Young has been a general partner at U.S. Venture Partners, a venture capital firm, since April 1990. He was a managing director of Dillon, Read and Co., Inc., and general partner of Dillon Read's Concord Partners venture capital activity in Palo Alto from January 1986 to April 1990. He currently serves on the Boards of Directors of Vical, Inc., CardioThoracic Systems, Inc., FemRx, Inc., Immune Response Corporation and Zoran Corporation. Mr. Young is also a director of several private companies. Mr. Young received a BME in nuclear engineering from Cornell University, an MS in Engineering Physics from George Washington University and an MBA from Harvard University. James Whims has served as a director of the Company since November 1996. Mr. Whims has been a Partner at Techfarm since December 1996. From November 1994 until March 1996, Mr. Whims was an Executive Vice President of Sony Computer Entertainment, a video game software development company. From 1990 until October 1994, Mr. Whims was Executive Vice President of the Computer Division of The Software Toolworks, Inc., a diversified software company. From 1985 to 1990, Mr. Whims served as Vice President of Sales of Worlds of Wonder, Inc., a toy products company which he co-founded. Mr. Whims received a BA from Northwestern University in Economics and Communications and an MBA in Finance and Marketing from the University of Arizona. All directors are elected at the annual meeting of shareholders and hold office until the election and qualification of their successors at the next annual meeting of shareholders. Officers of the Company serve at the discretion of the Board of Directors. DIRECTOR COMPENSATION Members of the Company's Board of Directors do not receive compensation for their services as directors. The Company's 1997 Director Option Plan provides that options shall be granted to non-employee directors of the Company pursuant to an automatic nondiscretionary grant mechanism. See "Stock Plans -- 1997 Director Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee consists of directors Still and Whims. See "Certain Transactions -- Transactions with Executive Officers and Directors". 51 53 EXECUTIVE COMPENSATION The following table sets forth information concerning the compensation awarded to, earned by, or paid for services rendered to the Company in all capacities during the year ended December 31, 1996, by the Company's Chief Executive Officer and the Company's next four most highly compensated executive officers whose salary and bonus for such fiscal year exceeded $100,000 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------- -------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION OPTIONS(#)(1) - ------------------------------------------ -------- -------- ------------ ------------- L. Gregory Ballard(2)..................... $ 11,538 $ -- $ -- 700,000 President, Chief Executive Officer and Director Karl Chicca(3)............................ 75,385 -- 110,003 150,000 Vice President, Operations Scott D. Sellers.......................... 116,667 1,400 -- 50,000 Vice President, Research and Development and Director Gary Tarolli.............................. 130,000 1,400 -- 50,000 Vice President and Chief Scientist Ross Q. Smith(4).......................... 111,666 350 -- 50,000 Vice President and General Manager, Systems Product Division
- ------------ (1) These shares are subject to exercise under stock options granted under the Company's 1995 Employee Stock Plan. (2) Mr. Ballard joined the Company in December 1996. (3) Other annual compensation amount relates to relocation expenses paid. (4) Mr. Smith resigned as a full time employee of the Company in April 1997, but will serve as a part-time employee until July 1997. Mr. Smith has subsequently founded Quantum3D, Inc., a supplier of advanced graphics subsystems based on 3Dfx technology. See "Business -- Products, Products Under Development and Technology License -- Graphics Subsystems and Development Boards." 52 54 STOCK OPTION GRANTS The following table provides information relating to stock options awarded to each of the Named Executive Officers during the year ended December 31, 1996. All such options were awarded under the Company's 1995 Employee Stock Plan. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ----------------------------------------------------- ANNUAL RATES OF NUMBER OF % OF TOTAL STOCK PRICE SECURITIES OPTIONS APPRECIATION FOR UNDERLYING GRANTED EXERCISE OPTIONS TERM(1) OPTIONS TO EMPLOYEES PRICE PER EXPIRATION -------------------- NAME GRANTED(1) IN FISCAL 1996 SHARE(2)(3) DATE(4) 5%($) 10%($) - ------------------------- --------- -------------- ----------- ---------- -------- -------- L. Gregory Ballard....... 700,000 26% $0.45 12/02/06 $198,102 $502,029 Karl Chicca.............. 150,000 5 0.22 06/27/06 20,754 52,594 Scott D. Sellers......... 50,000 2 0.22 07/25/06 6,918 17,531 Gary Tarolli............. 50,000 2 0.22 07/25/06 6,918 17,531 Ross Q. Smith............ 50,000 2 0.22 07/25/06 6,918 17,531
- ------------ (1) Potential gains are net of the exercise price but before taxes associated with the exercise. The 5% and 10% assumed annual rates of compounded stock appreciation based upon the exercise price per share are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future common stock price. Actual gains, if any, on stock option exercises are dependent on the future financial performance of the Company, overall market conditions and the option holders' continued employment through the vesting period. This table does not take into account any appreciation in the fair market value of the Common Stock from the date of grant to the date of this Prospectus, other than the columns reflecting assumed rates of appreciation of 5% and 10%. (2) Options were granted at an exercise price equal to the fair market value of the Company's Common Stock on the date of grant, as determined by the Board of Directors. (3) Exercise price may be paid in cash, check, promissory note, delivery of already-owned shares of the Company's Common Stock subject to certain conditions, authorization to the Company to retain from the total number of shares for which the option is exercised that number of shares having a fair market value on the date of exercise equal to the exercise price for the total number of shares as to which the option is exercised, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, or any combination of the foregoing methods of payment or such other consideration or method of payment to the extent permitted under applicable law. (4) Options become exercisable as to 25% of the option shares on the first anniversary of the date of grant and as to 1/48th of the option shares each month thereafter, with full vesting occurring on the fourth anniversary of the date of grant. 53 55 AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES There were no exercises of stock options by Named Executive Officers during the year ended December 31, 1996. The following table sets forth certain information regarding stock options held as of December 31, 1996 by the Named Executive Officers.
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996(#)(1) DECEMBER 31, 1996($)(2) --------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ------------------------- ----------- ------------- ----------- ------------- L. Gregory Ballard....... -- 700,000 -- -- Karl Chicca.............. -- 150,000 -- -- Scott D. Sellers......... -- 50,000 -- -- Gary Tarolli............. -- 50,000 -- -- Ross Q. Smith............ -- 50,000 -- --
- ------------ (1) Options granted under the Company's 1995 Employee Stock Plan may be exercised by the holder thereof prior to vesting with the shares purchased thereby subject to repurchase by the Company until fully vested. The table presents options as exercisable according to the vesting schedule of the option. (2) Based upon an assumed initial public offering price of $ per share minus the exercise price. STOCK PLANS Stock Option Plan. The Company's 1995 Employee Stock Plan (the "1995 Plan") was adopted by the Board of Directors in April 1995 and approved by the shareholders in May 1995. A total of 5,350,000 shares of Common Stock has been reserved for issuance under the 1995 Plan. The 1995 Plan, as amended, provides for grants of incentive stock options to employees (including officers and employee directors) and nonstatutory stock options to consultants of the Company. The purpose of the 1995 Plan is to attract and retain the best available personnel for positions of substantial responsibility and to provide additional incentive to employees and consultants to promote the success of the Company's business. The 1995 Plan is presently being administered by the Board of Directors, which determines the optionees and the terms of options granted, including the exercise price, number of shares subject to the option and the exercisability thereof. The term of options granted under the 1995 Plan is stated in the option agreement. However, the term of an incentive stock option may not exceed 10 years and, in the case of an option granted to an optionee who, at the time of grant, owns stock representing more than 10% of the Company's outstanding capital stock, the term of such option may not exceed five years. Options granted under the 1995 Plan vest and become exercisable as set forth in each option agreement. In general, no option may be transferred by the optionee other than by will or the laws of descent or distribution, and each option may be exercised, during the lifetime of the optionee, only by such optionee. An optionee whose relationship with the Company or any related corporation ceases for any reason (other than by death or total and permanent disability) may exercise options in the three-month period following such cessation, unless such options terminate or expire sooner (or for nonstatutory stock options, later), by their terms. The three-month period is extended to twelve months for terminations due to death or permanent total disability. In the event of a merger of the Company with or into another corporation, all outstanding options may either by assumed or an equivalent option may be substituted by the surviving entity or, if such options are not assumed or substituted, such options shall become exercisable as to all of the shares subject to the options, including shares as to which they would not otherwise be exercisable. In the event that options become exercisable in lieu of assumption or substitution, the Board of Directors shall notify optionees that all options shall be fully exercisable for 54 56 a period of 15 days, after which such options shall terminate. The Board of Directors determines the exercise price of options granted under the 1995 Plan at the time of grant, provided that the exercise price of all incentive stock options must be at least equal to the fair market value of the shares on the date of grant unless the grant is pursuant to a merger or other corporate transaction. With respect to any participant who owns stock possessing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date. The consideration for exercising any incentive stock option or any nonstatutory stock option may consist of cash, check, delivery of already-owned shares of the Company's Common Stock subject to certain conditions, authorization to the Company to retain from the total number of shares for which the option is exercised that number of shares having a fair market value on the date of exercise equal to the exercise price for the total number of shares as to which the option is exercised, delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, or any combination of the foregoing methods of payment or such other consideration or method of payment to the extent permitted under applicable law. No incentive stock options may be granted to a participant, which, when aggregated with all other incentive stock options granted to such participant, would have an aggregate fair market value in excess of $100,000 becoming exercisable in any calendar year. No employee may be granted, in any fiscal year of the Company, options to purchase more than 300,000 shares (or 500,000 shares in the case of a new employee's initial employment with the Company). The 1995 Plan will terminate in April 2005, unless sooner terminated by the Board of Directors. As of March 31, 1997, 750,450 shares of Common Stock, net of repurchases, had been issued upon the exercise of options granted under the 1995 Plan, options to purchase 3,750,943 shares of Common Stock at a weighted average exercise price of $1.36 per share were outstanding and 848,607 shares remain available for future option grants under the 1995 Plan. Employee Stock Purchase Plan. The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in March 1997 and approved by the shareholders in April 1997. A total of 1,100,000 shares of Common Stock has been reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended, is administered by the Board of Directors or by a committee appointed by the Board. Employees (including officers and employee directors of the Company) are eligible to participate if they are customarily employed for at least 20 hours per week and for more than five months in any calendar year, provided that no Employee shall be granted an option (i) to the extent that immediately after the grant such Employee owns more than 5% of the voting power of outstanding capital stock of the Company or (ii) to the extent such Employee's rights to purchase stock under all employee stock purchase plans of the Company accrues at a rate which exceeds $25,000 worth of stock for each calendar year in which such option is outstanding at any time. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 15% of an employee's compensation. The Purchase Plan will be implemented in a series of overlapping offering periods, each to be of approximately 24 months duration. The initial offering period under the Purchase Plan will begin on the effective date of this offering and subsequent offering periods will begin on the first trading day on or after May 1 and November 1 of each year. Each participant will be granted an option on the first day of the offering period and such option will be automatically exercised on the last date of each semi-annual period throughout the offering period. If the fair market value of the Common Stock on any purchase date is lower than such fair market value on the start date of that offering period, then all participants in that offering period will be automatically withdrawn from such offering period and re-enrolled in the immediately following offering period. The purchase price of the Common Stock under the Purchase Plan will be equal to 85% of the lesser of the fair market value per share of Common Stock on the start date of the offering period or on the date on which the option is exercised. Employees may end their participation in an offering period at any time during that period, and participation ends automatically on termination of employment with the Company. In the event of a proposed dissolution or liquidation of the Company, 55 57 the offering periods then in progress shall terminate immediately prior to the consummation of the proposed dissolution or liquidation, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the Company's assets or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, then the offering period in progress will be shortened by setting a new exercise date that is before the sale or merger and the offering period in progress shall end on the new exercise date. Each participant shall be notified at least ten business days prior to the new exercise date, and unless such participant ends his or her participation, the option will be exercised automatically on the new exercise date. The Purchase Plan will terminate in March 2007, unless sooner terminated by the Board of Directors. Director Option Plan. The Company's 1997 Director Option Plan (the "Director Plan") was adopted by the Board of Directors in March 1997 and approved by the shareholders of the Company in April 1997. A total of 300,000 shares of Common Stock has been reserved for issuance under the Director Plan. The option grants under the Director Plan are automatic and non-discretionary, and the exercise price of the options is 100% of the fair market value of the Common Stock on the grant date. The Director Plan provides for an initial grant of options to purchase 25,000 shares of Common Stock to each new non-employee director of the Company who is neither affiliated with or nominated by a shareholder that owns one percent or more of the outstanding capital stock of the Company on the later of the effective date of the Director Plan or the date he or she first becomes a director. In addition, each non-employee director will automatically be granted an additional option to purchase 10,000 shares of Common Stock at the next meeting of the Board of Directors following the annual meeting of shareholders in each year beginning with the 1998 annual meeting of shareholders, if on such date, such director has served on the Board of Directors for at least six months; provided, however, if such director is elected as Chairman of the Board of Directors, such option grant shall be 20,000 shares. In addition to these grants, each director shall automatically be granted an option to purchase 2,000 shares at the next meeting of the Board of Directors following the annual meeting of shareholders in each year beginning with the 1997 annual meeting of shareholders, if such director serves on either the Audit Committee or Compensation Committee of the Board of Directors. If such Director serves on both such Committees, this grant shall be 4,000 shares. The term of such options is ten years, provided that such options shall terminate three months following the termination of the optionee's status as a director (or twelve months if the termination is due to death or disability). 25,000 share options granted to a director vest at a rate of 1/48th of the shares subject to the option per month following the date of grant. 10,000 or 20,000 share options granted to a director vest at a rate of 1/12th of the shares subject to the option per month following the date of grant. 2,000 share options granted to a director vest at a rate of 1/12th of the shares subject to the option per month following the date of grant. In the event of a merger of the Company with or into another corporation, all outstanding options may either be assumed or an equivalent option may be substituted by the surviving entity or, if such options are not assumed or substituted, such options shall become exercisable as to all of the shares subject to the options, including shares as to which they would not otherwise be exercisable. In the event that options become exercisable in lieu of assumption or substitution, the Board of Directors shall notify optionees that all options shall be fully exercisable for a period of 30 days, after which such options shall terminate. The Director Plan will terminate in March 2007, unless sooner terminated by the Board of Directors. 401(k) Plan. Substantially all full-time employees of the Company participate in the 3Dfx Interactive 401(k) Plan (the "401(k) Plan"), a plan intended to qualify under Section 401 of the Internal Revenue Code of 1986, as amended. Employees may begin to participate in the 401(k) Plan the first of the month following their hire date provided they have reached the age of 18. Pursuant to the 401(k) Plan, employees may elect to reduce their current compensation by up to the lesser of 15% of eligible compensation or the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan permits, but does not require, additional matching contributions to the 401(k) Plan by the Company on behalf of the participants. Contribu- 56 58 tions by employees or by the Company to the 401(k) Plan, and income earned on plan contributions, are generally not taxable to employees until withdrawn, and contributions by the Company, if any, should be deductible by the Company when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the assets of the 401(k) Plan in selected investment options. EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS Pursuant to letter agreements entered into with each of L. Gregory Ballard, Karl Chicca, Scott Sellers and Gary Tarolli, in the event there is a change of control of the Company and such executive is terminated other than for cause within one year following the effective date of such change of control, (i) in the case of Messrs. Ballard and Chicca, 25% (or, in the event that less than 25% of such executive's options remain unvested, all) of such executive's options will be accelerated and become fully vested and (ii) in the cases of Messrs. Sellers and Tarolli, 25% of the executive's stock subject to the Company's repurchase option under a restricted stock purchase agreement shall be released from such repurchase option (or all of such stock if less than 25% of the executive's stock remains subject to the Company's repurchase option). For purposes of these letter agreements a "change of control" means the (i) the sale of all or substantially all of the Company's assets, or (ii) a consolidation or merger of the Company with or into any other corporation (other than a wholly-owned subsidiary of the Company) or engagement in a transaction or series of transactions in which more than 50% of the voting power of the Company is disposed. Termination other than for cause includes constructive termination resulting from (i) the reduction of such employee's rate of compensation, (ii) the reduction of such employee's scope of engagement or (iii) the requirement that such employee provide services at a location more than 50 miles from the employee's office location as of the date of the letter agreement. LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Articles of Incorporation that eliminate to the fullest extent permissible under California law the liability of its directors to the Company for monetary damages. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by California law, including in circumstances in which indemnification is otherwise discretionary under California law. The Company has entered into indemnification agreements with its officers and directors containing provisions which may require the Company, among other things, to indemnify the officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 57 59 CERTAIN TRANSACTIONS PRIVATE PLACEMENT OF SECURITIES Between January 12 and May 18, 1995, the Company sold an aggregate of 3,292,500 shares of its Common Stock at prices ranging from $.0125 to $.05 per share. Between March 13, 1995 and January 17, 1997 the Company sold the following shares of its Preferred Stock in private placement transactions: 5,501,979 shares of Series A Preferred Stock at a price of $1.00 per share; 5,300,000 shares of Series B Preferred Stock at a price of $2.20 per share and 3,241,718 shares of Series C Preferred Stock at a price of $3.75 per share. In addition, the Company issued warrants to purchase the following shares of Preferred Stock: 87,500 shares of Series A Preferred Stock at an exercise price of $1.00 per share; 209,717 shares of Series B Preferred Stock at an exercise price of $2.20 per share and 70,000 shares of Series C Preferred Stock at an exercise price of $3.75 per share. The purchasers of Common Stock and Preferred Stock described above included, among others, the following officers, directors and holders of more than five percent of the Company's voting securities:
SHARES OF PREFERRED STOCK (1) COMMON -------------------------------------- STOCK SERIES A SERIES B SERIES C ---------- ---------- ---------- ---------- OFFICERS Scott D. Sellers............................ 600,000 -- -- -- Greg Tarolli................................ 600,000 -- -- -- Ross Q. Smith(2)............................ 600,000 -- -- -- DIRECTORS Gordon A. Campbell.......................... 181,750 89,616 463,063 -- ENTITIES AFFILIATED WITH DIRECTORS Venture capital funds affiliated with U.S. Venture Partners (Philip M. Young)....... -- 1,950,000 681,800 266,667 Venture capital funds affiliated with Venrock Associates (Anthony Sun)......... -- 1,950,000 681,800 266,667 Norwest Equity Partners V (George J. Still, Jr.)..................................... -- 1,591,000 266,667 Techfarm, Inc. (Gordon A. Campbell)......... 925,000 -- -- -- OTHER 5% SHAREHOLDERS Chase Capital Partners...................... -- -- 1,477,273 266,667 Intel Corporation........................... -- -- -- 1,333,334
- ------------ (1) The purchasers of these securities are entitled to registration rights. See "Description of Capital Stock -- Registration Rights." (2) Mr. Smith resigned as a full time employee of the Company in April 1997, but will serve as a part-time employee until July 1997. Mr. Smith has subsequently founded Quantum3D, Inc., a supplier of advanced graphics subsystems based on 3Dfx technology. TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS Techfarm provides management services to the Company for which the Company pays a fee of $5,000 per month. Gordon Campbell, the Chairman of the Board of Directors of the Company, and James Whims, a director of the Company, are each officers of Techfarm. The Company made total payments to Techfarm under the consulting agreement during 1995 and 1996 of $45,000 and $60,000, respectively. The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal shareholders and their affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors, and will continue to be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 58 60 PRINCIPAL SHAREHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Common Stock as of March 31, 1997 and as adjusted to reflect the sale of the 4,200,000 shares of Common Stock offered hereby: (i) by each person or entity who is known by the Company to own beneficially more than 5% of the Common Stock; (ii) by each director of the Company, (iii) by the Named Executive Officers, and (iv) by all directors and executive officers of the Company as a group. Except as otherwise noted, the shareholders named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to applicable community property laws.
SHARES PERCENT BENEFICIALLY OWNED(1) BENEFICIALLY ---------------------------------- BENEFICIAL OWNER OWNED BEFORE OFFERING AFTER OFFERING - ------------------------------------------------ ------------ --------------- -------------- Entities affiliated with U.S. Venture Partners...................................... 2,898,467 15.9% 12.9% 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025 Entities affiliated with Venrock Associates..... 2,898,467 15.9 12.9 755 Page Mill Road, A-230 Palo Alto, CA 94304 Norwest Equity Partners V....................... 1,857,667 10.2 8.3 245 Lytton Avenue, Suite 250 Palo Alto, CA 94301-1426 Entities affiliated with Chase Capital Partners...................................... 1,743,940 9.6 7.8 380 Madison Avenue, 12th Flr. New York, NY 10017 Techfarm, Inc.(2)............................... 1,759,429 9.7 7.8 111 West Evelyn Avenue, #101 Sunnyvale, CA 94086 Intel Corporation, SC-4-210..................... 1,333,334 7.3 6.0 2200 Mission College Blvd. Santa Clara, CA 95052-8119 Tony Sun(3)..................................... 2,898,467 15.9 12.9 Philip M. Young(4).............................. 2,898,467 15.9 12.9 George J. Still, Jr.(5)......................... 1,857,667 10.2 8.3 Gordon A. Campbell(6)........................... 1,759,429 9.7 7.8 L. Gregory Ballard.............................. 5,000 * * James Whims..................................... -- -- -- Scott D. Sellers................................ 600,000 3.3 2.7 Gary Tarolli.................................... 600,000 3.3 2.7 Ross Q. Smith................................... 600,000 3.3 2.7 Karl Chicca..................................... 46,875 * * All executive officers and directors as a group (12 persons)(7)............................... 11,022,947 60.1 48.9
- ------------ * Less than 1%. (1) Applicable percentage ownership is based on 18,195,199 shares of Common Stock outstanding as of March 31, 1997, and 22,395,199 shares of Common Stock outstanding after completion of this offering, in each case together with applicable options for such shareholder. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, based on factors including voting and investment power with respect to shares, subject to the applicable community property laws. Shares of Common Stock subject to options or warrants currently exercisable, or exercisable within 60 days after March 31, 1997, are deemed outstanding for the 59 61 purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person. (2) Includes 634,429 shares and 100,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1997 held by Gordon A. Campbell. Mr. Campbell is President of Techfarm, Inc. Techfarm, Inc. disclaims beneficial ownership of the shares held by Mr. Campbell. (3) Represents 2,898,467 shares held by entities affiliated with Venrock Associates. Mr. Sun is a general partner of Venrock Associates and disclaims beneficial ownership of the shares held by the venture capital funds except to the extent of his proportionate partnership interest therein. (4) Represents 2,898,467 shares held by entities affiliated with U.S. Venture Partners. Mr. Young is a general partner of U.S. Venture Partners and disclaims beneficial ownership of the shares held by the venture capital funds except to the extent of his proportionate partnership interest therein. (5) Represents 1,857,667 shares held by Norwest Equity Partners V. Mr. Still is a general partner of Norwest Equity Partners V and disclaims beneficial ownership of the shares held by the venture capital funds except to the extent of his proportionate partnership interest therein. (6) Includes 100,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 1997. Also includes 925,000 shares held by Techfarm, Inc. Mr. Campbell disclaims beneficial ownership of the shares held by Techfarm, Inc. (7) Includes 139,062 shares of Common Stock issuable upon exercise of stock options exercisable within 60 days of March 31, 1997. 60 62 DESCRIPTION OF CAPITAL STOCK GENERAL Upon the completion of this offering, the Company will be authorized to issue 50,000,000 shares of Common Stock, no par value, and 5,000,000 shares of undesignated Preferred Stock, no par value. COMMON STOCK As of March 31, 1997, there were 18,195,199 shares of Common Stock outstanding held of record by approximately 125 shareholders. As of March 31, 1997, options to purchase an aggregate of 3,750,943 shares of Common Stock were also outstanding. See "Management -- Stock Plans". The holders of Common Stock are entitled to one vote per share on all matters to be voted on by shareholders and have cumulative voting rights with respect to the election of directors. Subject to the prior rights of holders of Preferred Stock, if any, the holders of Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by the Board of Directors in its discretion from funds legally available therefor. Upon liquidation or dissolution of the Company, the remainder of the assets of the Company will be distributed ratably among the holders of Common Stock after payment of liabilities and the liquidation preferences of any outstanding shares of Preferred Stock. The Common Stock has no preemptive or other subscription rights and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. All of the outstanding shares of Common Stock are, and the shares to be sold in this offering will be, fully paid and nonassessable. PREFERRED STOCK Effective upon the closing of this offering, the Company will be authorized to issue 5,000,000 shares of undesignated Preferred Stock. The Board of Directors has the authority to issue the Preferred Stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting a series or the designation of such series, without any further vote or action by the Company's shareholders. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of delaying, deferring or preventing a change in control of the Company without further action by the shareholders and may adversely affect the market price of, and the voting and other rights of, the holders of Common Stock. The Company has no current plans to issue any shares of Preferred Stock. WARRANTS As of March 31, 1997, there were outstanding warrants to purchase an aggregate of 87,500 shares of Common Stock at an exercise price of $1.00 per share, an aggregate of 56,817 shares of Common Stock at an exercise price of $2.20 per share and an aggregate of 10,000 shares of Common Stock at $3.75 per share. Warrants to purchase 212,900 shares of Common Stock will expire automatically upon the closing of this offering if not exercised. The remaining warrants expire between December 31, 2001 and January 1, 2003. REGISTRATION RIGHTS The holders of approximately 14,043,697 shares of Common Stock and rights to acquire 154,317 shares of Common Stock and their permitted transferees (the "Holders") are entitled to certain rights with respect to the registration of such shares ("Registrable Securities") under the Securities Act. Under the terms of an agreement between the Company and the Holders, the holders of at least 40% of the Registrable Securities may require, on two occasions after nine months from the effective date of this offering, that the Company use its best efforts to register the Registrable Securities for public resale. In addition, if the Company proposes to register any of its securities under 61 63 the Securities Act, either for its own account or for the account of other security holders exercising registration rights, the Holders are entitled to notice of such registration and are entitled to include shares of such Common Stock therein. The holders of Registrable Securities may also require the Company on no more than two occasions to register all or a portion of their Registrable Securities on Form S-3 under the Securities Act when use of such form becomes available to the Company. All such registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares to be included in such registration. In addition, the Company need not effect a registration within six months following a previous registration, or within six months following any offering of securities for the account of the Company made subsequent to this offering, or after such time as all Holders may sell under Rule 144 in a three month period all shares of Common Stock to which such registration rights apply. TRANSFER AGENT The transfer agent for the Common Stock is First National Bank of Boston. Its telephone number is (617) 575-3120. 62 64 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Sales of a substantial number of shares of Common Stock in the public market following this offering could adversely affect the market price of the Common Stock prevailing from time to time. Upon completion of this offering, the Company will have approximately 22,395,199 shares of Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option.) Of these shares, the 4,200,000 shares sold in this offering will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by an existing "affiliate" of the Company, as that term is defined by the Securities Act (an "Affiliate"), which shares will be subject to the resale limitations of Rule 144 adopted under the Act. On the date of this Prospectus, 18,195,199 "restricted shares" as defined in Rule 144 promulgated under the Securities Act will be outstanding. All officers, directors and all other shareholders of the Company have agreed not to offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, until the later of 180 days after the date of this Prospectus or the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997, without the prior written consent of Robertson, Stephens & Company. Robertson, Stephens & Company may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. Robertson, Stephens & Company currently has no plans to release any portion of the securities subject to lock-up agreements. As a result of these contractual restrictions and the provisions of Rules 144(k), 144 and 701, the restricted shares will be available for sale in the public market as follows: (i) no shares will be eligible for immediate sale on the date of this Prospectus, (ii) no shares will be eligible for sale 90 days after the date of this Prospectus, (iii) approximately 6,600 shares will be eligible for sale 120 days after the date of this Prospectus, (iv) approximately 17,975,699 shares will be eligible for sale on the later of 180 days after the date of this Prospectus or the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997 upon expiration of lock-up agreements and (v) approximately 212,900 shares will be eligible for sale approximately one year from the date of this Prospectus. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, a person (or persons whose shares are aggregated) who has beneficially owned restricted securities for at least one year (including the holding period of any prior owner except an affiliate of the Company) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 224,000 shares immediately after this offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an Affiliate at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an Affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Subject to the contractual restrictions described above, "144(k) shares" may therefore be sold immediately upon the completion of this offering. Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisors prior to the date the issuer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended 63 65 (the "Exchange Act"), pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options (including exercises after the date of this Prospectus). Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this Prospectus, may be sold by persons other than Affiliates subject only to the manner of sale provisions of Rule 144 and by Affiliates under Rule 144 without compliance with its two-year minimum holding period requirements. At March 31, 1997, options to purchase 3,750,943 shares of Common Stock were outstanding, of which options to purchase approximately 370,253 shares were then vested and exercisable. Shortly after this offering, the Company intends to file a registration statement on Form S-8 under the Securities Act covering shares of Common Stock reserved for issuance under the Company's stock plans. See "Management -- Stock Plans." Shares of Common Stock issued upon exercise of options under the Form S-8 will be available for sale in the public market, subject to Rule 144 volume limitations applicable to Affiliates and subject to the contractual restrictions described above. Beginning 180 days after the Effective Date, approximately 1,188,000 shares issuable upon the exercise of vested stock options will become eligible for sale in the public market, if such options are exercised. At the present time, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Company in which indemnification would be required or permitted. The Company is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 64 66 UNDERWRITING The Underwriters named below, acting through their representatives, Robertson, Stephens & Company LLC, Montgomery Securities and UBS Securities LLC (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company the number of shares of Common Stock set forth opposite their names below. The Underwriters are committed to purchase and pay for all such shares, if any are purchased.
NUMBER UNDERWRITER OF SHARES ----------------------------------------------------------------------- ---------- Robertson, Stephens & Company LLC...................................... Montgomery Securities.................................................. UBS Securities LLC..................................................... --------- Total........................................................ 4,200,000 =========
The Representatives have advised the Company that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession of not more than $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 630,000 additional shares of Common Stock at the same price per share as the Company will receive for the 4,200,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 630,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 4,200,000 shares are being sold. The Underwriting Agreement contains covenants of indemnity among the Underwriters and the Company against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Each executive officer and director and certain other shareholders of the Company have agreed with the Representatives until the later of 180 days after the effective date of the Registration Statement or the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997 (the "Lock-Up Period") not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of Common Stock, any options or warrants to purchase any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock owned as of the date of this Prospectus or thereafter acquired directly by such holders or with respect to which they have or hereinafter acquire the power of disposition, without the prior written consent of Robertson, Stephens & Company LLC. However, Robertson, Stephens & Company LLC may, in its sole discretion at any time or from time to time, without notice, release all or any portion of the securities subject to the lock-up agreements. Approximately 17,975,699 of such shares will be eligible for immediate public sale following expiration of the Lock-Up Period, subject to the provisions of Rule 144. In addition, the Company has agreed that during the Lock-Up Period, it will not, without the prior written consent of Robertson, Stephens & Company LLC, issue, sell, contract to sell or otherwise dispose of any shares of 65 67 Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the issuance of Common Stock upon the exercise of outstanding options and under the existing employee stock purchase plan and the Company's issuance of options under existing stock option plans. See "Shares Eligible For Future Sale." The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority in excess of 5% of the number of shares of Common Stock offered hereby. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock offered hereby was determined through negotiations among the Company and the Representatives. Among the factors considered in such negotiations were prevailing market conditions, certain financial information of the Company, market valuations of other companies that the Company and the Representatives believe to be comparable to the Company; estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. Of the 4,200,000 shares of Common Stock offered hereby, it is currently anticipated that 700,000 shares will be purchased by Sega at the price per share set forth under "Proceeds to the Company" on the cover of this Prospectus. See "Investment by Sega." The Representatives have advised the Company that, pursuant to rules promulgated by the Commission, certain persons participating in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the offering of the Common Stock originally sold by such Underwriter or syndicate member is repurchased by the representatives in syndicate covering transactions, in stabilizing transactions or otherwise. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. 66 68 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS The financial statements of the Company as of December 31, 1995 and 1996 and March 31, 1997, and for each of the two years in the period ended December 31, 1996, and the three month period ended March 31, 1997 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and the exhibits and schedules filed as a part thereof. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified in all respects by such reference. Copies of the Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., or obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a world wide web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http://www.sec.gov. 67 69 3DFX INTERACTIVE, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Accountants.................................................... F-2 Balance Sheets as of December 31, 1995, December 31 1996 and March 31, 1997.......... F-3 Statements of Operations for the years ended December 31, 1995 and 1996 and for the three months ended March 31, 1996 (unaudited) and 1997............................. F-4 Statements of Shareholders' Equity for the years ended December 31, 1995 and 1996 and for the three months ended March 31, 1997.......................................... F-5 Statement of Cash Flows for the years ended December 31, 1995 and 1996 and for the three months ended March 31, 1996 (unaudited) and 1997............................. F-6 Notes to Financial Statements........................................................ F-7
F-1 70 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of 3Dfx Interactive, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, shareholders' equity and cash flows present fairly, in all material respects, the financial position of 3Dfx Interactive, Inc. at December 31, 1995 and 1996 and March 31, 1997, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1996 and the three month period ended March 31, 1997 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP San Jose, California April 11, 1997 F-2 71 3DFX INTERACTIVE, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS
PRO FORMA DECEMBER 31, MARCH MARCH 31, ------------------ 31, 1997 1995 1996 1997 (NOTE 1) ------ ------- ------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents...................... $ 865 $ 5,291 $ 4,141 $ 4,369 Accounts receivable less allowance for doubtful accounts of $0, $78 and $128................ -- 1,393 3,985 3,985 Inventory...................................... 37 4,960 2,999 2,999 Other current assets........................... 135 321 896 896 ------ ------- ------- ------- Total current assets................... 1,037 11,965 12,021 12,249 Property and equipment, net...................... 1,369 3,482 3,431 3,431 Other assets..................................... 34 134 134 134 ------ ------- ------- ------- $2,440 $15,581 $15,586 $15,814 ====== ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Line of credit................................. $ -- $ 1,076 $ 1,649 $ 1,649 Accounts payable............................... 471 2,236 1,394 1,394 Accrued liabilities............................ 440 1,061 937 937 Deferred revenue............................... -- -- 800 800 Accrued salaries, wages and benefits........... 124 354 577 577 Current portion of capitalized lease obligations................................. 309 601 615 615 ------ ------- ------- ------- Total current liabilities.............. 1,344 5,328 5,972 5,972 Capitalized lease obligations, less current portion........................................ 544 632 468 468 ------ ------- ------- ------- Commitments (Note 8) Shareholders' equity: Preferred Stock, no par value, 14,633,000 shares authorized, 5,501,979, 13,903,697 and 14,043,697 shares issued and outstanding; 5,000,000 shares authorized pro forma, none issued and outstanding pro forma............ 5,474 28,701 29,222 -- Common Stock, no par value, 25,033,000 shares authorized; 50,000,000 shares authorized pro forma; 3,542,500, 3,780,027 and 3,938,602 shares issued and outstanding and 18,195,199 shares issued and outstanding pro forma..... 310 1,626 2,078 31,861 Warrants....................................... -- 353 353 20 Notes receivable............................... (25) (19) (12) (12) Deferred compensation.......................... (168) (1,250) (1,544) (1,544) Accumulated deficit............................ (5,039) (19,790) (20,951) (20,951) ------ ------- ------- ------- Total shareholders' equity............. 552 9,621 9,146 9,374 ------ ------- ------- ------- $2,440 $15,581 $15,586 $15,814 ====== ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-3 72 3DFX INTERACTIVE, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER THREE MONTHS ENDED 31, MARCH 31, -------------------- ----------------------- 1995 1996 1996 1997 ------- -------- ----------- ------- (UNAUDITED) Revenues: Product....................................... $-- ... $ 6,390 $ -- $ 4,497 Development contract.......................... -- -- -- 750 ------- -------- ------- ------- Total revenues........................ -- 6,390 -- 5,247 Cost of product revenues........................ -- 5,123 -- 2,582 ------- -------- ------- ------- Gross profit.................................... -- 1,267 -- 2,665 ------- -------- ------- ------- Operating expenses: Research and development...................... 2,940 9,435 1,659 1,953 Selling, general and administrative........... 2,166 6,642 1,028 1,846 ------- -------- ------- ------- Total operating expenses.............. 5,106 16,077 2,687 3,799 ------- -------- ------- ------- Loss from operations............................ (5,106) (14,810) (2,687) (1,134) Interest and other income (expense), net........ 67 59 35 (27) ------- -------- ------- ------- Net loss........................................ $(5,039) $(14,751) $(2,652) $(1,161) ======= ======== ======= ======= Pro forma net loss per share (unaudited) (Note 1)............................................ $ (0.75) $ (0.06) -------- ------- Shares used in pro forma net loss per share calculations (unaudited) (Note 1)............. 19,661 20,621
The accompanying notes are an integral part of these financial statements. F-4 73 3DFX INTERACTIVE, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONVERTIBLE PREFERRED STOCK COMMON STOCK -------------------- ------------------ NOTES DEFERRED ACCUMULATED SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION DEFICIT TOTAL ---------- ------- --------- ------ -------- ---------- ------------ ----------- -------- Issuance of Common Stock to founders, investors and employees at $0.0125 per share........... -- $ -- 2,728,000 $ 34 $ -- $(19) $ -- $ -- $ 15 Issuance of Common Stock to founders, investors and employees at $0.0375 per share........... -- -- 146,000 6 -- (6) -- -- -- Issuance of Common Stock to founders, investors and employees at $0.05 per share........... -- -- 418,500 21 -- (21) -- -- -- Issuance of Series A Convertible Preferred Stock in March 1995 at $1.00 per share, net of issuance costs...... 5,501,979 5,474 -- -- -- -- -- -- 5,474 Common Stock options exercised........... -- -- 250,000 25 -- -- -- -- 25 Forgiveness of notes receivable from shareholders........ -- -- -- -- -- 21 -- -- 21 Deferred compensation........ -- -- -- 224 -- -- (224) -- -- Amortization of deferred compensation........ -- -- -- -- -- -- 56 -- 56 Net loss.............. -- -- -- -- -- -- -- (5,039) (5,039) ---------- ------ --------- ----- --- --- ------ ------- ------- Balance at December 31, 1995............ 5,501,979 5,474 3,542,500 310 -- (25) (168) (5,039) 552 Issuance of Series B Convertible Preferred Stock in March 1996 at $2.20 per share, net of issuance costs...... 5,300,000 11,634 -- -- -- -- -- -- 11,634 Issuance of Series C Convertible Preferred Stock in November 1996 at $3.75 per share, net of issuance costs... 3,101,718 11,593 -- -- -- -- -- -- 11,593 Common Stock options exercised........... -- -- 370,417 42 -- -- -- -- 42 Forgiveness of notes receivable from shareholders........ -- -- -- -- -- 6 -- -- 6 Repurchased Common Stock............... -- -- (132,890) (4) -- -- -- -- (4) Issuance of Series B and C Convertible >Preferred Stock warrants............ -- -- -- -- 353 -- -- -- 353 Deferred compensation........ -- -- -- 1,278 -- -- (1,278) -- -- Amortization of deferred compensation........ -- -- -- -- -- -- 196 -- 196 Net loss.............. -- -- -- -- -- -- -- (14,751) (14,751) ---------- ------ --------- ----- --- --- ------ ------- ------- Balance at December 31, 1996............ 13,903,697 28,701 3,780,027 1,626 353 (19) (1,250) (19,790) 9,621 Issuance of Series C Convertible Preferred Stock in January 1997 at $3.75 per share, net of issuance costs... 140,000 521 -- -- -- -- -- -- 521 Common Stock options exercised........... -- -- 168,002 38 -- -- -- -- 38 Common Stock repurchased......... -- -- (9,427) (1) -- -- -- -- (1) Repayment of notes receivable from shareholders........ -- -- -- -- -- 7 -- -- 7 Deferred compensation........ -- -- -- 415 -- -- (415) -- -- Amortization of deferred compensation........ -- -- -- -- -- -- 121 -- 121 Net loss.............. -- -- -- -- -- -- -- (1,161) (1,161) ---------- ------ --------- ----- --- --- ------ ------- ------- Balance at March 31, 1997................ 14,043,697 $29,222 3,938,602 $2,078 $353 $(12) $ (1,544) $ (20,951) $ 9,146 ========== ====== ========= ===== === === ====== ======= =======
The accompanying notes are an integral part of these financial statements F-5 74 3DFX INTERACTIVE, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER THREE MONTHS ENDED MARCH 31, 31, ---------------------- ------------------------- 1995 1996 1997 -------- --------- 1996 --------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss.................................. $ (5,039) $ (14,751) $ (2,652) $ (1,161) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation......................... 227 1,017 146 385 Warrant valuation.................... -- 353 138 -- Stock compensation................... 56 196 14 121 Increase in allowance for doubtful accounts.......................... -- 78 -- 50 Changes in assets and liabilities: Accounts receivable............... -- (1,471) (92) (2,642) Inventory......................... (37) (4,923) -- 1,961 Other assets...................... (169) (286) 21 (575) Accounts payable.................. 471 1,765 533 (842) Accrued liabilities............... 564 851 (205) 99 Deferred revenue.................. -- -- -- 800 -------- --------- -------- -------- Net cash used in operating activities................... (3,927) (17,171) (2,097) (1,804) -------- --------- -------- -------- Cash flows from investing activities for the purchase of property and equipment........ (589) (2,210) (877) (334) -------- --------- -------- -------- Cash flows from financing activities: Proceeds from issuance of Convertible Preferred Stock, net................... 5,474 23,227 11,650 521 Proceeds from issuance of Common Stock, net............................. 61 44 18 44 Principal payments of capitalized lease obligations............................ (154) (540) (228) (150) Proceeds from drawdown on line of credit................................. -- 1,076 152 573 -------- --------- -------- -------- Net cash provided by financing activities................... 5,381 23,807 11,592 988 -------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents............................... 865 4,426 8,618 (1,150) Cash and cash equivalents at beginning of period................................. -- 865 865 5,291 -------- --------- -------- -------- Cash and cash equivalents at end of period.................... $ 865 $ 5,291 $ 9,483 $ 4,141 ======== ========= ======== ======== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest............................... $ 45 $ 96 $ 26 $ 63 Acquisition of property and equipment under capitalized lease obligations.... 1,007 920 160 --
The accompanying notes are an integral part of these financial statements F-6 75 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES: 3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in California on August 24, 1994. The Company is engaged in the design, development and marketing of 3D media processors specifically designed for interactive electronic entertainment applications in the PC, home game console and coin-op arcade markets. The Company did not incur any expenses from the period of inception (August 24, 1994) through December 31, 1994. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition Revenue from product sales is recognized upon product shipment. Revenue resulting from development contracts is recognized under the percentage of completion method based upon costs incurred relative to total contract costs or when the related contractual obligations have been fulfilled and fees are billable. Costs associated with development contracts are included in research and development. Royalty revenue is recognized upon the sale of products subject to royalties. Cash and Cash Equivalents The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 1996 and March 31, 1997, approximately $3,137,000 and $2,908,000, respectively, of money market funds and commercial paper instruments, the fair value of which approximate cost, are included in cash and cash equivalents. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents and accounts receivable. 3Dfx invests primarily in money market accounts and commercial paper instruments. Cash equivalents are maintained with high quality institutions and their composition and maturities are regularly monitored by management. The Company performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. One customer accounted for 21% of accounts receivable at December 31, 1996. Three customers accounted for 38%, 31% and 13% of accounts receivable at March 31, 1997.
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 ----------------- ------------------ Customers comprising 10% or more of the Company's product revenues for the periods indicated: A..................................................... 44% 4% B..................................................... 33% 59% C..................................................... 11% 15%
F-7 76 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Inventory Inventory is stated at the lower of cost or market, cost being determined under the first-in, first-out method. Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally three years or less. Assets held under capital leases are amortized using the straight-line method over the term of the lease or estimated useful lives, whichever is shorter. Income Taxes The Company accounts for income taxes using an asset and liability approach and recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Research and Software Development Costs Research and development costs are charged to operations as incurred. Software development costs incurred prior to the establishment of technological feasibility are included in research and development and are expensed as incurred. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of the product are capitalized, if material. To date, all software development costs incurred subsequent to the establishment of technological feasibility have been expensed as incurred due to their immateriality. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In January 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (see Note 6). Interim Results (unaudited) The accompanying statements of operations and cash flows for the three month period ended March 31, 1996 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting solely of normal recurring adjustments, necessary for the fair statement of results for the interim periods. The results of operations and cash flows for the interim period are not necessarily indicative of the results to be expected for any other interim future period. Pro Forma Balance Sheet (unaudited) If the offering contemplated by this Prospectus (the "offering") is consummated, all shares of Convertible Preferred Stock outstanding will automatically convert into an aggregate of 14,043,697 shares of Common Stock. The pro forma effect of this conversion has been reflected in the accompanying unaudited balance sheet as of March 31, 1997. In addition, the pro forma balance sheet gives effect to the assumed exercise of warrants to purchase 212,900 shares of Common Stock that otherwise expire automatically upon the closing of this offering. F-8 77 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Pro Forma Net Loss Per Share (unaudited) Pro forma net loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the periods. Common equivalent shares for the year ended December 31, 1996 and the three month period ended March 31, 1997 consist of Common Stock issuable upon the conversion of the Company's Series A, B, and C Convertible Preferred Stock using the if-converted method. Pursuant to the requirements of the Securities and Exchange Commission, common stock equivalent shares relating to the stock options and warrants issued subsequent to April 15, 1996, using the treasury stock method are included in the computation of pro forma net loss per share for all periods presented, as if they were outstanding for the entire period. Prior period earnings per share data have not been presented since such amounts are not deemed meaningful. Recent Accounting Pronouncements (unaudited) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share." This statement is effective for the Company's fiscal year ending December 31, 1997. The Statement redefines earnings per share under generally accepted accounting principles. Under the new standard, primary earnings per share is replaced by basic earnings per share and fully diluted earnings per share is replaced by diluted earnings per share. If the Company had adopted this Statement for the year ended December 31, 1996 and for the three month period ended March 31, 1997, the Company's loss per share would have been as follows:
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1996 MARCH 31, 1997 ----------------- ------------------ Basic loss per share............. ($ 3.91) ($0.30) Diluted loss per share........... ($ 1.56) ($0.12)
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
DECEMBER 31, ------------------ MARCH 31, 1995 1996 1997 ------ ------- --------- Inventory: Raw material............................... $ 37 $ 424 $ 428 Work in process............................ -- 231 260 Finished goods............................. -- 4,305 2,311 ------ ------- ------- $ 37 $ 4,960 $ 2,999 ====== ======= ======= Property and equipment: Computer equipment......................... $ 995 $ 3,122 $ 3,328 Computer software.......................... 521 1,047 1,160 Furniture and equipment.................... 80 557 572 ------ ------- ------- 1,596 4,726 5,060 Less: accumulated depreciation and amortization............................ (227) (1,244) (1,629) ------ ------- ------- $1,369 $ 3,482 $ 3,431 ====== ======= =======
Assets acquired under capitalized lease obligations are included in property and equipment and totaled $1,007,000, $1,927,000 and $1,927,000 with related accumulated amortization of $181,000, $602,000 and $909,000 at December 31, 1995 and 1996 and March 31, 1997, respectively. F-9 78 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3 -- DEBT: The Company has a line of credit agreement with a bank, which provides for maximum borrowings in an amount up to the lesser of 75% of eligible accounts receivable plus 100% of cash and cash equivalents or $4,000,000. Borrowings under the line are secured by all of the Company's owned assets and bear interest at the bank's prime rate plus 1.50% per annum (10.0% as of March 31, 1997). The agreement requires that the Company maintain certain financial ratios and levels of tangible net worth, profitability and liquidity. As of March 31, 1997, the Company was in compliance with its covenants. The line of credit expires in August 1997. At March 31, 1997, there were no borrowings outstanding under this line of credit. The Company has an equipment line of credit with a bank, which provides for the purchase of up to $2,000,000 of property and equipment. Borrowings under this line are secured by all of the Company's owned assets and bear interest at the bank's prime rate plus 1.50% per annum. The agreement requires that the Company maintain certain financial ratios and levels of tangible net worth, profitability and liquidity. As of March 31, 1997, the Company was in compliance with its covenants. The equipment line of credit expires in August 1998. At March 31, 1997, approximately $1,649,000 was outstanding under this equipment line of credit. NOTE 4 -- DEVELOPMENT CONTRACT: In March 1997, the Company entered into a development and license agreement with Sega Enterprises, Ltd., under which the Company is entitled to receive development contract revenues and royalties for units sold by Sega which include the Company's product. The Company recognized development contract revenues of $750,000 in the three months ended March 31, 1997, representing a non-refundable amount due for the delivery of certain engineering designs. Costs incurred relating to this contract are included in research and development expense. NOTE 5 -- SHAREHOLDERS' EQUITY: Common Stock The Company has issued 3,292,500 shares of its Common Stock to founders and investors. The shares either vested immediately or will vest on various dates through 1999. The Company can buy back unvested shares at the original price paid by the purchasers in the event the purchasers' employment with the Company is terminated for any reason. During the year ended December 31, 1996 and the three month period ended March 31, 1997, 99,140 and 5,208 shares, respectively, of Common Stock were repurchased. In addition, during the two year period ended December 31, 1996 and the three month period ended March 31, 1997, certain employees exercised options to purchase 620,417 and 168,002 shares, respectively, of Common Stock which are subject to a right of repurchase by the Company at the original share issuance price. The repurchase right lapses over a period generally ranging from two to four years. During the year ended December 31, 1996 and the three month period ended March 31, 1997, 33,750 and 4,219 shares, respectively, of Common Stock were repurchased. As of December 31, 1996 and March 31, 1997, approximately 1,670,260 and 1,489,442 shares, respectively, of Common Stock were subject to these repurchase rights. The holders of Common Stock, voting as a class, are entitled to elect three members of the Board of Directors. F-10 79 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Convertible Preferred Stock The aggregate authorized number of preferred shares is 14,633,000, of which 5,600,000, 5,700,000 and 3,333,000 are designated as Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock, respectively. Each share of Series A, B and C Convertible Preferred Stock outstanding is convertible at the option of the holder into one share of Common Stock, subject to certain adjustments, and automatically converts upon the completion of an underwritten public offering of Common Stock with gross proceeds of at least $15 million and a public offering price of not less than $6.60 per share or in the event of the vote of a majority of each of the holders of Series A, B and C Convertible Preferred Stock outstanding at the time of such a vote. The holders of Series A, B and C Convertible Preferred Stock are entitled to elect two members, one member, and one member, respectively, to the Board of Directors and have voting rights equal to Common Stock on an if-converted basis. Dividends at the rate of $0.10, $0.22 and $0.375 per share for Preferred Series A, B and C Convertible Preferred Stock, respectively, as declared by the Board of Directors, are payable to the preferred stockholders in preference to any dividends for Common Stock declared by the Board of Directors. Dividends are noncumulative. No dividends have been declared by the Board of Directors through March 31, 1997. The holders of the Series A, B and C Convertible Preferred Stock are entitled to receive their original issuance prices of $1.00, $2.20 and $3.75 per share, respectively, in liquidation, plus an amount equal to all declared but unpaid dividends, prior and in preference to any distribution to the holders of Common Stock. As of December 31, 1996 and March 31, 1997, the aggregate liquidation preference of the Series A, B and C Convertible Preferred Stock was approximately $28,795,000 and $29,319,000, respectively. At December 31, 1996 and March 31, 1997, 13,903,697 and 14,043,697 shares, respectively, of Common Stock were reserved for issuance upon conversion of the preferred stock. Warrants In March 1995, the Company issued a warrant to a vendor to purchase 87,500 shares of Series A Convertible Preferred Stock at $1.00 per share. The warrant expires on March 31, 2002. The warrant was deemed by management to have a nominal value at the date of grant. The Company has reserved 87,500 shares of Series A Convertible Preferred Stock for the exercise of this warrant. In January 1996, the Company entered into a line of credit. To secure the line , the Company issued to the lessor a warrant to purchase 39,772 shares of Series B Convertible Preferred Stock at an exercise price of $2.20. The warrant expires on January 1, 2003. The warrant was deemed by management to have a nominal value at the date of grant. The Company has reserved 39,772 shares of Series B Convertible Preferred Stock for the exercise of this warrant. In February 1996, the Company issued to a financial institution in accordance with a bridge loan agreement a warrant to purchase 17,045 shares of Series B Convertible Preferred Stock at $2.20 per share. The warrant expires on December 31, 2001. The warrant was deemed by management to have a nominal value at the date of grant. The Company has reserved 17,045 shares of Series B Convertible Preferred Stock for the exercise of this warrant. In February 1996, the Company entered into an agreement to issue warrants to TSMC to purchase 280,000 shares of Series B Convertible Preferred Stock at an exercise price of $2.20 per share. The purchase right of 100,000 warrants is exercisable, in whole or in part, at any time on or before December 31, 2001. These warrants will expire, if not previously exercised, immediately upon the closing of an underwritten public offering in which the proceeds received by the Company equal at F-11 80 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) least $7,500,000 and the public offering price is not less than $3.00 per share. The purchase right of 180,000 warrants became exercisable at the rate of 20 shares of Series B Convertible Preferred Stock for each wafer above 2,000 wafers purchased from TSMC by the Company during fiscal 1996 and became exercisable for 52,900 shares of Series B Convertible Preferred Stock in conjunction with wafer purchases in 1996. These warrants expire on December 31, 2001. The warrant was deemed to have a total value of approximately $211,000 and was recognized as a cost of revenues and research and development expense during 1996. The Company has reserved 152,900 shares of Series B Convertible Preferred Stock for the exercise of this warrant. In 1996, the Company issued to a university and consultants warrants to purchase 10,000 and 60,000 shares, respectively, of Series C Convertible Preferred Stock at an exercise price of $3.75 per share. These warrants were deemed to have a total value of approximately $142,000 at the date of grant and the related cost was recognized as other expense and research and development expense, respectively, during 1996. The Company has reserved 70,000 shares of Series C Convertible Preferred Stock for the exercise of these warrants. At March 31, 1997, the Company had reserved 367,217 shares of Common Stock for the exercise of warrants and the subsequent conversion to Common Stock. NOTE 6 -- STOCK OPTION PLANS: The Option Plan In May 1995, the Company adopted a Stock Plan, (the Option Plan) which provides for granting of incentive and nonqualified stock options to employees and consultants and directors of the Company. Under the Option Plan, 4,249,500 shares of Common Stock have been reserved for issuance at March 31, 1997. Options granted under the Option Plan are generally for periods not to exceed ten years, and are granted at prices not less than 100% and 85%, for incentive and nonqualified stock options, respectively, of the fair market value of the stock determined by the Board of Directors on the date of grant. Incentive stock options granted to shareholders who own greater than 10% of the outstanding stock are for periods not to exceed five years, and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. Options granted under the Option Plan generally vest 25% on the first anniversary of the grant date and 1/48th of the option shares each month thereafter, with full vesting occurring on the fourth anniversary of the grant date. F-12 81 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) The following is a summary of activity under the Option Plan during the years ended December 31, 1995 and 1996 and the three months ended March 31, 1997:
WEIGHTED OPTIONS AVERAGE AVAILABLE OPTIONS EXERCISE FOR GRANT OUTSTANDING PRICE ----------- ----------- -------- Balance at May 1, 1995 (date of plan adoption)............................. 1,707,500 -- -- Granted................................. (1,281,500) 1,281,500 $ 0.10 Exercised............................... -- (250,000) $ 0.10 Canceled................................ 5,000 (5,000) $ 0.10 ----------- ---------- Balance at December 31, 1995............ 431,000 1,026,500 $ 0.10 Additional shares authorized............ 2,392,500 -- -- Granted................................. (2,738,276) 2,738,276 $ 0.29 Exercised............................... -- (370,417) $ 0.12 Canceled................................ 317,335 (317,335) $ 0.21 Repurchased............................. 33,750 $ 0.10 ----------- ---------- Balance at December 31, 1996............ 436,309 3,077,024 $ 0.26 Additional shares authorized............ 1,250,000 -- -- Granted................................. (900,838) 900,838 $ 4.81 Exercised............................... -- (168,002) $ 0.23 Canceled................................ 58,917 (58,917) $ 0.28 Repurchased............................. 4,219 -- $ 0.10 ----------- ---------- Balance at March 31, 1997............... 848,607 3,750,943 $ 1.36 =========== ==========
At December 31, 1996 and March 31, 1997, 272,343 and 370,253, respectively, Common Stock options were vested. During the years ended December 31, 1995 and 1996 and the three month period ended March 31, 1997, the Company granted options for the purchase of 4,920,614 shares of Common Stock to employees at exercise prices ranging from $0.10 to $6.00 per share. Management has calculated deferred compensation of approximately $1,900,000 related to options granted during 1995 and 1996 and the three month period ended March 31, 1997. Such deferred compensation will be amortized over the vesting period relating to these options, of which $56,000, $196,000 and $121,000 has been amortized during the years ended December 31, 1995 and 1996 and the three month period ended March 31, 1997. Employee Stock Purchase Plan In March 1997, the Company's Board of Directors approved an Employee Stock Purchase Plan. Under this plan, employees of the Company can purchase Common Stock through payroll deductions. A total of 1,100,000 shares have been reserved for issuance under this plan. The plan was approved by the Company's shareholders on April 1997. Directors' Stock Option Plan In March 1997, the Company adopted a 1997 Directors' Stock Option Plan. Under this plan options to purchase 300,000 shares of Common Stock may be granted. The plan provides that options may be F-13 82 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) granted at a price not less than fair value of a share at the date of grant. The plan was approved by the Company's shareholders in April 1997. Information relating to stock options outstanding under the Option Plan at March 31, 1997 is as follows:
OPTIONS OUTSTANDING --------------------------------------------------- WEIGHTED AVERAGE WEIGHTED NUMBER REMAINING AVERAGE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE ----------- ---------------- -------------- Range of exercise prices: $0.10 - $0.15................... 677,000 8.4 years $ 0.10 $0.22 - $0.375.................. 1,360,105 9.3 years $ 0.24 $0.45........................... 896,500 9.7 years $ 0.45 $1.00 - $6.00................... 817,338 10.0 years $ 5.25
OPTIONS VESTED -------------------------- WEIGHTED NUMBER AVERAGE VESTED EXERCISE PRICE ------- -------------- Range of exercise prices: $0.10 - $0.15...................................... 242,232 $ 0.10 $0.22 - $0.375..................................... 128,021 $ 0.22 $0.45.............................................. -- -- $1.00 - $6.00...................................... -- --
Certain Pro Forma Disclosures The Company accounts for its employee stock options plans in accordance with the provisions of Accounting Principles Board Opinion No. 25. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation" which established a fair value based method of accounting for employee stock option plans and shares issued to founders which are subject to repurchase. Compensation cost for the Company's option plans determined based on the fair value of the options at their grant dates, as prescribed in FAS 123, were not materially different than compensation expense recorded by the Company for the years ended December 31, 1995 and 1996 and the three month period ended March 31, 1997. The weighted average fair value of stock options granted in the years ended December 31, 1995 and 1996 and the three month period ended March 31, 1997, was $0.09, $0.30 and $4.81, respectively. Because the determination of the fair value of all options granted after the Company becomes a public entity will include an expected volatility factor in addition to the factors described in the preceding paragraph and, because options granted prior to 1995 are not taken into consideration, the above results are not representative of future years. Benefit Plan Effective January 1, 1995, the Company adopted a 401(k) Savings Plan which allows all employees to participate by making salary deferral contributions to the 401(k) Savings Plan ranging from 1% to 20% of their eligible earnings. The Company may make discretionary contributions to the 401(k) Savings Plan upon approval by the Board of Directors. The Company has not contributed to the 401(k) Savings Plan to date. F-14 83 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- INCOME TAXES: No provision for federal or state income taxes has been recorded for the years ended December 31, 1995 and 1996 and the three months ended March 31, 1997 as the Company incurred net operating losses. Deferred tax assets related to the following (in thousands):
DECEMBER 31, MARCH ------------------- 31, 1995 1996 1997 ------- ------- ------- Net operating loss and credit carryforwards... $ 1,994 $ 7,278 $ 7,665 Expenses not currently deductible............. -- 357 429 Capitalized research and development.......... 100 134 141 ------- ------- ------- 2,094 7,769 8,235 Less: valuation allowance..................... (2,094) (7,769) (8,235) ------- ------- ------- $ -- $ -- $ -- ======= ======= =======
Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that a full valuation allowance has been recorded. These factors include the Company's history of losses, recent increases in expense levels, the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology, the lack of carryback capacity to realize deferred tax assets, and the uncertainty regarding market acceptance of the Company's products. The Company will continue to assess the realizability of the deferred tax assets in future periods. At December 31, 1995 and 1996 and March 31, 1997, the Company had net operating loss carryforwards for federal income tax purposes of approximately $5,100,000, $18,162,000 and $19,127,000, respectively, which expire beginning in 2010. Under the Tax Reform Act of 1986, the amount of and the benefit from net operating losses that can be carried forward may be impaired in certain circumstances. Events which may cause changes in the Company's tax carryovers include, but are not limited to, a cumulative ownership change of more than 50% over a three year period. The issuance of Series A Convertible Preferred Stock resulted in an annual limitation of the Company's ability to utilize net operating losses incurred prior to that date. The limitation is insignificant. Net operating losses incurred between the time of the Series A Convertible Preferred Stock issuance and March 31, 1997, had not been subject to any annual limitations through March 31, 1997. NOTE 8 -- COMMITMENTS: The Company is obligated under noncancelable operating leases for its facilities and certain equipment and capital leases for certain equipment. Rent expense on the operating leases for the year ended December 31, 1995 and 1996 and the three month period ended March 31, 1997, was approximately $192,000, $305,000 and $74,000, respectively. F-15 84 3DFX INTERACTIVE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) Future minimum lease payments under the operating and capitalized leases are as follows (in thousands):
OPERATING CAPITALIZED LEASES LEASES --------- ----------- April 1, 1997 through December 31, 1997............. $ 716 $ 548 1998................................................ 1,034 508 1999................................................ 1,033 119 2000................................................ 1,027 -- 2001................................................ 1,027 -- Thereafter.......................................... 5,479 -- ------- ------ Total minimum lease payments........................ $10,316 1,175 ======= Less: amount representing interest.................. (92) ------ Present value of minimum lease payments............. 1,083 Less: current portion............................... (615) ------ Noncurrent portion of capitalized lease obligations....................................... $ 468 ======
Purchase Commitments The Company's manufacturing relationship with Taiwan Semiconductor Manufacturing Corporation ("TSMC") allows for the cancellation of all outstanding purchase orders, but requires the repayment of all expenses incurred to date. As of March 31, 1997, TSMC had incurred approximately $626,000 of manufacturing expenses on the Company's outstanding purchase orders. F-16 85 APPENDIX -- DESCRIPTION OF GRAPHICS INSIDE FRONT COVER Graphic: Illustration of 3D image from computer game containing starfighter and planets. Caption: The Company's technology enables a highly immersive, interactive 3D experience with compelling graphics, realistic motion and complex character and scene interaction at real time frame rates. GATEFOLD Graphic: Illustrations of characters and scenes from 3D video games and software applications designed to or utilizing the Company's 3D hardware. Caption: 3Dfx Technology is designed to perform on a variety of platforms . . . . and support a multitude of third-party PC titles. Credits: Images courtesy of Criterion Studios, Eidos Entertainment, Shiny Entertainment and Ubisoft. All other trademarks are the property of their respective owners. Copyright (C)1996 3Dfx Interactive, Inc. PAGE 42 Graphic: Block diagram depicting the Company's Voodoo Graphics product. INSIDE BACK COVER Graphic: Depiction of the steps required to create a 3D image, starting with a wireframe model and moving into shading, mapping and additional techniques, flat shading (addition of color), texture mapping and final techniques to complete the image in a realistic manner. PHOTO: Caption: ONE. A wireframe model is created that forms the basis of the three dimensional objects. This image shows the vertices and the outline of the set and characters before the coloring techniques have been applied. PHOTO: Caption: TWO. Flat shading has been added to the wireframe. One color is assigned to all the pixels in a given triangle. This demonstrates the simplest of the shading techniques available. PHOTO: Caption: THREE. Basic point-sampled texture mapping has been added to the image. Texture mapping is said to have the greatest impact in adding realism to a 3D image. A fixed pattern or texture is transferred to a polygon on the surface of a 3D object. The texture is warped to simulate the perspective of a 3D object. PHOTO: Caption: FOUR. Bilinear filtering and MIP mapping added to the scene further enhance the image quality -- a subtle improvement in a static image. These techniques more accurately simulate smoothness of color changes and the behavior of detail as the objects grow more distant. PHOTO: Caption: FIVE. The final enhancement comes from lighting effects added to the characters and set. First pass texture maps on the set are made either lighter or darker through shadow maps that simulate the effect of lights. The lighting effect on character texture maps is produced with Gouraud color shading during rendering. 86 BACK OUTSIDE COVER 3Dfx Interactive, Inc. logo. 87 LOGO 88 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth all expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of the Common Shares being registered. All of the amounts shown are estimates except for the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID ---------- SEC Registration Fee..................................................... $ 12,441 NASD Filing Fee.......................................................... 4,606 The Nasdaq Stock Market Listing Fee...................................... 40,000 Blue Sky Qualification Fees and Expenses................................. 15,000 Printing and Engraving Expenses.......................................... 150,000 Legal Fees and Expenses.................................................. 300,000 Accounting Fees and Expenses............................................. 150,000 Transfer Agent and Registrar Fees........................................ 5,000 Miscellaneous............................................................ 22,953 -------- Total.......................................................... $700,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 204(a) of the California General Corporation Law, the Registrant's Articles of Incorporation eliminate a director's personal liability for monetary damages to the Registrant and its shareholders arising from a breach or alleged breach of the director's fiduciary duty, except for liability arising under Sections 310 and 316 of the California General Corporation Law or liability for (i) acts or omissions that involve intentional misconduct or knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director, (iii) any transaction from which a director derived an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Registrant or its shareholders, (v) acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders, (vi) interested transactions between the corporation and a director in which a director has a material financial interest, and (vii) liability for improper distributions, loans or guarantees. This provision does not eliminate the directors' duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under California law. Sections 204(a) and 317 of the California General Corporation Law authorize a corporation to indemnify its directors, officers, employees and other agents in terms sufficiently broad to permit indemnification (including reimbursement for expenses) under certain circumstances for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). The Registrant's Articles of Incorporation and Bylaws contain provisions covering indemnification to the maximum extent permitted by the California General Corporation Law of corporate directors, officers and other agents against certain liabilities and expenses incurred as a result of proceedings involving such persons in their capacities as directors, officers employees or agents, including proceedings under the Securities Act or the Securities Exchange Act of 1934, as amended. The Company has entered into Indemnification Agreements with its directors and executive officers. II-1 89 In addition to the foregoing, the Underwriting Agreement provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the several Underwriters, against certain liabilities, including liabilities arising under the Securities Act. At present, there is no pending litigation or proceeding involving a director, officer, employee or other agent of the Registrant in which indemnification is being sought, nor is the Registrant aware of any threatened litigation that may result in a claim for indemnification by any director, officer, employee or other agent of the Registrant. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since August 24, 1994, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities. 1. On January 12, 1995, the Registrant issued and sold 2,728,000 shares of Common Stock to investors at a price of $.0125 per share. 2. From March 3, 1995 to May 18, 1995, the Registrant issued and sold 564,500 shares of Common Stock to employees at $.0375 to $.05 price per share. 3. From May 1995 to March 31, 1997, the Registrant issued and sold 788,419 shares of Common Stock to employees and consultants at prices ranging from $.01 to $.45 per share, upon exercise of stock options and stock purchase rights, pursuant to the Registrant's 1995 Employee Stock Plan. 4. On March 13, 1995, the Registrant issued and sold 5,501,979 shares of Series A Preferred Stock to a total of 43 investors for an aggregate purchase price of $5,501,979. 5. On March 31, 1995, the Registrant issued a warrant to purchase an aggregate of 87,500 shares of Series A Preferred Stock to one investor with an exercise price of $1.00 per share. 6. From November 2, 1995 to December 31, 1996, the Registrant issued warrants to purchase an aggregate of 209,717 shares of Series B Preferred Stock to a total of 3 investors with an exercise price of $2.20 per share. 7. From February 14, 1996 to February 28, 1996, the Registrant issued and sold 5,300,000 shares of Series B Preferred Stock to a total of 33 investors for an aggregate purchase price of $11,660,000. 8. From September 12, 1996 to January 17, 1997, the Registrant issued and sold 3,241,718 shares of Series C Preferred Stock to a total of 39 investors for an aggregate purchase price of $12,156,443. 9. From June 1, 1996 to September 1996, the Registrant issued warrants to purchase an aggregate of 70,000 shares of Series C Preferred Stock to 1 university and 2 consultants with an exercise price of $3.75 per share. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had adequate access, through their relationship with the Company or otherwise, to information about the Registrant. II-2 90 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits 1.1* Form of Underwriting Agreement (draft dated , 1997). 3.1 Articles of Incorporation of the Registrant, as currently in effect. 3.2 Form of Restated Articles of Incorporation of the Registrant, to be filed prior to the effective date of the offering made under this Registration Statement. 3.3 Form of Restated Articles of Incorporation of the Registrant, to be filed immediately following the closing of the offering made under this Registration Statement. 3.4 Bylaws of the Registrant. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2* 1995 Employee Stock Plan and form of Stock Option Agreement thereunder. 10.3* 1997 Director Option Plan and form of Director Stock Option Agreement thereunder. 10.4* 1997 Employee Stock Purchase Plan and forms of agreement thereunder. 10.5 Lease Agreement dated August 7, 1996 between Registrant and South Bay/Fortran, and Tenant Estoppel Certificate dated March 25, 1997 between Registrant and CarrAmerica Realty Corporation for San Jose, California office. 10.6 Investors' Rights Agreement dated September 12, 1996, Amendment No. 1 to Investors' Rights Agreement dated November 25, 1996, Amendment No. 2 to Investors' Rights Agreement dated December 18, 1996 and Amendment No. 3 to Investors' Rights Agreement dated March 27, 1997 by and among the Registrant and holders of the Registrant's Series A, Series B and Series C Preferred Stock. 10.7* Warrants to purchase shares of Common Stock issued by the Registrant. 10.8 Form of Restricted Stock Purchase Agreement between the Registrant and certain shareholders. 10.9+ Technology Development and License Agreement dated as of February 28, 1997 by and between Registrant and Sega Enterprises, Ltd. 10.10 Master Equipment Lease Agreement dated January 1, 1996 by and between the Registrant and MMC/GATX Partnership No. 1. 10.11 Master Equipment Lease dated March 31, 1995 by and between the Registrant and Lighthouse Capital Partners, L.P. 10.12 Loan Commitment Agreement dated July 1, 1996 by and between the Registrant and Silicon Valley Bank. 10.13.1 Change of Control Letter Agreement between the Registrant and L. Gregory Ballard. 10.13.2 Change of Control Letter Agreement between the Registrant and Karl Chicca. 10.13.3 Change of Control Letter Agreement between the Registrant and Scott D. Sellers. 10.13.4 Change of Control Letter Agreement between the Registrant and Gary Tarolli. 11.1 Calculation of pro forma net loss per share. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
II-3 91 - --------------- * To be supplied by amendment. + Confidential treatment requested for portions of these agreements. (b) Financial Statement Schedules: None. ITEM 17. UNDERTAKINGS The Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the California General Corporation Law, the Articles of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer of controlling person in connection with the securities being registered hereunder, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 92 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, State of California, on the 17th day of April, 1996. 3DFX INTERACTIVE, INC. By /s/ L. GREGORY BALLARD ------------------------------------ L. Gregory Ballard President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints L. Gregory Ballard and Gary P. Martin, and each one of them, acting individually and without the other, as his or her attorney-in-fact, each with full power of substitution, for him and her in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE - ---------------------------------------- ------------------------------------- --------------- /s/ L. GREGORY BALLARD President and Chief Executive Officer April 17, 1997 - ---------------------------------------- (Principal Executive Officer) L. Gregory Ballard /s/ GARY P. MARTIN Vice President, Administration and April 17, 1997 - ---------------------------------------- Chief Financial Officer (Principal Gary P. Martin Financial and Accounting Officer) /s/ GORDON A. CAMPBELL Chairman of the Board of Directors April 17, 1997 - ---------------------------------------- Gordon A. Campbell /s/ ANTHONY SUN Director April 17, 1997 - ---------------------------------------- Anthony Sun /s/ PHILIP M. YOUNG Director April 17, 1997 - ---------------------------------------- Philip M. Young /s/ SCOTT D. SELLERS Director April 17, 1997 - ---------------------------------------- Scott D. Sellers /s/ JAMES WHIMS Director April 17, 1997 - ---------------------------------------- James Whims /s/ GEORGE J. STILL, JR. Director April 17, 1997 - ---------------------------------------- George J. Still, Jr.
II-5 93 INDEX TO EXHIBITS
EXHIBIT NO. EXHIBIT - ------- 1.1* Form of Underwriting Agreement (draft dated , 1997). 3.1 Articles of Incorporation of the Registrant, as currently in effect. 3.2 Form of Restated Articles of Incorporation of the Registrant, to be filed prior to the effective date of the offering made under this Registration Statement. 3.3 Form of Restated Articles of Incorporation of the Registrant, to be filed immediately following the closing of the offering made under this Registration Statement. 3.4 Bylaws of the Registrant. 4.1* Specimen Common Stock Certificate. 5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1 Form of Indemnification Agreement between the Registrant and each of its directors and officers. 10.2* 1995 Employee Stock Plan and form of Stock Option Agreement thereunder. 10.3* 1997 Director Option Plan and form of Director Stock Option Agreement thereunder. 10.4* 1997 Employee Stock Purchase Plan and forms of agreement thereunder. 10.5 Lease Agreement dated August 7, 1996 between Registrant and South Bay/ Fortran, and Tenant Estoppel Certificate dated March 25, 1997 between Registrant and CarrAmerica Realty Corporation for San Jose, California office. 10.6 Investors' Rights Agreement dated September 12, 1996, Amendment No. 1 to Investors' Rights Agreement dated November 25, 1996, Amendment No. 2 to Investors' Rights Agreement dated December 18, 1996 and Amendment No. 3 to Investors' Rights Agreement dated March 27, 1997 by and among the Registrant and holders of the Registrant's Series A, Series B and Series C Preferred Stock. 10.7* Warrants to purchase shares of Common Stock issued by the Registrant. 10.8 Form of Restricted Stock Purchase Agreement between the Registrant and certain shareholders. 10.9+ Technology Development and License Agreement dated as of February 28, 1997 by and between Registrant and Sega Enterprises, Ltd. 10.10 Master Equipment Lease Agreement dated January 1, 1996 by and between the Registrant and MMC/GATX Partnership No. 1. 10.11 Master Equipment Lease dated March 31, 1995 by and between the Registrant and Lighthouse Capital Partners, L.P. 10.12 Loan Commitment Agreement dated July 1, 1996 by and between the Registrant and Silicon Valley Bank. 10.13.1 Change of Control Letter Agreement between the Registrant and L. Gregory Ballard. 10.13.2 Change of Control Letter Agreement between the Registrant and Karl Chicca. 10.13.3 Change of Control Letter Agreement between the Registrant and Scott D. Sellers. 10.13.4 Change of Control Letter Agreement between the Registrant and Gary Tarolli.
94
EXHIBIT NO. EXHIBIT - ------- 11.1 Calculation of pro forma net loss per share. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 23.2* Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-5). 27.1 Financial Data Schedule.
- --------------- * To be supplied by amendment. + Confidential treatment requested for portions of these agreements. EX-3.1 2 ARTICLES OF INCORPORATION OF THE REGISTRANT 1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF 3DFX INTERACTIVE, INC. a California Corporation The undersigned, Gary Martin and John B. Montgomery, hereby certify that: 1. They are the duly elected and acting Vice President and Assistant Secretary, respectively, of 3Dfx Interactive, Inc., a California corporation (the "Corporation"). 2. The Articles of Incorporation of the Corporation are amended and restated in their entirety as in Appendix I attached hereto. 3. The amendments and restatements herein set forth have been duly approved by the Board of Directors of the Corporation. 4. The amendments herein set forth have been duly approved by the required vote of the shareholders of the Corporation in accordance with Sections 902 and 903 of the California Corporations Code. The total number of shares of Common Stock entitled to vote is 3,753,360, the total number of shares of Series A Preferred Stock entitled to vote is 5,501,979 shares, the total number of shares of Series B Preferred Stock entitled to vote is 5,300,000 shares and the total number of shares of Series C Preferred Stock entitled to vote is 2,514,085. The number of shares voting in favor of the amendments equalled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares of Common Stock, more than 50% of the outstanding shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock voting together as a single class, more than 50% of the Common Stock, Series A Preferred Stock and Series B Preferred Stock voting together as a single class, and more than 50% of the outstanding shares each of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, each voting as a separate class. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of our own knowledge. Executed on November __ 1996. ________________________________ Gary Martin, Vice President _______________________________________ John B. Montgomery, Assistant Secretary 2 Appendix I RESTATED ARTICLES OF INCORPORATION OF 3DFX INTERACTIVE, INC. a California Corporation ARTICLE I NAME The name of this corporation is 3Dfx Interactive, Inc. (the "Corporation"). ARTICLE II PURPOSES The purpose of this Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. ARTICLE III CAPITAL STOCK The total number of shares of all classes of stock which the Corporation is authorized to issue is 39,666,666, consisting of 25,033,333 shares of Common Stock, no par value, and 14,633,333 shares of Preferred Stock, no par value. The Preferred Stock consists of three series, of which 5,600,000 shares have been designated as Series A Preferred Stock (the "Series A Preferred Stock"), 5,700,000 shares have been designated as Series B Preferred Stock (the "Series B Preferred Stock") and of which 3,333,333 have been designated as Series C Preferred Stock (the "Series C Preferred Stock"). The relative rights, preferences, privileges and restrictions granted to or imposed on the respective series or classes of capital stock or the holders thereof are as follows: 3 Section 1. Dividends. 1.1 Dividend Rights. The holders of the Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, out of funds legally available therefor, dividends at an annual rate of $0.10 per share of Series A Preferred Stock (the "Series A Dividend Rate"), $0.22 per share of Series B Preferred Stock (the "Series B Dividend Rate") and $0.375 per share of Series C Preferred Stock (the "Series C Dividend Rate") payable in preference and priority to any payment of any dividend on Common Stock of the Corporation. Such dividends shall not be cumulative and no right to such dividends shall accrue to holders of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock unless declared by the Board of Directors. Without limiting the foregoing, no distribution shall be made in respect of the Common Stock unless the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall receive a proportionate share of any such distribution as though the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were the holders of the number of shares of Common Stock of the Corporation into which such shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock are then convertible. 1.2 Definition of Distribution. For purposes of this Section 1, unless the context otherwise requires, a "distribution" shall mean the transfer of cash or other property without consideration whether by way of dividend or otherwise or the purchase or redemption of shares of the Corporation (other than repurchases of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase) for cash or property. 1.3 Certain Repurchases not Distributions. As authorized by Section 402.5(c) of the California Corporations Code, the provisions of Sections 502 and 503 of the California Corporations Code shall not apply with respect to repurchases by the Corporation of shares of Common Stock issued to or held by employees, officers, directors or consultants of the Corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase. -2- 4 Section 2. Liquidation Preference. (a) In the event of any liquidation, dissolution or winding up of the Corporation, either voluntary or involuntary, distributions to the shareholders of the Corporation shall be made in the following manner: (i) Each series of Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Corporation to the holders of the Common Stock by reason of their ownership thereof, an amount per share as may be fixed for such series (the "Preferential Amount"). The Preferential Amount shall be $1.00 for each share of Series A Preferred Stock, $2.20 for each share of Series B Preferred Stock and $3.75 for each share of Series C Preferred Stock, adjusted for any stock split, combination, consolidation, or stock distributions or stock dividends with respect to such shares, plus an amount equal to all declared but unpaid dividends on the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock as provided in Section 1 above. If the assets and funds thus distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid Preferential Amount, then the entire assets and funds of the Corporation legally available for distribution shall be distributed among the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock in proportion to the respective Preferential Amounts which each such holder is entitled to receive pursuant to this Section 2(a)(i). (ii) After payment has been made to the holders of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock of the full amounts to which they shall be entitled as set forth in Section 2(a)(i) above, then the holders of the Common Stock shall be entitled to receive an amount per share equal to (as such amount shall be adjusted to reflect subdivisions and combinations of shares and stock dividends), $0.10 with respect to each outstanding share of Common Stock, plus an amount equal to all declared and unpaid dividends with respect to such share. If the assets and funds legally available for distribution among the holders of Common Stock shall be insufficient to permit the payment to such holders of the full preferential amount, then such assets and funds shall be distributed ratably among the holders of Common Stock in proportion to the total preferential amount which each such holder is entitled to receive pursuant to this Section 2(a)(ii). (iii) Any assets remaining after the distributions pursuant to Sections 2(a)(i) and (ii) shall be distributed on a pro rata basis to the holders of Common Stock and Preferred Stock based on the number of shares (assuming conversion of each holder's shares of Preferred Stock into the number of shares of Common Stock into which such holder's Preferred Stock is then convertible, as -3- 5 adjusted from time to time pursuant to Section 4 hereof) then held by each holder of Common Stock and Preferred Stock. (b) (i) If the Corporation should sell all or substantially all of its assets, or should consolidate or merge with or into any other corporation or corporations (other than wholly-owned subsidiaries of the Corporation), or should engage in a transaction or series of related transactions after the Series A Original Issue Date, as hereinafter defined, in which more than 50% of the voting power of the Corporation is disposed, then such sale, merger or other transaction shall be treated as a liquidation subject to this Section 2. (ii) In any of such events, if the consideration received by the Corporation is other than cash or indebtedness, its value will be deemed to be its fair market value. In the case of securities, fair market value shall be determined as follows: (A) Securities not subject to investment letter or other similar restrictions on free marketability: (I) If traded on a securities exchange, or over-the-counter as a NASDAQ National Market System security, the value shall be deemed to be the average of the closing prices of the securities on such exchange or NASDAQ National Market System over the 30-day period ending three (3) days prior to the closing; (II) If actively traded over-the-counter (but not on the National Market System), the value shall be deemed to be the average of the closing bid prices over the 30-day period ending three (3) days prior to the closing; and (III) If there is no active public market, the value shall be the fair market value thereof, as determined by the unanimous consent or vote of the Board of Directors and such determination shall be binding upon the holders of the Preferred Stock; and (B) The method of valuation of securities subject to investment letter or other restrictions on free marketability shall be to make an appropriate discount from the market value determined as above in subparagraphs (A) (I), (II) or (III) to reflect the approximate fair market value thereof, as determined by the unanimous consent or vote of the Board of Directors and such determination shall be binding upon the shareholders. -4- 6 (c) The liquidation preference of holders of Preferred Stock provided herein shall not be deemed to be impaired by distributions made by the Corporation in connection with the repurchase of Reserved Shares, as hereinafter defined, from former employees or consultants upon termination of their employment or services pursuant to stock restriction agreements between the Corporation and such persons approved by the Corporation's Board of Directors, and such holders shall be deemed to have consented to such repurchases. Section 3. Voting Rights. (a) General. Except with respect to the election of directors of the Corporation as set forth below, the holder of each share of Common Stock issued and outstanding shall have one vote and each holder of Preferred Stock issued and outstanding shall have the number of votes equal to the number of shares of Common Stock into which such holder's shares of Preferred Stock are then convertible, as adjusted from time to time pursuant to Section 4 hereof, at the record date for determination of the shareholders entitled to vote on such matters or, if no record date is established, at the date such vote is taken or any written consent of shareholders is first solicited. The holders of Preferred Stock shall be entitled to receive notice, together with the holders of Common Stock, of all shareholder meetings even if only the holders of Common Stock are entitled to vote on the issues addressed at such meeting. (b) Board of Directors. The authorized number of directors shall be set forth in the Bylaws of the Corporation and may be increased or decreased by an amendment to such Bylaws in accordance with their provisions. As long as there are at least 2,000,000 shares of Preferred Stock issued and outstanding, of the authorized number of members of the Corporation's Board of Directors: (i) the holders of Series A Preferred Stock voting separately as a class shall be entitled to elect two (2) directors (and to fill any vacancies with respect thereto), with each holder of Series A Preferred Stock entitled to the number of votes determined as provided in Section 3(a) above; (ii) the holders of Series B Preferred Stock voting separately as a class shall be entitled to elect one (1) director (and to fill any vacancies with respect thereto), with each holder of Series B Preferred Stock entitled to the number of votes determined as provided in Section 3(a) above; (iii) the holders of Series C Preferred Stock voting separately as a class shall be entitled to elect one (1) director (and to fill any vacancies with respect thereto), with each holder of Series C Preferred Stock entitled to the number of votes determined as provided in Section 3(a) above; and -5- 7 (iv) the holders of Common Stock voting separately as a class shall be entitled to elect three (3) directors to be elected (and to fill any vacancies with respect thereto). Subject to Section 302 and Section 303 of the California Corporations Code, any director who shall have been elected by a specified group of shareholders may be removed during the aforesaid term of office, either for or without cause, by and only by, the affirmative vote of the holders of a majority of the shares of such specified group, given at a special meeting of such shareholders duly called or by an action by written consent for that purpose. Section 4. Conversion. The holders of Preferred Stock shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. (i) Optional Conversion. Each share of Preferred Stock shall be convertible at the option of the holder thereof at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for Preferred Stock, into such number of fully paid and nonassessable shares of Common Stock as is determined in the case of the Series A Preferred Stock, by dividing $1.00 by the Series A Conversion Price at the time in effect, as is determined in the case of the Series B Preferred Stock, by dividing $2.20 by the Series B Conversion Price at the time in effect and as is determined in the case of the Series C Preferred Stock, by dividing $3.75 by the Series C Conversion Price at the time in effect. As of the effective date of these Restated Articles of Incorporation, the Series A Conversion Price shall be $1.00, the Series B Conversion Price shall be $2.20 and the Series C Conversion Price shall be $3.75. Such initial Series A Conversion Price, Series B Conversion Price and Series C Conversion Price shall be subject to adjustment as set forth below. (ii) Series A Preferred Stock. Each share of Series A Preferred Stock shall automatically be converted into shares of Common Stock at the Series A Conversion Price then in effect upon the earlier of (1) the affirmative vote of holders of 66 2/3 percent of the Series A Preferred, (2) the date on which fewer than 50,000 shares of Series A Preferred Stock (appropriately adjusted for any stock splits, combinations, consolidations, or stock distributions or dividends with respect to such shares) remain outstanding or (3) the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at a price per share (before deduction of underwriter discounts and commissions and offering expenses) of not less than $6.60 per share (as adjusted for any stock -6- 8 splits, combinations, consolidations, or stock distributions or dividends with respect to such shares) and an aggregate offering price to the public of not less than $15,000,000. (iii) Series B Preferred Stock. Each share of Series B Preferred Stock shall automatically be converted into shares of Common Stock at the Series B Conversion Price then in effect upon the earlier of (1) the affirmative vote of holders of 66 2/3 percent of the Series B Preferred (2) the date on which fewer than 50,000 shares of Series B Preferred Stock (appropriately adjusted for any stock splits, combinations, consolidations, or stock distributions or dividends with respect to such shares) remain outstanding or (3) the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at a price per share (before deduction of underwriter discounts and commissions and offering expenses) of not less than $6.60 per share (appropriately adjusted for any stock splits, combinations, consolidations, or stock distributions or dividends with respect to such shares) and an aggregate offering price to the public of not less than $15,000,000. (iv) Series C Preferred Stock. Each share of Series C Preferred Stock shall automatically be converted into shares of Common Stock at the Series C Conversion Price then in effect upon the earlier of (1) the affirmative vote of holders of 66 2/3 percent of the Series C Preferred (2) the date on which fewer than 50,000 shares of Series C Preferred Stock (appropriately adjusted for any stock splits, combinations, consolidations, or stock distributions or dividends with respect to such shares) remain outstanding or (3) the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation to the public at a price per share (before deduction of underwriter discounts and commissions and offering expenses) of not less than $6.60 per share (appropriately adjusted for any stock splits, combinations, consolidations, or stock distributions or dividends with respect to such shares) and an aggregate offering price to the public of not less than $15,000,000. (v) In the event of the automatic conversion of the Series A, Series B or Series C Preferred Stock as set forth in Sections 4 (a)(ii)(3), 4(a)(iii)(3) and 4(a)(iv)(3) above, the person(s) entitled to receive the Common Stock issuable upon such conversion shall not be deemed to have converted such shares until immediately prior to the closing of such sale of securities causing the conversion, at which time the Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the -7- 9 Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Preferred Stock being converted are either delivered to the Corporation or its transfer agent, as hereinafter provided, or the holder notifies the Corporation or its transfer agent, as hereinafter provided, that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. Upon the automatic conversion of the Preferred Stock, the holders of the Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or of any transfer agent for the Preferred Stock. Thereupon, there shall be issued and delivered to such holder, promptly at such office and in his name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of the Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. (vi) Upon conversion of the Preferred Stock, the Common Stock so issued shall be duly and validly issued, fully paid and nonassessable shares of the Corporation. (b) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then-effective conversion price for a particular series of Preferred Stock (a "Conversion Price"). Except as provided in Sections 4(a)(ii), 4 (a)(iii) and 4(a)(iv), before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Preferred Stock, and shall give written notice by mail, postage prepaid, to the Corporation at its principal corporate office, of the election to convert the same. The Corporation shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled as aforesaid and a check payable to the holder in the amount of any cash payable in lieu of fractional shares of Common Stock (after aggregating all shares of Common Stock issuable to such holder of Preferred Stock upon conversion of the number of shares of Preferred Stock at the time being converted). In addition, if less than all of the shares represented by such certificates are surrendered for conversion pursuant to Section 4(a)(i), the Corporation shall issue and deliver to such holder a new certificate for the balance of the shares of Preferred Stock not so converted. Except as provided in Sections 4(a)(ii), 4(a)(iii) and 4(a)(iv), such conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the shares of such Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common -8- 10 Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act of 1933, the conversion may, at the option of any holder tendering such Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to such offering, in which event the person(s) entitled to receive Common Stock issuable upon such conversion of such Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of such sale of securities. (c) Adjustment to Conversion Price for Diluting Issues. (i) Special Definitions. For purposes of this Section 4(c), the following definitions shall apply: (1) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock, Series A Preferred Stock, Series B Preferred Stock or Series C Preferred Stock) or other securities convertible into or exchangeable for Common Stock. (2) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities, except for those issued to officers or employees of, or consultants to, the Corporation as provided in Section 4(c)(i)(6)(B). (3) "Series A Original Issue Date" shall mean March 13, 1995. (4) "Dilutive Financing" means any issuance or deemed issuance of Additional Shares of Common Stock after the Series A Original Issue Date for a consideration per share less than the applicable Conversion Price in effect on the date of and immediately prior to such sale. (5) "New Securities" means shares of Common Stock, Preferred Stock or any other class of capital stock of the Company, whether or not now authorized, securities of any type that are convertible into shares of such capital stock, and options, warrants or rights to acquire shares of such capital stock. Notwithstanding the foregoing, the term "New Securities" will not include: (A) securities issued in connection with bona fide equipment lease or working capital debt financings with lending institutions; (B) securities offered to the public pursuant to a registration statement filed under the Securities Act; (C) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially -9- 11 all of the assets, or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation; (D) securities issued upon exercise or conversion of options, warrants and other convertible securities outstanding on the date of filing of these Amended and Restated Articles of Incorporation, excluding Reserved Shares; and (E) shares of Common Stock or Preferred Stock issued in connection with any stock split, stock dividend or recapitalization by the Company in which all classes and series of capital stock are adjusted equally. (6) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 4(c)(iii), deemed to be issued) by the Corporation after the Series A Original Issue Date including New Securities, other than shares of Common Stock issued or issuable: (A) upon conversion of shares of Preferred Stock; (B) to officers or employees of, or consultants to, the Corporation pursuant to a stock grant, stock option plan, stock purchase plan or other stock incentive agreement (collectively, the "Plans"), (collectively, the "Reserved Shares") up to an aggregate of 3,500,000 shares; (C) as a dividend or distribution on Preferred Stock; (D) as securities excluded from the definition of New Securities in Section 4(c)(i)(5); (E) following a vote of the holders of 66 2/3% of the Preferred Stock voting on the basis of the number of shares of Common Stock into which each holder's shares of Preferred Stock are then convertible, as adjusted from time to time pursuant to Section 4 hereof, that designated shares of Common Stock issued or deemed to be issued shall not constitute Additional Shares of Common Stock; and (F) in connection with any transaction for which adjustment is made pursuant to Section 4(d) hereof. (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price of a share of Preferred Stock shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by -10- 12 the Corporation is less than the Conversion Price in effect on the date of, and immediately prior to, such issuance, for such share of Preferred Stock. (iii) Deemed Issue of Additional Shares of Common Stock. (1) Options and Convertible Securities. In the event the Corporation at any time or from time to time after the Series A Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date; provided, however, that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(c)(vi) hereof) of such Additional Shares of Common Stock would be less than the applicable Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be; and, provided, further, that in any such case in which Additional Shares of Common Stock are deemed to be issued: (A) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the original issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease, insofar as it affects such Conversion Price, but no further change in the Conversion Price shall be made upon the exercise, conversion or exchange of such Options or Convertible Securities, and no such adjustment of the Conversion Price shall affect Common Stock previously issued upon conversion of the Preferred Stock; -11- 13 (C) if any such Options or Convertible Securities shall expire or be cancelled without having been exercised or converted, the Conversion Price as adjusted upon the original issuance thereof (or upon the occurrence of a record date with respect thereto) shall be readjusted as if (I) in the case of Convertible Securities or Options for Common Stock, the only Additional Shares of Common Stock so issued were shares of Common Stock, if any, actually issued or sold on the exercise of such Options or the conversion or exchange of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such Options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion or exchange of such Convertible Securities; and (II) in the case of Options for Convertible Securities, only the Convertible Securities, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the Additional Shares of Common Stock deemed to have been then issued was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised; (D) no readjustment pursuant to clauses (B) or (C) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date (immediately prior to the adjustment), or (ii) the Conversion Price that would have resulted from any actual issuance of Additional Shares of Common Stock between the original adjustment date and such readjustment date. (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. Subject to Section 4(c)(ii), the Conversion Price of each series of Preferred Stock shall be subject to adjustment under this Section 4(c)(iv) as follows: (1) In the event the Corporation shall at any time after the Series A Original Issue Date issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant Section -12- 14 4(c)(iii)), without consideration or for a consideration per share less than a particular Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, any such Conversion Price shall be reduced, concurrently with such issue, to the price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction (x) the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price, and (y) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue plus the number of such Additional Shares of Common Stock so issued; provided, however, that, for the purposes of this Section 4(c)(iv), all shares of Common Stock issuable upon conversion of outstanding shares of Preferred Stock shall be deemed to be outstanding; and, further provided, that any Additional Shares of Common Stock deemed issued pursuant to Section 4(c)(iii) shall be deemed to be outstanding. (v) Adjustment of Conversion Price of Series C Preferred Stock Upon Certain Financings. The Conversion Price of the Series C Preferred Stock shall be subject to adjustment under this Section 4(c)(v) as follows: (1) In the event the Corporation shall issue shares of equity securities other than shares of Series C Preferred Stock in an equity financing resulting in gross cash proceeds to the Company of at least $1,000,000 (a "Financing"), for a consideration per share that is less than 125% of the Series C Conversion Price in effect on the date of and immediately prior to such issue, then and in such event, the Series C Conversion Price shall be reduced, concurrently with such issue, to the price (calculated to the nearest cent) determined by multiplying such Conversion Price by a fraction (x) the numerator of which shall be 80% of the consideration per share in the Financing and (y) the denominator of which shall be such Conversion Price. (vi) Determination of Consideration. For purposes of this Section 4(c), the consideration received by the Corporation for the issuance of any Additional Shares of Common Stock shall be computed as follows: (1) Cash and Property. Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation excluding amounts paid or payable for accrued interest or accrued dividends; -13- 15 (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, by the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(c)(iii)(1), relating to Options and Convertible Securities, shall be determined by dividing: (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such Options for Convertible Securities and the conversion or exchange of such Convertible Securities, by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provisions contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (d) Adjustments for Stock Dividends, Distributions, Subdivisions, Combinations or Consolidations of Common Stock. (i) Stock Dividends, Distributions or Subdivisions. In the event the Corporation shall issue shares of Common Stock pursuant to a stock dividend, stock distribution or subdivision, the Conversion Price in effect immediately prior to such stock dividend, stock distribution or subdivision shall concurrently with such stock dividend, stock distribution or subdivision, be proportionately decreased. (ii) Combinations or Consolidations. In the event the outstanding shares of Common Stock shall be combined or consolidated, by -14- 16 reclassification or otherwise, into a lesser number of shares of Common Stock, the Conversion Price in effect immediately prior to such combination or consolidation shall, concurrently with the effectiveness of such combination or consolidation, be proportionately increased. (iii) Adjustments for Other Distributions. In the event the Corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution payable in securities of the Corporation other than shares of Common Stock and other than as otherwise adjusted in this Section 4(c) or (d) or as otherwise provided in Section 1, then, and in each such event, provision shall be made so that the holders of Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Corporation which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the date of conversion, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4(c) or (d) with respect to the rights of the holders of the Preferred Stock. (iv) Adjustments for Reclassification, Exchange, and Substitution. If the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), the applicable Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted such that the Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of their Prefer red Stock immediately before that change. (e) No Impairment. The Corporation will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any other terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. -15- 17 (f) Reservation of Stock Issuable Upon Conversion. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Preferred Stock, such number of shares of its Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then-outstanding shares of Preferred Stock, in addition to such other remedies as shall be available to the holders of Preferred Stock, the Corporation will take such corporate actions as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes. (g) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Conversion Price pursuant to this Section 4, the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) all such adjustments and readjustments, (ii) the Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of such Preferred Stock. (h) Notices of Record Date. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon the Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus, other than distributions to shareholders in connection with the repurchase of Reserved Shares of former employees or consultants, to which the holders of Preferred Stock have consented in Section 2(c) hereof; or (ii) to offer for subscription to the holders of any class or series of its capital stock any additional shares of stock of any class or series or any other rights; or (iii) to effect any reclassification or recapitalization; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially all its property or business, or to -16- 18 liquidate, dissolve or wind up, or to effect any other transaction subject to the provisions of Section 2 of these Amended and Restated Articles of Incorporation; then, in connection with each such event, the Corporation shall send to the holders of the Preferred Stock: (1) at least 20 days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining the rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least 20 days' prior written notice of the date of a shareholders meeting at which a vote on such matters shall take place or the effective date of any written consent (and specifying the material terms and conditions of the proposed transaction or event and the date on which the holders of Preferred Stock and Common Stock shall be entitled to exchange their Preferred Stock and Common Stock for securities or other property deliverable upon the occurrence of such event and the amount of securities or other property deliverable upon such event). Each such written notice shall be given personally or by first class mail, postage prepaid, addressed to the holders of Preferred Stock at the address for each such holder as shown on the books of the Corporation. Section 5. No Reissuance of Preferred Stock. No share or shares of Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares which the Corporation shall be authorized to issue. Section 6. Protective Provisions. (a) Series A Preferred Stock. In addition to any other rights provided by law and without limiting Section 6(d) below, so long as at least 50,000 shares of Series A Preferred Stock (as such number may be adjusted for stock splits, combinations, consolidations and stock distributions or dividends) shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of Series A Preferred Stock voting as a separate class (based on the number of shares of Common Stock into which each holder's Series A Preferred Stock is then convertible, as adjusted from time to time pursuant to Section 4 hereof): -17- 19 (i) amend or repeal any provision of, or add any provision to, this Corporation's Articles of Incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series A Preferred Stock in a material and adverse manner or alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Series B or Series C Preferred Stock if such alteration or change would affect the Series A Preferred Stock in a material and adverse manner; (ii) increase the authorized number of shares of Series A Preferred Stock; and (iii) authorize or issue any new shares or reclassify any Common Stock into shares of any class or series of stock senior to or on parity with the Series A Preferred Stock as to dividends, redemption rights, liquidation preferences, conversion rights, voting rights or otherwise. (b) Series B Preferred Stock. In addition to any other rights provided by law and without limiting Section 6(d) below, so long as at least 50,000 shares of Series B Preferred Stock (as such number may be adjusted for stock splits, combinations, consolidations and stock distributions or dividends) shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of Series B Preferred Stock voting as a separate class (based on the number of shares of Common Stock into which each holder's Series B Preferred Stock is then convertible, as adjusted from time to time pursuant to Section 4 hereof): (i) amend or repeal any provision of, or add any provision to, this Corporation's Articles of Incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series B Preferred Stock in a material and adverse manner or alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Series A or Series C Preferred Stock if such alteration or change would affect the Series B Preferred Stock in a material and adverse manner; (ii) increase the authorized number of shares of Series B Preferred Stock; and (iii) authorize or issue any new shares or reclassify any Common Stock into shares of any class or series of stock senior to or on parity with the Series B Preferred Stock as to dividends, redemption rights, liquidation preferences, conversion rights, voting rights or otherwise. -18- 20 (c) Series C Preferred Stock. In addition to any other rights provided by law and without limiting Section 6(d) below, so long as at least 50,000 shares of Series C Preferred Stock (as such number may be adjusted for stock splits, combinations, consolidations and stock distributions or dividends) shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of Series C Preferred Stock voting as a separate class (based on the number of shares of Common Stock into which each holder's Series C Preferred Stock is then convertible, as adjusted from time to time pursuant to Section 4 hereof): (i) amend or repeal any provision of, or add any provision to, this Corporation's Articles of Incorporation or bylaws if such action would alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series C Preferred Stock in a material and adverse manner or alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of the Series A or Series B Preferred Stock if such alteration or change would affect the Series C Preferred Stock in a material and adverse manner; (ii) increase the authorized number of shares of Series C Preferred Stock; and (iii) authorize or issue any new shares or reclassify any Common Stock into shares of any class or series of stock senior to or on parity with the Series C Preferred Stock as to dividends, redemption rights, liquidation preferences, conversion rights, voting rights or otherwise. (d) In addition to any other rights provided by law and without limiting the foregoing, so long as any shares of any series of Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of such series of Preferred Stock voting as a separate class (based on the number of shares of Common Stock into which each holder's Preferred Stock is then convertible, as adjusted from time to time pursuant to Section 4 hereof), take any action to amend the Articles of Incorporation in which the dividend, liquidation preference, conversion, voting, redemption or other rights of such series of Preferred Stock will be adversely affected. In addition to any other rights provided by law and without limiting the foregoing, so long as any shares of any series of Preferred Stock shall be outstanding, the Corporation shall not, without first obtaining the affirmative vote or written consent of the holders of a majority of the outstanding shares of the Preferred Stock voting as a separate class (based on the number of shares of Common Stock into which each holder's Preferred Stock is then convertible, as adjusted from time to time pursuant to Section 4 hereof), take any action to: -19- 21 (i) sell or otherwise dispose of all or substantially all of the assets or business of the Corporation; (ii) effect a consolidation, reorganization or merger of the Corporation with or into any other corporation, or any other transaction in which ownership of a majority of the Corporation's capital stock is transferred; (iii) authorize or issue any new shares or reclassify any Common Stock into shares of any class or series of stock senior to or on parity with the Series A, Series B and/or C Preferred Stock as to dividends, redemption rights, liquidation preferences, conversion rights, voting rights or otherwise; (iv) increase the authorized number of directors of this Corporation to more than seven (7), without the unanimous approval (by vote or written consent) of all of the directors then in office (including, without limitation, the directors elected by the holders of Preferred Stock). ARTICLE IV LIMITATION OF LIABILITY The liability of the directors of the Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Any repeal or modification of this Article IV, or the adoption of any provision of the Articles of Incorporation inconsistent with this Article IV, shall only be prospective and shall not adversely affect the rights under this Article IV in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability. ARTICLE V INDEMNIFICATION The Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through By-law provisions, agreements with agents, vote of shareholders or disinterested directors, or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits on indemnification set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the Corporation or its shareholders. Any repeal or modification of this Article V, or the adoption of any provision of the Articles of Incorporation inconsistent with this Article V, shall only be prospective and shall not adversely affect the rights under this Article V in effect at the time of the alleged occurrence of any action or omission to act giving rise to indemnification. -20- EX-3.2 3 FORM OF RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.2 CERTIFICATE OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF 3Dfx INTERACTIVE, INC. The undersigned, Gary P. Martin and John B. Montgomery, hereby certify that: 1. They are the Vice President and Assistant Secretary, respectively, of 3Dfx Interactive, Inc., a California corporation. 2. So much of Article III of the Restated Articles of Incorporation of this corporation which currently reads as follows: "The total number of shares of all classes of stock which the Corporation is authorized to issue is 39,666,666, consisting of 25,033,333 shares of Common Stock, no par value, and 14,633,333 shares of Preferred Stock, no par value. The Preferred Stock consists of three series, of which 5,600,000 shares have been designated as Series A Preferred Stock (the "Series A Preferred Stock"), 5,700,000 shares have been designated as Series B Preferred Stock (the "Series B Preferred Stock") and of which 3,333,333 have been designated as Series C Preferred Stock (the "Series C Preferred Stock")." is hereby amended to read in its entirety as follows: "The total number of shares of all classes of stock which the Corporation is authorized to issue is 64,633,333, consisting of 50,000,000 shares of Common Stock, no par value, and 14,633,333 shares of Preferred Stock, no par value. The Preferred Stock consists of three series, of which 5,600,000 shares have been designated as Series A Preferred Stock (the "Series A Preferred Stock"), 5,700,000 shares have been designated as Series B Preferred Stock (the "Series B Preferred Stock") and of which 3,333,333 have been designated as Series C Preferred Stock (the "Series C Preferred Stock")." 3. Section 4(c)(i)(6)(B) of Article III of the Restated Articles of Incorporation of this corporation shall be amended to read in its entirety as follows: "(B) to officers, directors or employees of, or consultants to, the Corporation pursuant to a stock grant, stock option plan, stock purchase plan or other stock incentive agreement (collectively, the "Plans"), (collectively, the "Reserved Shares") up to an aggregate of 5,650,000 shares;" 4. The foregoing Certificate of Amendment of Restated Articles of Incorporation has been duly approved by the Board of Directors. 5. The foregoing Certificate of Amendment of Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 and 903 of the 2 California Corporations Code. The authorized number of shares of Common Stock is 25,033,333, of which 3,921,679 shares are issued and outstanding. The authorized number of shares of Preferred Stock is 14,633,333, 5,600,000 shares have been designated as Series A Preferred Stock, 5,501,979 of which are issued and outstanding, 5,700,000 shares have been designated as Series B Preferred Stock, 5,300,000 of which are issued and outstanding, and 3,333,333 have been designated as Series C Preferred Stock, 3,241,718 of which are issued and outstanding. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the Common Stock and more than 50% of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, each voting as a separate class. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the foregoing Certificate are true and correct or our own knowledge. Date: April __, 1997 ________________________________________ Gary P. Martin, Vice President ________________________________________ John B. Montgomery, Assistant Secretary EX-3.3 4 FORM OF RESTATED ARTICLES OF INCORPORATION 1 EXHIBIT 3.3 RESTATED ARTICLES OF INCORPORATION OF 3Dfx INTERACTIVE, INC. Gary P. Martin and John B. Montgomery hereby certify that: 1. They are the duly elected Vice President and Assistant Secretary, respectively, of 3Dfx Interactive, Inc., a California corporation. 2. The Articles of Incorporation of this corporation, as amended to the date of the filing of these Restated Articles of Incorporation, and with the omissions required by Section 910 of the Corporations Code, are hereby amended and restated to read as follows: First: The name of this corporation is: 3Dfx Interactive, Inc. Second: The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. Third: (A) This corporation is authorized to issue 55,000,000 shares of its capital stock, which shall be divided into two classes known as "Common Stock" and "Preferred Stock." (B) The total number shares of Common Stock which this corporation is authorized to issue is 50,000,000 and the total number of shares of Preferred Stock which this corporation is authorized to issue is 5,000,000. (C) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this corporation is authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Shares, and within the limitations or restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, to increase or decrease (but not below the number of shares of any such series then outstanding) the number of shares of any such series subsequent to the issue of shares of that series, to determine the designation and par value of any series and to fix the number of shares of any series. 2 Fourth: (A) Limitation of Directors' Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. (B) Indemnification of Corporate Agents. This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the corporation and its shareholders. (C) Repeal or Modification. Any repeal or modification of the foregoing provisions of this Article Fourth by the shareholders of this corporation shall not adversely affect any right of indemnification or limitation of liability of a director or officer of this corporation relating to acts or omissions occurring prior to such repeal or modification. 3. The foregoing Restated Articles of Incorporation have been duly approved by the Board of Directors of said corporation. 4. The foregoing Restated Articles of Incorporation were approved by the required vote of the shareholders of said corporation in accordance with Sections 902 and 903 of the California General Corporations Code at an Annual Meeting of Shareholders, the record date for which was March 27, 1997. The total number of outstanding shares of the corporation entitled to vote as of the record date for said meeting was 3,921,679 shares of Common Stock, 5,501,979 shares of Series A Preferred Stock, 5,300,000 shares of Series B Preferred Stock, and 3,241,178 shares of Series C Preferred Stock. The number of shares of stock voting in favor of the foregoing Restated Articles of Incorporation equalled or exceeded the vote required. The vote required was more than 50% of the outstanding shares of Common Stock and more than 50% of the outstanding shares of the Series A, Series B and Series C Preferred Stock, each voting as a separate class. The Restated Articles are necessary as a result of the automatic conversion of all outstanding Preferred Shares upon the effectiveness of the corporation's initial public offering. -2- 3 We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the foregoing Restated Articles of Incorporation are true and correct of our own knowledge. Executed at San Jose, California, on June __, 1997. _______________________________________ Gary P. Martin, Vice President _______________________________________ John B. Montgomery, Assistant Secretary -3- EX-3.4 5 BYLAWS OF 3DFX INTERACTIVE, INC. 1 EXHIBIT 3.4 BYLAWS OF 3DFX INTERACTIVE, INC. 2 BY-LAWS OF 3DFX INTERACTIVE, INC. ARTICLE I Principal Office Section 1. Location of Principal Office. The principal executive office for the transaction of the business of the corporation shall be established and maintained by the board of directors at any place within or without the State of California. The board of directors may change said principal executive office from one location to another. Section 2. Other Business Offices. The board of directors may at any time establish other business offices within or without the State of California. ARTICLE II Meetings of Shareholders Section 1. Location of Meetings. All meetings of the shareholders shall be held at any place within or without the State of California which may be designated either by the board of directors or by the written consent of all shareholders entitled to vote thereat and not present at the meeting given either before or after the meeting and filed with the secretary of the corporation. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. Annual Meetings. The annual meeting of the shareholders of the corporation shall be held on such date and at such time as shall be determined by the board of directors, not more than fifteen (15) months after the date of the preceding annual meeting or, in the case of the first annual meeting, not more than fifteen (15) months after the organization of the corporation. At such meeting, directors shall be elected and any other proper business may be transacted which is within the powers of the shareholders. Written notice of each annual meeting shall be given to each shareholder entitled to vote either personally or by first-class mail or other means of written communications (which includes, without limitation and wherever used in these bylaws, telegraphic and facsimile communication), charges prepaid, addressed to each shareholder at the address appearing on the books of the corporation, or given by the shareholder to the corporation for the purpose of notice. If any notice or report addressed to the shareholder at 3 the address of such shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If no address of a shareholder appears on the books of the corporation or is given by the shareholder to the corporation, notice is duly given to him if sent by mail or other means of written communication addressed to the place where the principal executive office of the corporation is located or if published at least once in a newspaper of general circulation in the county in which said principal executive office is located. All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the United States mail or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or transfer agent of the corporation shall be prima facie evidence of the giving of the notice. Such notices shall state: (a) The place, date and hour of the meeting; (b) Those matters which the board, at the time of the mailing of the notice, intends to present for action by the shareholders; (c) If directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election; (d) The general nature of a proposal, if any, to take action with respect to the approval of (i) a contract or other transaction with an interested director, (ii) an amendment of the articles of incorporation, (iii) a reorganization of the corporation as defined in section 181 of the California General Corporation Law (the "General Corporation Law"), (iv) a voluntary dissolution of the corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (e) Such other matters, if any, as may properly come before the meeting or may be expressly required by statute. -2- 4 Section 3. Special Meetings. Special meetings of the shareholders for the purpose of taking any action permitted to be taken by the shareholders under the General Corporation Law and the articles of incorporation of this corporation, may be called by the chairman of the board or the president, or by the board of directors, or by the holders of shares entitled to cast not less than ten percent (10%) of the votes at the meeting. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairman of the board, president, vice president or secretary by any person (other than the board of directors) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to the shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner and contain the same statements as required for annual meetings of shareholders. Notice of any special meeting shall also specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 4. Quorum. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 5. Adjournment. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 4 above. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, except that notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at an adjourned meeting in accordance with Section 2 of this Article 11 if a new record date for the adjourned meeting is fixed by the board of directors, or if the adjournment is for more than forty-five (45) days from the date set for the original meeting. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 6. Record Date: Cumulative Voting. Unless a record date for voting purposes be fixed as provided in Section 1 of Article VI of these bylaws, then, subject to the provisions of sections 702 to 704, inclusive, of the General Corporation Law, only persons in whose names shares entitled to vote stand on the stock records of the corporation at the close of -3- 5 business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held (except that the record date for shareholders entitled to give consent to corporate action without a meeting shall be determined in accordance with Section 8 of this Article 11) shall be entitled to receive notice of and to vote at such meeting, and such day shall be the record date for such meeting. Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal (other than elections of directors), but if the shareholder fails to specify the number of shares such shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares such shareholder is entitled to vote. Such vote may be viva voce or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. The affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively shall constitute at least a majority of the required quorum) shall be the act of the shareholders except as may otherwise be provided by (i) Section 4 of this Article 11, (ii) the cumulative voting provisions for the election of directors as stated in this section below, and (iii) the General Corporation Law or the articles of incorporation of this corporation (including without limitation the provision that, upon the vote of the holder or holders of shares representing fifty percent or more of the voting power of this corporation, this corporation may elect voluntarily to wind up and dissolve). Subject to the requirements of the next sentence, every shareholder entitled to vote at any election for directors may cumulate his votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which his shares are normally entitled, or distribute his votes on the same principle among as many candidates as he shall think fit. No shareholder shall be entitled to cumulate votes unless such candidate or candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate his votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for candidates in nomination. The candidates receiving the highest number of votes of shares entitled to be voted for them, up to the number of directors to be elected, shall be elected. Section 7. Waiver of Notice. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been determined at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice, consent or approval need not specify either the business to be transacted or the purpose of any regular or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in subparagraph (d) of the third paragraph of Section 2 of this Article 11, the waiver of notice, consent or approval shall state the general nature of such -4- 6 proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be included in the notice but not so included if such objection is expressly made at the meeting. Section 8. Action by Written Consent. Directors may be elected without a meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors; in addition a director may be elected at any time to fill a vacancy (other than a vacancy created by removal) not filled by the directors by the written consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. Notice of such election shall be given to nonconsenting shareholders if required by this Section 8. Any other action which, under any provision of the General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the secretary of the corporation and shall be maintained in the corporate records. Unless the consents of all shareholders entitled to vote have been solicited in writing: (a) Notice of any proposed shareholder approval of (i) a contract or other transaction with an interested director; (ii) indemnification of an agent of the corporation as authorized by Section 9 of Article IV of these bylaws; (iii) a reorganization of the corporation as defined in section 181 of the General Corporation Law; or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (b) Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent, to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner provided in Section 2 of Article II of these bylaws. -5- 7 Unless, as provided in Section 1 of Article VI of these bylaws, the board of directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be (a) the day on which the first written consent is given, when no prior action by the board of directors has been taken, or (b) the close of business on the day the board of directors adopts the resolution relating to such action. Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the secretary of the corporation. Section 9. Proxies. Every person entitled to vote shares or execute consents shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and delivered to the secretary of the corporation. A proxy shall be deemed executed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney in fact. Any proxy duly executed which does not state that it is irrevocable shall continue in full force and effect until (i) a writing stating that the proxy is revoked is delivered to the secretary of the corporation, (ii) a proxy bearing a later date is executed by the person who executed the prior proxy and is presented to the meeting, (iii) as to any meeting, by attendance at such meeting and voting in person by the person executing the proxy or (iv) written notice of the death or incapacity of the maker of such proxy is received by the corporation before the vote pursuant thereto is counted; provided that no such proxy shall be valid after the expiration of eleven (11 ) months from the date of its execution, unless otherwise provided in the proxy. The revocability of a proxy which states on its face that it is irrevocable shall be governed by the provisions of sections 705(e) and (f) of the General Corporation Law. Section 10. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting and any adjournment thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may and on the request of any shareholder or a shareholder's proxy shall, be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the meeting. -6- 8 The duties of such inspectors shall be as prescribed by section 707 of the General Corporation Law and shall include: determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. ARTICLE III Board of Directors Section 1. Powers of the Board. Subject to the provisions of the General Corporation Law and any limitations in the articles of incorporation and these bylaws as to action to be authorized or approved by the shareholders, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the board of directors shall have the following powers: First: To conduct, manage and control the affairs and business of the corporation and to make such rules and regulations therefor, not inconsistent with law or with the articles of incorporation or with these bylaws, as they may deem best; Second: To elect and remove at pleasure the officers, agents and employees of the corporation, prescribe their duties and fix their compensation; Third: To authorize the issue of shares of stock of the corporation from time to time upon such terms as may be lawful, in consideration of money paid, labor done, services actually rendered to the corporation or for its benefit or in its formation or reorganization, debts or securities canceled, and tangible or intangible property actually received, but neither promissory notes of the purchaser (unless adequately secured by collateral other than the shares acquired or unless permitted by section 408 of the General -7- 9 Corporation Law) nor future services shall constitute payment or part payment for the shares of the corporation; Fourth: To borrow money and incur indebtedness for the purposes of the corporation and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor; Fifth: To alter, repeal or amend, from time to time, and at any time, these bylaws and any and all amendments of the same, and from time to time, and at any time, to make and adopt such new and additional bylaws as may be necessary and proper, subject to the power of the shareholders to adopt, amend or repeal such bylaws, or to revoke the delegation of authority of the directors, as provided by law or by Article VIII of these bylaws; and Sixth: By resolution adopted by a majority of the authorized number of directors, to designate an executive and/or other committees, each consisting of two or more directors, to serve at the pleasure of the board, and to prescribe the manner in which proceedings of such committee shall be conducted. The appointment of members or alternate members (who may replace any absent member at any meeting of the committee) of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in a resolution of the board, shall have all of the authority of the board, except with respect to: (i) The approval of any action for which the General Corporation Law or the articles of incorporation also require shareholder approval; (ii) The filling of vacancies on the board or in any committee; (iii) The fixing of compensation of the directors for serving on the board or on any committee; (iv) The adoption, amendment or repeal of bylaws; (v) The amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable; (vi) Any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the board; and (vii) The appointment of other committees of the board or the members thereof. -8- 10 Section 2. Number of Directors. The number of directors of the corporation shall be not less than five (5) nor more than seven (7). The exact number of directors shall be seven (7) 0. until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 3. Election of Directors. The directors shall be elected at each annual meeting of shareholders, but if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected, except as otherwise provided by statute. Section 4. Vacancies; Resignation. A vacancy in the board of directors shall be deemed to exist in case of the death, resignation or removal of any director, if the authorized number of directors be increased, or if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. The board of directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or has been convicted of a felony. Vacancies in the board of directors, except for a vacancy created by the removal of a director, may be filled by a majority of the directors then in office, whether or not less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the shareholders. A vacancy in the board of directors created by the removal of a director may only be filled by the vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute at least a majority of the required quorum), or by the written consent of the holders of all of the outstanding shares. -9- 11 The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent other than to fill a vacancy created by removal shall require the consent of holders of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the chairman of the board, the president, the secretary or the board of directors of the corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the board of directors accepts the resignation of a director tendered to take effect at a future time, the board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of the directors shall have the effect of removing any director prior to the expiration of his term of office. ARTICLE IV Meetings of Directors Section 1. Location of Meetings. Regular meetings of the board of directors shall be held at any place within or without the State of California that has been designated from time to time by the board of directors. In the absence of such designation, regular meetings shall be held at the principal executive office of the corporation, except as provided in Section 2. Special meetings of the board of directors may be held at any place within or without the State of California which has been designated in the notice of the meeting, or, if not designated in the notice or if there is no notice, at the principal executive office of the corporation. Section 2. Regular Meetings. Immediately following each annual meeting of the shareholders there shall be a regular meeting of the board of directors of the corporation at the place of said annual meeting or at such other place as shall have been designated by the board of directors for the purpose of organization, election of officers and the transaction of other business. Other regular meetings of the board of directors shall be held without call on such date and time as may be fixed by the board of directors; provided, however, that should any such day fall on a legal holiday, then said meeting shall be held at the same time on the next business day thereafter ensuing which is not a legal holiday. Notice of regular meetings of the directors is hereby dispensed with and no notice whatever of any such meeting need be given, provided that notice of any change in the time or place of regular meetings shall be given to all of the directors in the same manner as notice for special meetings of the board of directors. Section 3. Special Meetings: Notice. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or president or, -10- 12 if both the chairman of the board and the president are absent or are unable or refuse to act, by any vice president or by any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director, or sent by first-class mail or telegram or facsimile transmission, charges prepaid, addressed to him at his address as it appears upon the records of the corporation or, if it is not so shown on the records and is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, telephoned, telegraphed or sent by facsimile transmission, it shall be delivered to the director or transmitted to the director at least forty-eight (48) hours prior to the time of the holding of the meeting. Any notice given personally or by telephone, telegraph or facsimile may be communicated to either the director or to a person at the office of the director whom the person giving the notice has reason to believe will promptly communicate it to the director. Such deposit in the mail, delivery to a common carrier, transmission by electronic means or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such directors. The notice need not specify the place of the meeting if the meeting is to be held at the principal executive office of the corporation, and need not specify the purpose of the meeting. Section 4. Quorum. Presence of a majority of the authorized number of directors at a meeting of the board of directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of sections 310, 311 and 317 of the General Corporation Law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four (24) hours, notice of any adjournment to another time or place (other than adjournments until the time fixed for the next regular meeting of the board of directors, as to which no notice is required) shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of the adjournment. Section 5. Waiver of Notice. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. -11- 13 Section 6. Action by Written Consent. Any action required or permitted to be taken by the board of directors, may be taken without a meeting if all members of the board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 7. Committees. The provisions of this Article IV shall also apply, with necessary changes in points of detail, to committees of the board of directors, if any, and to actions by such committees (except for the first sentence of Section 2 of Article IV, which shall not apply, and except that special meetings of a committee may also be called at any time by any two members of the committee), unless otherwise provided by these bylaws or by the resolution of the board of directors designating such committees. For such purpose, references to "the board" or "the board of directors" shall be deemed to refer to each such committee and references to "directors" and "members of the board" shall be deemed to refer to members of the committee. Section 8. Compensation of Directors. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the board. Section 9. Indemnification. The corporation shall, to the maximum extent permitted by the General Corporation Law, indemnify each of its agents against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding arising by reason of the fact that any such person is or was an agent of the corporation. For purposes of this Section, an "agent" of the corporation includes any person who is or was a director, officer, employee or other agent of the corporation, or who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or who was a director, officer, employee or agent of a corporation which was a predecessor of the corporation or of another enterprise at the request of such predecessor corporation. ARTICLE V Officers Section 1. Designation of Officers. The officers of the corporation shall be a chairman of the board or a president, or both, a secretary, and a treasurer, who shall also be the chief financial officer of the corporation. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be designated from time to time by the board of directors. Any number of offices may be held by the same person. The officers shall be elected by the board of directors and shall hold office at the pleasure of such board. -12- 14 Section 2. Chairman of the Board. The chairman of the board, if there be such officer, shall, if present, preside at all meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is not a president, the chairman of the board shall, in addition, be the general manager and chief executive officer of the corporation and shall have the powers and duties prescribed in Section 3 of Article V of these bylaws. Section 3. President. Subject to such powers and duties, if any, as may be prescribed by these bylaws or the board of directors for the chairman of the board, if there be such officer, the president shall be the general manager and chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have all of the powers and shall perform all of the duties which are ordinarily inherent in the office of the president, and he shall have such further powers and shall perform such further duties as may be prescribed for him by the board of directors. Section 4. Vice Presidents. In the absence or disability or refusal to act of the president, the vice presidents in order of their rank as fixed by the board of directors, or, if not ranked, the vice president designated by the president or the board of directors, shall perform all of the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them, respectively, by the board of directors or the bylaws. Section 5. Secretary. The secretary shall keep or cause to be kept at the principal executive office of the corporation or such other place as the board of directors may order, a book of minutes of all proceedings of the shareholders, the board of directors and committees of the board, with the time and place of holding, whether regular or special, and if special how authorized, the notice thereof given, the names of those present at directors' and committee meetings, and the number of shares present or represented at shareholders' meetings. The secretary shall keep or cause to be kept at the principal executive office or at the office of the corporation's transfer agent a record of shareholders or a duplicate record of shareholders showing the names of the shareholders and their addresses, the number of shares and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. The secretary or an assistant secretary, or, if they are absent or unable or refuse to act, any other officer of the corporation, shall give or cause to be given notice of all the meetings of the shareholders, the board of directors and committees of the board required by the bylaws or by law to be given, and he shall keep the seal of the corporation, if any, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. -13- 15 Section 6. Assistant Secretary. It shall be the duty of the assistant secretaries to assist the secretary in the performance of his duties and generally to perform such other duties as may be delegated to them by the board of directors. Section 7. Treasurer. The treasurer shall be the chief financial officer of the corporation and shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of account of the corporation. He shall receive and deposit all moneys and other valuables belonging to the corporation in the name and to the credit of the corporation and shall disburse the same only in such manner as the board of directors or the appropriate officers of the corporation may from time to time determine, shall render to the president and the board of directors, whenever they request it, an account of all his transactions as treasurer and of the financial condition of the corporation, and shall perform such further duties as the board of directors may require. Section 8. Assistant Treasurer. It shall be the duty of the assistant treasurers to assist the treasurer in the performance of his duties and generally to perform such other duties as may be delegated to them by the board of directors. ARTICLE VI Miscellaneous Section 1. Record Date. The board of directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion, or exchange of shares. The record date so fixed shall be not more than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided by statute or in the articles of incorporation or bylaws. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. -14- 16 (b) The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given. (c) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later. Section 2. Inspection of Corporate Records. The accounting books and records, the record of shareholders, and minutes of proceedings of the shareholders and the board and committees of the board of this corporation and any subsidiary of this corporation shall be open to inspection upon the written demand on the corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the corporation and its subsidiary corporations. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 3. Certificates for Shares. Every holder of shares in the corporation shall be entitled to have a certificate signed in the name of the corporation by the chairman or vice chairman of the board or the president or a vice president and by the treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. Any such certificate shall contain such legend or other statement as may be required by the California Corporate Securities Law of 1968, the Federal securities laws, and any agreement between the corporation and the issuee thereof. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the board of directors or the bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment thereof. Section 4. Representation of Shares of Other Corporations. The president or any vice president or the secretary or any assistant secretary of this corporation is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any -15- 17 other corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 5. Inspection of Bylaws. The corporation shall keep in its principal executive office in California, or if its principal executive office is not in California, then at its principal business office in California (or otherwise provide upon written request of any shareholder), the original or a copy of the bylaws as amended to date, certified by the secretary, which shall be open to inspection by the shareholders at all reasonable times during office hours. Section 6. Construction and Definitions. Unless the context otherwise requires, the general provisions, rules of construction and definitions contained in the General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VII Amendments Section 1. Amendment by Shareholders. New bylaws may be adopted or these bylaws may be amended or repealed by the affirmative vote or written consent of a majority of the outstanding shares entitled to vote, except as otherwise provided by law or by the articles of incorporation or these bylaws. Section 2. Amendment by Board of Directors. Subject to the right of shareholders as provided in Section 1 of this Article to adopt, amend or repeal bylaws, and except as otherwise provided by law or by the articles of incorporation, bylaws (other than a bylaw or amendment thereof changing the authorized maximum or minimum number of directors) may be adopted, amended or repealed by the board of directors. -16- 18 ARTICLE VIII Annual and Other Reports Section 1. Annual Report to Shareholders. (a) So long as the corporation shall have fewer than one hundred shareholders of record (determined as provided in section 605 of the General Corporation Law), the requirement of section 1501 (a) of said law that an annual report be sent to the shareholders is expressly waived. (b) Notwithstanding subdivision (a) of this Section, the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of a fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, the financial statements required by section 1501 (a) of the General Corporation Law. Section 2. Request for Financial Statements. A shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of the corporation may make a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the current fiscal year ended more than thirty (30) days prior to the date of the request and a balance sheet of the corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the statements referred to in section 1501 (a) of the General Corporation Law for the last fiscal year. The corporation shall deliver or mail the statements to the person making the request within thirty (30) days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the corporation for twelve (12) months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The quarterly income statements and balance sheets referred to in this Section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that such financial statements were prepared without audit from the books and records of the corporation. -17- EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.1 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT ("AGREEMENT") is made as of this _____ day of April, 1997, by and between 3Dfx Interactive, Inc., a California corporation (the "COMPANY"), and __________________ ("INDEMNITEE"). WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers, directors, employees and agents of the Company may not be willing to continue to serve in such capacities without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. (a) Third Party Proceedings. The Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that (i) Indemnitee did not act in good faith and in a manner 2 which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its shareholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its shareholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine. 2. EXPENSES; INDEMNIFICATION PROCEDURE. (a) Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action or proceeding which amounts are not considered expenses which can be advanced). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within forty-five (45) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as reasonably practicable of any claim made against Indemnitee for which indemnification will or will be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. -2- 3 (c) Procedure. Any indemnification and advances provided for in Section 1 and this Section 2 shall be made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Restated Articles of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 2(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such -3- 4 defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 3. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. (a) Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation or Bylaws (as now or hereafter in effect) or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a California corporation to indemnify a member of its Board of Directors, an officer or other corporate agent, such changes shall be ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its Board of Directors, an officer or other corporate agent, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation or Bylaws (as now or hereafter in effect), any agreement, any vote of shareholders or disinterested Directors, the Corporation Law of the State of California, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. 4. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 5. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 6. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors -4- 5 of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees or agents, if Indemnitee is not an officer or director but is a key employee or agent. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 7. SEVERABILITY. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 8. EXCEPTIONS. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions or transactions from which a director may not be relieved of liability under the California General Corporation Law; or (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 317 of the California Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts -5- 6 paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. CONSTRUCTION OF CERTAIN PHRASES. (a) For purposes of this Agreement, references to the "Company" shall include, in addition to Pete's Brewing Company, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. 10. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 11. BINDING EFFECT; SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, -6- 7 officer, employee or agent (as applicable) of the Company or of any other enterprise at the Company's request. 12. ATTORNEYS' FEES. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 13. NOTICE. All notices, requests, demands and other communications under this Agreement shall be in writing, shall be effective upon receipt, and shall be delivered by Federal Express or a similar courier, personal delivery, certified or registered air mail, or by facsimile transmission. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 14. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. 15. CHOICE OF LAW. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of California, as applied to contracts between California residents entered into and to be performed entirely within California. 16. SEVERABILITY. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. SUBROGATION. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable to corporation effectively to bring suit to enforce such rights. -7- 8 18. CONTINUATION OF INDEMNIFICATION. All agreements and obligations of the Company contained herein shall continue during the period that Indemnitee is a director, officer or agent of the Company and shall continue thereafter so long as Indemnitee shall be subject to any possible claim or threatened, pending or completed action, suit or proceeding, whether civil, criminal, arbitrational, administrative or investigative, by reason of the fact that Indemnitee was serving in the capacity referred to herein. 19. AMENDMENT AND TERMINATION. Subject to Section 17, no amendment, modification, termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 20. INTEGRATION AND ENTIRE AGREEMENT. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. NO CONSTRUCTION AS EMPLOYMENT AGREEMENT. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. -8- 9 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. 3Dfx INTERACTIVE, INC. By: __________________________________ Title: _______________________________ Address: 4435 Fortran Drive San Jose, California 94089 AGREED TO AND ACCEPTED: INDEMNITEE: __________________________________ __________________________________ __________________________________ (address) -9- EX-10.5 7 LEASE AGREEMENT DATED AUGUST 7, 1996 1 EXHIBIT 10.5 LEASE AGREEMENT 1. Parties. This Lease, dated for reference purposes only, August 7, 1996, is made by and between South Bay/Fortran, a California limited partnership, ("Landlord"), and 3Dfx Interactive, a California corporation ("Tenant."). 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, upon the terms and conditions hereinafter set forth, those certain premises (the "Premises") presently known, as of the date of this Lease, as 4435 Fortran Court, situated in the City of San Jose, County of Santa Clara, State of California, described as follows: for purposes of this Lease, the rentable square footage area of the Building shall be deemed to be approximately seventy-seven thousand eight hundred five (77,805) square feet (the "Building"), as shown cross-hatched on the site plan (the "Site Plan") attached hereto as Exhibit ~An. The Building is located on a larger parcel (the "Parcel") containing other buildings (the "Buildings") as shown on the Site Plan, which Parcel is described in Exhibit "B" attached hereto, In the event Landlord subdivides the Parcel in the future into two (2) or more legal parcels, the term "Parcel" shall thereafter refer to the legal parcel on which the Premise are located. Landlord shall not be required to make any alterations, additions or improvements to the Premises and the Premises shall be leased to Tenant in an "as-is" condition, except Landlord shall complete, at Landlord's expense, minor, previously planned, structural improvements and modifications required by the Americans with Disabilities Act (ADA) with regard to the existing Premises. Landlord shall not be responsible to pay or the cost of any improvements required to comply with ADA which is a result of any work of improvement to the Premises initiated or completed by Tenant. If Landlord's Work is not completed prior to Commencement Date, Tenant shall cooperate with Landlord and Landlord's contractor in the performance of Landlord's Work. To the extent Landlord's Work interferes with Tenant's use of the Premises, the Monthly Installment of rent shall be reduced during the period of such interference in proportion to the square footage of the area of the Premises which is not usable by Tenant during the performance of Landlord's Work. 3. Term. The term of this Lease ("Lease Term") shall be for ten (10) years, commencing on the earlier of (i) May 1, 1997 or (ii) the date of termination of the existing lease between Landlord and Reply Corporation (the "Commencement Date"), and ending ten (10) years thereafter, unless sooner terminated pursuant to any provision hereof. Notwithstanding said scheduled Commencement Date, If for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder, but in such case Tenant shall not be obligated to pay rent until possession of the Premises is tendered to Tenant and the commencement and termination dates of this Lease shall be revised to conform to the date of Landlord's delivery of possession. 2 4. Rent. A. Time of Payment. Tenant shall pay to Landlord as rent for the Premises the respective sums specified in Paragraphs 4.B and 4.C below (the "Monthly Installment".) each month in advance on the first day of each calendar month, without deduction or offset, prior notice or demand, commencing on the Commencement Date and continuing through the term of this Lease, together with such additional rents as are payable by Tenant to Landlord under the terms of this Lease. The Monthly Installment for any period during the Lease Term which; period is less than one (1) full month shall be a prorate portion of the Monthly Installment based upon a thirty (30) day month. B. Monthly Installment. The initial Monthly Installment of rent payable each month during the first (1st) through the twenty-fourth (24th) months of the Lease Term shall be the sum of Seventy Thousand Twenty-five and no/100ths Dollars ($70,025.00) per month. C. Rental Adjustments. The Monthly Installment of rent payable each month shall increase during the Lease Term as follows: (a) Commencing on the twenty-fifth (25th) month of the Lease Term and continuing through the forty-eighth (48th) month of the Lease Term, the Monthly Installment of rent payable each month shall be Seventy-Seven Thousand Eight Hundred Five and no/100ths Dollars ($77,805.00). (b) Commencing on the forty-ninth (49th) month of the Lease Term and continuing through the seventy-second (72nd) month of the Lease Term, the Monthly Installment of rent payable each month shall be Eighty-five Thousand Five Hundred Eighty-six and no/100ths Dollars ($85,586.00). (c) Commencing on the seventy-third (73rd) month of the Lease Term and continuing through the ninety-sixth (96th) month, the Monthly Installment of rent payable each month shall be Ninety-three Thousand Three Hundred Sixty-six and no/100ths Dollars ($93,366.00). (d) Commencing on the ninety-seventh month (97th) and continuing through the one hundred and twentieth (120th) month, the Monthly Installment of rent payable each month shall be One Hundred One Thousand One Hundred Forty-seven and no/100ths Dollars ($101,147.00). D. Late Charge. Tenant acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any -2- 3 installment of rent or any other sum due from Tenant shall not be received by Landlord within ten (10) days after such amount shall be due, Tenant shall pay to Landlord, as additional rent, a late charge equal to five percent (5%) or such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. E. Additional Rent. All taxes, insurance premiums, Common Area Charges, late charges, costs and expenses which Tenant is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Tenant's failure to pay such amounts, and all reasonable damages, costs and attorneys, fees and expenses which Landlord may incur by reason of any default of Tenant or failure on Tenant's part to comply with the terms of this Lease, shall be deemed to be additional rent ("Additional Rent") and shall be paid in addition to the Monthly Installment of rent, and, in the event of nonpayment of the Monthly Installment of rent. F. Place of Payment. Rent shall be payable in lawful money of the United States of America to Landlord at 511 Division Street, Campbell CA, or to such other person(s) or at such other place(s) as Landlord may designate in writing. G. Advance Payment. Concurrently with the execution of this Lease, Tenant shall pay to Landlord the sum of Seventy Thousand Twenty-Five Dollars ($70,025.00) to be applied to the Monthly Installment of rent first accruing under this Lease. 5. Security Deposit. Tenant shall deposit the sum of Seventy Thousand Twenty-Five Dollars ($70,025.00) (the "Security Deposit") upon execution of this Lease, to secure the faithful performance by Tenant of each term, covenant and condition of this Lease. On each date that the Monthly Installment of rent is increased pursuant to Paragraph 4.C above, Tenant shall deposit with Landlord an additional sum to increase the Security Deposit to an amount equal to the Monthly Installment of rent then payable under the Lease. If Tenant shall at any time fail to make any payment or fail to keep or perform any term, covenant or condition on its part to be made or performed or kept under this Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation under this Lease, use, apply or retain the whole or any part of the Security Deposit (A) to the extent of any sum due to Landlord; (B) to make any required payment on Tenant's behalf; or (C) to compensate Landlord for any loss, damages, attorneys' fees or expense sustained by Landlord due to Tenant's default. In such event, Tenant shall, within five (5) days of written demand by Landlord, remit to Landlord sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its general funds. Should Tenant comply with all the terms, covenants, and conditions of this Lease and at the end of the term of this Lease leave the Premises in the condition required by this Lease, then said Security Deposit, less any sums owing to Landlord, shall be returned to Tenant within thirty (30) days after the termination of this Lease and vacancy of the Premises by Tenant. -3- 4 6. Use of Premises. Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, sales, manufacturing, assembly, distribution and warehousing of electronics materials and for no other purpose. Tenant shall indemnify, protect, defend, and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any applicable law. Tenant shall not commit or suffer to be committed, any waste upon the Premises, or any nuisance, or other acts or things which may disturb the quiet enjoyment of any other tenant in the buildings adjacent to the Premises, or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purpose, or place any loads upon the floor, walls or ceiling which endanger the structure, or place any harmful liquids in the drainage system of the Building. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the Building proper, except in trash containers placed inside exterior enclosures designated for that purpose by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper. Tenant shall strictly comply with the provisions of Paragraph 39 below. 7. Taxes and Assessments. A. Tenant's Property. Tenant shall pay before delinquency any and all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture, appliances and persona' property installed or located on or within the Premises. Tenant shall petition the applicable taxing authority to cause said fixtures, equipment, furnishings, furniture, appliances and personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant's said personal property shall be assessed with Landlord's real property, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's property. B. Property Taxes. Tenant shall pay, as additional rent, its Pro Rata Share (as defined below) of all Property Taxes levied or assessed with respect to the land comprising the Parcel and with respect to all buildings and improvements located on the Parcel which become due or accrue during the term of this Lease. Tenant shall pay such Property Taxes to Landlord within thirty (30) days after receipt of billing. Provided that Landlord bills Tenant at least thirty (30) days prior to the delinquency date of such Property Taxes, Tenant shall pay such Property Taxes to Landlord at least ten (10) days prior to the delinquency date, and if Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for all interest, late fees and penalties that the taxing authority charges Landlord. In the event Landlord's mortgagee requires an impound for Property Taxes, then on the first day of each month during the Lease Term, Tenant shall pay Landlord one twelfth (1/12) of its annual share of such Property Taxes. Tenant's liability hereunder shall be prorated to reflect the Commencement and termination dates of this Lease. If Landlord elects to pay any assessment imposed against the Premises or the Building in full (which assessment could have been paid in -4- 5 installments), the amount of any such~ assessment to be included in the calculation of Tenant's Pro Rata Share of Property Taxes shall be limited to the installments of the principal and interest which would have become due during the Lease Term had Landlord elected to pay such assessment installments over the longest period available to Landlord. As used in this Lease, the term "Tenant's Pro Rata Share" shall mean a fraction, expressed as a percentage, the numerator of which is the number of square feet of floor space contained in the Premises and the denominator of which is the number of square feet of floor space contained in all of the Buildings located on the Parcel. As of the Commencement Date, Tenant's Pro Rata Share is twenty-five and eighty-five hundredths percent (25.85~). For the purpose of this Lease, "Property Taxes" means and includes all taxes, assessments (including, but not limited to, assessments for public improvements or benefits), taxes based on vehicles, utilizing parking areas, taxes based or measured by the rent paid, payable or received under this Lease, taxes on the value, use, or occupancy of the Premises, the Buildings and/or the Parcel, Environmental Surcharges, and all other governmental impositions and charges of every kind and nature whatsoever, whether or not customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing which, at any time during the Lease Term, shall be applicable to the Premises, the Buildings and/or the Parcel or assessed, levied or imposed upon the Premises, the Buildings e: d/or the Parcel, or become due and payable and a lien or charge upon the Premises, the Buildings and/or the Parcel, or any part thereof, under or by virtue of any present or future laws, statutes, ordinances, regulations or other requirements of any governmental authority whatsoever. The term "Environmental Surcharges" shall mean and include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, the Federal Environmental protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder or any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments, or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy. The term "Property Taxes" shall not include any federal, state or local net income, estate, or inheritance tax imposed on Landlord. C. Proposition 13 Limitation. If, during the first three (3) years of the Lease Term, Landlord voluntarily sells or transfers ownership of the Premises, and if such sale or transfer causes Property Taxes to be increased to such an extent that Tenant's Pro Rata Share of Property Taxes would exceed $1.20 per square foot of rentable area of the Premises per year, then in such case, and only in such case, Tenant shall not be obligated to pay that portion of Tenant's Pro Rata Share of Property Taxes which (i) exceeds $1.20 per square foot of rentable area of the Premises per year, and (ii) is attributable to the increase in Property Taxes caused by such sale or transfer; provided, however, that the foregoing limitation on Tenant's obligation to pay Property Taxes shall not apply to increases in Property Taxes resulting from (i) a transfer caused by foreclosure (whether resulting from a judicial foreclosure, non-judicial foreclosure or deed-in-lieu thereof) of a first -5- 6 mortgage or first deed of trust encumbering the Premises or (ii) any sale or transfer occurring after the first three (3) years of the Lease Term. D. Other Taxes. Tenant shall, as additional rent, pay or reimburse Landlord for any tax based upon, allocable to, or measured by the area of the Premises or the Buildings or the Parcel; or by the rent paid, payable or received under this Lease; any tax upon or with respect to the possession, leasing, operation, any tax upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof; any privilege tax, excise tax, business and occupation tax, gross receipts tax, sales and/or use tax, water tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or Tenant with respect to the Premises; any tax upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 8. Insurance. A. Indemnity. Tenant agrees to indemnify, protect and defend Landlord against and hold Landlord harmless from any and all claims, causes of action, judgements, obligations or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), on account of, or arising out of, the operation, maintenance, use or occupancy of the Premises and all areas appurtenant thereto. This Lease is made on the express understanding that Landlord shall not be liable for, or suffer loss by reason of, injury to person or property, from whatever cause (except for negligence or willful misconduct of Landlord or its Agents), which in any way may be connected with the operation, use or occupancy of the Premises specifically including, without limitation, any liability for injury to the person or property of Tenant, its agents, officers, employees, licensees and invitees. B. Liability Insurance. Tenant shall, at Tenant's expense, obtain and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against claims and liabilities arising out of the operation, use, or occupancy of the Premises and all areas appurtenant thereto, including parking areas. Such insurance shall be in an amount of not less than Three Million Dollars ($3,000,000.00) for bodily injury or death as a result of any one occurrence and Five Hundred Thousand Dollars ($500,000.00) for damage to property as a result of any one occurrence. The insurance shall be with companies approved by Landlord, which approval Landlord agrees not to withhold unreasonably. Tenant shall deliver to Landlord, prior to possession, and at least thirty (30) days prior to the expiration thereof, a certificate of insurance evidencing the existence of the policy required hereunder and such certificate shall certify that the policy (1) names Landlord as an additional insured, (2) shall not be cancelled or altered without thirty (30) days prior written notice to Landlord, (3) insures performance of the indemnity set forth in Paragraph 8.A above, (4) the coverage is primary and any coverage by Landlord is in excess thereto and (5) contains a cross-liability endorsement. Landlord may maintain a policy or policies of comprehensive general liability insurance insuring Landlord (and such others as are designated by Landlord), against liability for personal -6- 7 injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises or the Common Area, with such limits of coverage as Landlord may from time to time determine are reasonably necessary for its protection. The cost of any such liability insurance maintained by Landlord shall be a Common Area Charge and Tenant shall pay, as Additional Rent, Tenant's Pro Rata Share of such cost to Landlord as provided in Paragraph 12 below. C. Property Insurance. Landlord shall, as a Common Area Charge, obtain and keep in force during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises and the Buildings, in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risk" insurance, plus a policy of rental income insurance in the amount of one hundred percent (100%) of twelve (12) months rent (including, without limitation, sums payable as Additional Rent), plus, at Landlord's option, flood insurance and earthquake insurance, and any other coverages which may be required from time to time by Landlord's mortgagee. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord on the Premises. The full cost of such insurance procured and maintained by Landlord shall be a Common Area Charge and Tenant shall pay, as Additional Rent, Tenant's Pro Rata Share of such cost to Landlord pursuant to Paragraph 12 below. Tenant acknowledges that such insurance procured by Landlord shall contain a deductible which reduces Tenant~s cost for such insurance and, in the event of loss or damage, Tenant shall be required to pay to Landlord the amount of such deductible. Notwithstanding the foregoing, Tenant shall not be required to pay that portion of the annual cost of earthquake insurance which exceeds forty cents (40(cent)) per $100.00 of insured value. D. Tenant's Insurance. Tenant acknowledges that the insurance to be maintained by Landlord on the Premises pursuant to Subparagraph C above will not insure any of Tenant's property. Accordingly, Tenant, at Tenant's own expense, shall maintain in full force and effect on all of its fixtures, equipment, leasehold improvements and personal property in the Premises, a policy of "All Risk" coverage insurance to the extent of at least ninety percent (90%) of their insurable value. E. Mutual Waiver of Subrogation. Tenant and Landlord hereby mutually waive their respective rights of recovery against each other of any loss of or damage to the property of either party, to the extent such loss or damage is insured by any insurance policy required to be maintained by this Lease or otherwise in force at the time of such loss or damage. Each party shall obtain any special endorsements, if required by the insurer, whereby the insurer waives its right of subrogation against the other party hereto. The provisions of this Subparagraph 8.E shall not apply in those instances in which the waiver of subrogation would cause either party's insurance coverage to be voided or otherwise made uncollectible; provided, however, if either party's insurance carrier is not willing to waive its right of subrogation or if either party's insurance carrier notifies such party that such waiver of subrogation would cause such party's insurance coverage to be voided or made uncollectible, such party shall notify the other party of such fact, in which case, the other party shall -7- 8 not be required to obtain such waiver of subrogation from its insurance carrier. Each party shall use its best efforts to obtain such waiver of subrogation from its insurance carrier. 9. Utilities. Tenant shall pay for all water, gas, light, heat, power, electricity, telephone, trash pick-up, sewer charges and all other services supplied to or consumed on the Premises, and all taxes and surcharges thereon. In addition, the cost of any utility services supplied to the Common Area or not separately metered to the Premises shall be a Common Area Charge and Tenant shall pay its share of such costs to Landlord as provided in Paragraph 12 below. Landlord shall not take any action or knowingly consent to any action by a third party which cuts-off or interrupts utility service to the Premises. 10. Repairs and Maintenance. A. Landlord's Repairs. Subject to provisions of Paragraph :6, Landlord shall (i) keep and maintain the exterior roof, structural elements and exterior walls of the Building in good order and repair and (ii) repair any defects in Landlord's Work (as defined in Paragraph 2 above), including the failure to perform Landlord's Work in compliance with applicable Laws in effect at the time of such construction. Landlord shall not, however, be required to maintain, repair or replace the interior surface of exterior walls, nor shall Landlord be required to maintain, repair or replace windows, doors, skylights or plate glass. Landlord shall have no obligation to make repairs under this Subparagraph until a reasonable time after receipt of written notice from Tenant of the need for such repairs. Tenant shall reimburse Landlord, as Additional Rent, within thirty (30) days after receipt of billing, for the cost of such repairs and maintenance which are the obligation of Landlord hereunder, provided however, that Tenant shall not be required to reimburse Landlord for the (i) cost of maintenance and repairs of the structural elements of the Building unless such maintenance or repair is required because of the negligence or willful misconduct of Tenant or its employees, agents or invitees; or (ii) any amounts paid or payable by Landlord in connection with the repair of any defects in Landlord's Work (as defined in Paragraph 2); or (iii) any cost for which Landlord is reimbursed by any third party, including, without limitation, by insurance or condemnation proceeds; or (iv) any amounts paid or payable by Landlord in connection with the repairs or maintenance necessitated by (a) negligence or willful misconduct of Landlord or its Agents; (b) Landlord's failure to perform any of the Landlord's obligations under this Lease; or (c) the occurrence of any damage or destruction or condemnation as provided in Paragraphs 16 and 17, respectively (except with respect to payment by Tenant of Tenant's Pro Rata Share of any deductible); and (v) costs pertaining to Hazardous Materials (as defined in Paragraph 39) which are not the responsibility of Tenant under Paragraph 39 of this Lease. As used herein, the term 'structural elements of the Building" shall mean and be limited to the foundation, footings, floor slab (but not flooring), structural walls, and roof structure (but not roofing or roof membrane). B. Tenant's Repairs. Except as expressly provided in Subparagraph A above, Tenant shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including without limitation, the windows, window frames, plate glass, glazing, skylights, truck doors, doors -8- 9 and all door hardware, the walls and partitions, and the electrical, plumbing, lighting, heating, ventilating and air conditioning systems and equipment in good order, condition and repair. The term "repair' shall include replacements, restorations and/or renewals when necessary as well as painting. Tenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Tenant shall, at all times during the Lease Term, have in effect a service contract for the maintenance of the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC repair and maintenance contractor approved by Landlord. The HVAC service contract shall provide for periodic inspection and servicing at least once every three (3) months during the term hereof, and Tenant shall provide Landlord with a copy of such contract and all periodic service reports. Tenant shall not be responsible for any repairs or maintenance to the Premises necessitated by (i) the negligence or willful misconduct of Landlord or its agents; (ii) the failure of Landlord to perform any of Landlord's obligations under this Lease; or (iii) the occurrence of any damage or destruction or condemnation as provided in Paragraphs 16 and 17, respectively, except as otherwise provided in Paragraph 16 below. Should Tenant fail to make repairs required of Tenant hereunder within thirty (30) days after receipt of written notice of the need thereof from Landlord to Tenant, or if such repairs cannot be made within such thirty (30) day period, then such additional time as may be necessary to make such repairs provided Tenant has commenced such repairs within the thirty (30) day period and is diligently pursuing the repairs to completion, Landlord, in addition to all other remedies available hereunder or by law and without waiving any alternative remedies, may, following written notice to Tenant, make the same, and in that event, Tenant shall reimburse Landlord as Additional Rent for the reasonable cost of such maintenance or repairs within fifteen (15) days after receipt of written demand from Landlord. Landlord shall have no maintenance or repair obligations whatsoever with respect to the Premises except as expressly provided in Paragraphs 10.A, 10.C an 11. Tenant hereby expressly waives the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Landlord as provided in Section 1942 of said Civil Code. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Buildings or the Parcel. C. Replacement of Roof Membrane and/or HVAC Equipment. Notwithstanding anything contained in Paragraph 10.A above to the contrary, if the roof membrane of the Building requires replacement during the Lease Term, then Landlord shall perform such replacement and Tenant shall pay to Landlord, within thirty (30) days after receipt of billing, as Additional Rent, a fraction of the cost of such replacement, which fraction shall have as its numerator the number of calendar months then remaining in the Lease Term at the time of such replacement and shall have as its denominator one hundred eighty (180) months. Notwithstanding anything in Subparagraph 10.B to the contrary, if any HVAC equipment requires replacement during the first year of the Lease Term, then Landlord shall perform such replacement at its sole cost and expense. If any HVAC equipment requires replacement after the first year of the Lease Term, then Tenant shall perform such replacement at its sole cost and expense. -9- 10 11. Common Area. Subject to the terms and conditions of this Lease and such rules and regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Parcel, and their respective employees, invitees and customers, and others entitled to the use thereof, have the nonexclusive right to use the access roads, parking areas and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Parcel, which areas and facilities are referred to herein as "Common Area. This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of the Common Area provided that no area located outside the Parcel shall be included within the Common Areas and provided that such changes do not adversely affect Tenant's access to or use of the Premises. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interest of the occupants of the Parcel. The rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such rules and regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy of them to Tenant. Tenant shall have the non-exclusive use of no more than three hundred (300) of the parking spaces in the Common Area as designated from time to time by Landlord. Tenant shall not at any time park or permit the parking of Tenant's trucks or other vehicles, or the trucks or other vehicles of others, adjacent to loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park or permit the parking of Tenant's vehicles or trucks, or the vehicles or trucks of Tenant's suppliers or others, in any portion of the Common Area not designated by Landlord for such use by Tenant. Tenant shall not abandon any inoperative vehicles or equipment on any portion of the Common Area. Tenant shall make no alterations, improvements or additions to the Common Area. Landlord shall operate, manage, insure, maintain and repair the Common Area in good order, condition and repair. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the reasonable business discretion of Landlord. The cost of such repair, maintenance, operation, insurance and management, including without limitation, maintenance and repair of landscaping, irrigation systems, paving, sidewalks, fences, and lighting, shall be a Common Area Charge and Tenant shall pay to Landlord its share of such costs as provided in Paragraph 12 below. 12. Common Area Charges. Tenant shall pay to Landlord, as Additional Rent, within thirty (30) days after receipt of billing but not more often than once each calendar month, an amount equal to its Pro Rata Share of the Common Area Charges as defined in Paragraphs 8.B, 8.C, 9, 11 and 13 of this Lease. Tenant acknowledges and agrees that the Common Area Charges shall include an additional three percent (31) of the actual expenditures in order to compensate Landlord for accounting, management and processing services. Tenant shall have the right to review Landlord's books and records in order to confirm that only those charges which are permitted under this Lease -10- 11 are being passed through to Tenant provided that Tenant completes such review within ninety (90) days after receipt of a billing invoice from Landlord. 13. Alterations. Tenant shall not make, or suffer to be made, any alterations, improvements or additions in, on, about or to the Premises or any part thereof, without the prior written consent of Landlord and without a valid building permit issued by the appropriate governmental authority; provided, however, Tenant may make non-structural alterations to the interior of the Premises costing less than Fifty Thousand Dollars ($50,000.00) without obtaining the prior written consent of Landlord provided that such alterations do not change the use of the Premises. As a condition to giving such consent, Landlord may require that Tenant agree to remove any such alterations, improvements or additions at the termination of this Lease, and to restore the Premises to their prior condition. Unless Landlord requires that Tenant remove any such alterations, improvement or addition, any alteration, addition or improvement to the Premises, except movable furniture and trade fixtures not affixed to the Premises, shall become the property of Landlord upon termination of the Lease and shall remain upon and be surrendered with the Premises at the termination of this Lease. Without limiting the generality of the foregoing, all heating, lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts, main and subpanels), air conditioning, partitioning, drapery, and carpet installations made by Tenant regardless of how affixed to the Premises, together with all other additions, alterations and improvements that have become an integral part of the Building, shall be and become the property of the Landlord upon termination of the Lease, and shall not be deemed trade fixtures, and shall remain upon and be surrendered with the Premises at the termination of this Lease. If, during the Lease Term, any non-structural alteration, addition or change of any sort to all or any portion of the Premises (other than the fire sprinkler system) is required by law, regulation, ordinance or order of any public agency, Tenant shall promptly make the same at its sole cost and expense. If, during the Lease Term, any structural or fire sprinkler system alteration, addition or change of any sort to all or any portion of the Premises (other than the fire sprinkler system) is required by law, regulation, ordinance or order of any public agency because of (i) Tenant's particular use or change of use of the Premises, (ii) Tenant's application for a new permit or governmental approval, or (iii) Tenant's construction or installation of leasehold improvements or trade fixtures, Tenant shall promptly make the same at its sole cost and expense. If, during the Lease Term, any structural or fire sprinkler system alteration, addition or change of any sort to all or any portion of the Premises is required by law, regulation, ordinance or order for any reason other than those described in the immediately preceding sentence, Landlord shall promptly make the same at its sole cost and expense. If, during the Lease Term, any alteration, addition or change to the Common Area is required by law, regulation, ordinance or order of any public agency, Landlord shall make the same and the cost of such alteration, addition or change shall be a Common Area Charge and Tenant shall pay its share of said cost to Landlord as provided in Paragraph 12 above. -11- 12 14. Acceptance of the Premises. By entry and taking possession of the Premises pursuant to this Lease, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Premises in their condition existing as of the date of such entry, and Tenant further accepts the tenant improvements to be constructed by Landlord, if any, as being completed in accordance with the plans and specifications for such improvements, except for punch list items. Tenant acknowledges that neither the Landlord nor Landlord's agents has made any representation or warranty as to the suitability of the Premises to the conduct of Tenant's business. Any agreements, warranties or representations not expressly contained here n shall in no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Lease. This Lease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Lease shall be effective until set forth in a writing signed by both Landlord and Tenant. 15. Default. A. Events of Default. A breach of this Lease shall exist if any of the following events (hereinafter referred to as "Event of Default") shall occur: 1. Default in the payment when due of any installment of rent or other payment required to be made by Tenant hereunder, where such default shall not have been cured within three (3) days after written notice of such default is given to Tenant; 2. Tenant's failure to perform any other term, covenant or condition contained in this Lease where such failure shall have continued for thirty (30) days after written notice of such failure is given to Tenant; provided, however, if such failure reasonably requires more than thirty (30) days to cure, Tenant shall not be deemed in default if Tenant commences to cure such failure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion; 3. Tenant's assignment of its assets for the benefit of its creditors; 4. The sequestration of, attachment of, or execution on, any substantial part of the property of Tenant or on any property essential to the conduct of Tenant's business shall have occurred and Tenant shall have failed to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; 5. Tenant or any guarantor of Tenant's obligations hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, -12- 13 insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property; 6. Tenant or any such guarantor shall take any corporate action to authorize any of the actions set forth in Clause 5 above; or 7. Any case, proceeding or other action against Tenant or any guarantor of Tenant's obligations hereunder shall be commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (i) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of forty-five (45) days. B. Remedies. Upon any Event of Default, Landlord shall have the following remedies, in addition to all ether rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: 1. Recovery of Rent. Landlord shall be entitled to keep this Lease in full force and effect (whether or not Tenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Lease, including the right to recover rent and other sums as they become due, plus interest at the Permitted Rate (as defined in Paragraph 33 below) from the due date of each installment of rent or other sum until paid. 2. Termination. Landlord may terminate this Lease by giving Tenant written notice of termination. On the giving of the notice all of Tenant's rights in the Premises and the Building and Parcel shall terminate. Upon the giving of the notice of termination, Tenant shall surrender and vacate the Premises in the condition required by Paragraph 34, and Landlord may re-enter and take possession of the Premises and all the remaining improvements or property and eject Tenant or any of Tenant's subtenants, assignees or other person or persons claiming any right under or through Tenant or eject some and not others or eject none. This Lease may also be terminated by a judgement specifically providing for termination. Any termination under this paragraph shall not release Tenant from the payment of any sum then due Landlord or from any claim for damages or rent previously accrued or then accruing against Tenant. In no event shall any one or more of the following actions by Landlord constitute a termination of this Lease: a. maintenance and preservation of the Premises; b. efforts to relet the Premises; -13- 14 c. appointment of a receiver in order to protect Landlord's interest hereunder; d. consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to provisions hereof concerning subletting and assignment or otherwise; or e. any other action by Landlord or Landlord's agents intended to mitigate the adverse effects from any breach of this Lease by Tenant. 3. Damages. In the event this Lease is terminated pursuant to Subparagraph 15.B.2 above, or otherwise, Landlord shall be entitled to damages in the following sums: a. the worth at the time of award of the unpaid rent which has been earned at the time of termination; plus b. the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus c. the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and d. any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the Premises; (ii) real estate broker's fees, advertising costs and other expenses of reletting the Premises fairly allocable to the balance of the Lease Term; (iii) costs of carrying the Premises such as taxes and insurance premiums thereon, utilities and security precautions; (iv) expenses in retaking possession of the Premises; and (v) attorneys, fees and court costs. e. The "worth at the time of award's of the amounts referred to in Subparagraphs (a) and (b) of this Paragraph, is computed by allowing interest at the Permitted Rate. The "worth at the time of award" of the amounts referred to in Subparagraph (c) of this Paragraph is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent" as used in this Paragraph shall include all sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. -14- 15 C. Landlord's Default. In the event of failure by Landlord to perform any of its obligation under this Lease, Tenant shall notify Landlord of such failure. Landlord shall have thirty (30) days within which to cure such failure or if such failure is of such a nature that it cannot be reasonably cured within said thirty (30) day period, then such additional time; as may be required to cure such failure provided Tenant has commenced to cure such failure within the thirty (30) day period and diligently pursues such cure to completion. If Landlord fails to cure or commence to cure, as the case may be, such failure within the time set forth above, then Tenant, following written notice from Tenant to Landlord, may, but shall not be obligated to, perform such obligations. Landlord shall reimburse Tenant for all reasonable costs incurred by Tenant pursuant to the previous sentence within fifteen (15) days following written demand thereof by Landlord. 16. Destruction. In the event that any portion of the Premises are destroyed or damaged by an uninsured peril, Landlord or Tenant may, upon written notice to the other, given within thirty (30) days after the occurrence of such damage destruction, elect to terminate this Lease; provided, however, that either party may, within thirty (30) days after receipt of such notice, elect to make any required repairs and/or restoration at such party's sole cost and expense, in which event this Lease shall remain in full force and effect, and the party having made such election to restore or repair shall thereafter diligently proceed with such repairs and/or restoration. In the event neither parr~ elects to terminate this Lease as provided in the foregoing sentence, then Landlord shall be deemed to have elected to restore or repair the Premises at Landlord's sole cost and expense, in which event this Lease shall remain in full force and effect and Landlord shall thereafter diligently proceed with such repairs and/or restoration. For purposes of this paragraph, the term "uninsured peril" shall not include a peril which would have been covered by Landlord if Landlord had carried the insurance required under the terms of this Lease. In the event the Premises are damaged or destroyed from any insured peril to the extent of fifty percent (50~) or more of the then replacement cost of the Premises, Landlord may, upon written notice to Tenant, given within thirty (30) days after the occurrence of such damage or destruction, elect to terminate this Lease. If Landlord does not give such notice in writing within such period, Landlord shall be deemed to have elected to rebuild or restore the Premises, in which event Landlord shall, at its expense, promptly rebuild or restore the Premises to their condition prior to the damage or destruction and Tenant shall pay to Landlord upon commencement of reconstruction the amount of any deductible from the insurance policy. In the event the Premises are damaged or destroyed from any insured peril to the extent of less than fifty percent (50~) of the then replacement cost of the Premises, Landlord shall, at Landlord's expense, promptly rebuild or restore the Premises to their condition prior to the damage or destruction and Tenant shall pay to Landlord upon commencement of reconstruction the amount of any deductible from the insurance policy. In the event that, pursuant to the foregoing provisions, Landlord is to rebuild or restore the Premises, Landlord shall, within thirty (30) days after the occurrence of such damage or destruction, -15- 16 provide Tenant with written notice of the time required for such repair or restoration. If such period is longer than two hundred one hundred eighty (180) days from the issuance of a building permit, Tenant may, within thirty (30) days after receipt of Landlord's notice, elect to terminate the Lease by giving written notice to Landlord of such election, whereupon the Lease shall immediately terminate. If the repairs or restoration are not completed within two hundred seventy (270) days after the date of the damage or destruction, Tenant may elect to terminate this Lease by giving written notice to Landlord of such election, whereupon the Lease shall immediately terminate. The period of time for Landlord to complete the repair or restoration shall be extended for delays caused by the fault or neglect of Tenant or because of acts of God, acts of publication, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of contractors or subcontractors due to such causes, or other contingencies beyond the control of Landlord. Landlord's obligation to repair or restore the Premises shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises. Landlord and Tenant shall each have the right to terminate this Lease if (a) the damage to the Premises occurs at any time during the last eighteen (18) months of the Lease Term and (b) it is estimated that the necessary repairs will take more than sixty (60) days to complete from the date of the damage. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect; provided, however, that during any period of repairs or restoration, rent and all other amounts to be paid by Tenant on account of the Premises and this Lease shall be abated in proportion to the area of the Premises rendered not reasonably suitable for the conduct of Tenant's business thereon. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2 and Section 1933, Subdivision 4 of the California Civil Code. 17. Condemnation. A. Definition of Terms. For the purposes of this Lease, the term (1) "Taking" means a taking of the Premises or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "Total Taking" means the taking of the entire Premises or so much of the Premises as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; provided, however, in no event shall a Taking of less than ten percent (101) of the Premises be deemed a Total Taking; (3) "Partial Taking" means the taking of only a portion of the Premises which does not constitute a Total Taking; (4) "Date of Taking" means the date upon which the title to the Premises, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "Award" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. -16- 17 B. Rights. The parties agree that in the event of a Taking all rights between them or in and to an Award shall be as set forth herein and Tenant shall have no right to any Award except as set forth herein. C. Total Taking. In the event of a Total Taking during the term hereof (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the Premises shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied Security Deposit; (3) Tenant shall pay Landlord any rent or charges due Landlord under the Lease, each prorated as of the Date of Taking; (4) Tenant shall receive from Landlord those portions of the Award attributable to (i) trade fixtures of Tenant, (ii) unamortized value of leasehold improvements made to the Premises by Tenant (amortized on a straight line basis over the Lease Term), and (iii) good will and moving expenses of Tenant; and (5) the remainder of the Award shall be paid to and be the property of Landlord. D. Partial Taking. In the event of a Partial Taking during the term hereof (1) the rights of Tenant under the Lease and leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (2) from and after the Date of Taking the Monthly Installment of rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of square feet contained in the Premises after the Taking and the denominator of which is the number of square feet contained in the Premises prior to the Taking; (3) Tenant's Pro Rata Share shall be recalculated as provided in Paragraph 8 above; and (4) Tenant shall receive from the Award the portions of the Award attributable to (i) trade fixtures of Tenant; (ii) unamortized value of leasehold improvements made to the Premises by Tenant; and (iii) good will of Tenant and (iv) the remainder of the Award shall be paid to and be the property of Landlord. 18. Mechanics' Lien. Tenant shall (A) pay for all labor and services performed for, materials used by or furnished to, Tenant: or any contractor employed by Tenant with respect to the Premises; (B) indemnify, defend, protect and hold Landlord and the Premises harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgements created or suffered by reason of any labor or services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (C) give notice to Landlord in writing five (5) days prior to commencement of any construction in the Premises or delivery of materials to be used in such construction; and (D) permit Landlord to post a notice of nonresponsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof. In the event Tenant is required to post an improvement bond with a public agency in connection with the above, Tenant agrees to include Landlord as an additional obligee. 19. Inspection of the Premises. Tenant shall permit Landlord and its agents to enter the Premises at any reasonable time for the purpose of inspecting the same, performing Landlord's maintenance and repair responsibilities, posting a notice of non-responsibility for alterations, additions or repairs and at any time within ninety (90) days prior to expiration of this Lease, to place -17- 18 upon the Premises, ordinary "For Lease" or "For Sale" signs. Except in the event of an emergency, Landlord agrees that prior to any such entry onto the Premises, Landlord shall (a) give at least twenty-four (24) hours notice, (b) be accompanied by an employee of Tenant at all times while on the Premises provided that Tenant provides such employee on a reasonable basis, (c) comply with Tenant's reasonable security procedures, and (d) not unreasonably interfere with Tenant's use of the Premises. 20. Compliance with Laws. Subject to the provisions Oc Paragraph 12 above, Tenant shall comply with all of the requirements of all municipal, county, state and federal authorities now in force, or which may hereafter be in force, pertaining to the use and occupancy of the Premises, and shall faithfully observe all municipal, county, state and federal law, statutes or ordinances now in force or which may hereafter be in force. The judgement of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use and occupancy of the Premises shall be conclusive of the fact that such violation by Tenant has occurred. 21. Subordination. The following provisions shall govern the relationship of this Lease to any underlying lease, mortgage or deed of trust which now or hereafter affects the Premises, the Building and/or the Parcel, or Landlord's interest or estate therein (the "Project") and any renewal, modification, consolidation, replacement, or extension thereof (a "Security Instrument"). A. Priority. This Lease is subject and subordinate to Security Instruments existing as of the Commencement Date. However, if any Lender so requires, this Lease shall become prior and superior to any such Security Instrument. Tenant agrees to promptly execute a Subordination, Non-Disturbance and Attornment Agreement with Landlord's current Lender, Comerica Bank-California, in the form attached hereto as Exhibit "E" (the "Comerica SNA"). B. Subsequent Security Instruments. At Landlord's election, this Lease shall become subject and subordinate to any Security Instrument created after the Commencement Date provided that the Lender holding such Security Instrument agrees that in the event of foreclosure of the Security Instrument in question, such Lender shall recognize the tenancy of Tenant on the terms and conditions contained in this Lease so long as Tenant is not in default under this Lease. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default and performs all of its obligations under this Lease, unless this Lease is otherwise terminated pursuant to its terms. C. Documents. Tenant shall execute any reasonable document or instrument required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily requires in connection with such agreements, including provisions that the Lender, if it succeeds to the interest of Landlord under this Lease, shall not be (i) liable for any act or omission of any prior landlord (including Landlord), (ii) subject ~o any offsets or defenses which Tenant may have against any prior landlord -18- 19 (including Landlord), (iii) bound by any rent or Additional Rent paid more than one (1) month in advance of its date due under this Lease unless the Lender receives it from Landlord, (iv) liable for any defaults on the part of Landlord occurring prior to the time that the Lender takes possession of the Premises in connection with the enforcement of its Security Instrument, (v) liable for the return of any Security Deposit unless such deposit has been delivered to Lender, or (vi) bound by any agreement or modification of the Lease made without the prior written consent of Lender. Tenant's failure to execute any such document or instrument within twenty (20) days after written demand therefor shall constitute a default by Tenant. Tenant's obligation to execute and deliver any subordination agreement to any future Lender shall be conditioned upon such Lender agreeing that in the event of foreclosure of the Security Instrument in question, such Lender shall recognize the tenancy of Tenant on the terms and conditions contained in this Lease so long as Tenant is not in default under this Lease. Landlord shall not request Tenant to execute a subordination agreement more often than two times in a twelve (12) month period. Tenant agrees that any proposed subordination agreement which is substantially similar to the Comerica SNA shall be deemed a reasonable document or instrument. D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Project; (2) to grantee or transferee designated in any deed given in lieu of foreclosure; or (3) to the lessor under any underlying ground lease should such ground lease be terminated. E. Lender. The term "Lender" shall mean (1) any beneficiary, mortgagee, secured party, or other holder of any deed of trust, mortgage, or other written security device or agreement affecting the Project; and (2) any lessor under any underlying lease under which Landlord holds its interest in the Project. 22. Holding Over. This Lease shall terminate without further notice at the expiration of the Lease Term. Any holding over by Tenant after expiration shall not constitute a renewal or extension or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after the expiration with the consent of Landlord shall be construed to be a tenancy from month to month, at one hundred fifty percent (1501) of the monthly rent for the last month of the Lease Term, and shall otherwise be on the terms and conditions herein specified insofar as applicable. 23. Notices. Any notice required or desired to be given under this Lease shall be in writing with copies directed as indicated below and shall be personally served, sent by overnight delivery service or given by mail. Any notice given personally or by overnight delivery service shall be deemed given on the date of delivery. Any notice given by mail shall be deemed to have been given when forty-eight (48) hours have elapsed from the time such notice was deposited in the United States mails, certified and postage prepaid, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this Paragraph. At this date of execution of this Lease, the address of Landlord is: -19- 20 511 Division Street Campbell CA 95008 and the address of Tenant is: 3Dfx Interactive 411 Clyde Avenue Mountain View, CA 94043 Attn: Mr. Gary Martin, CFO/VP Admin. After the Commencement Date, the address of Tenant shall be at the Premises. Either party may, by notice given in accordance with this paragraph, specify a different address for notice purposes. 24. Attorneys' Fees. In the event either party shall bring any action or legal proceeding for damages for any alleged breach of any provision of this Lease, to recover rent or possession of the Premises, to terminate this Lease, or to enforce, protect or establish any term or covenant of this Lease or right or remedy of either party, the prevailing party shall be entitled to recover as a part of such action or proceeding, reasonable attorneys' fees and court costs, including attorneys' fees and costs for appeal, as may be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgement, judgement, or otherwise. 25. Nonassignment. A. Landlord's Consent Required. Tenant's interest in this Lease is not assignable, by operation of law or otherwise, nor shall Tenant have the right to sublet the Premises, transfer any interest of Tenant therein or permit any use of the Premises by another party, without the prior written consent of Landlord to such assignment, subletting, transfer or use, which consent Landlord agrees not to withhold unreasonably subject to the provisions of Subparagraph C below. A consent to one assignment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of Landlord, terminate this Lease. Landlord's waiver or consent to any assignment or subletting hereunder shall not relieve Tenant from any obligation under this Lease unless the consent shall so provide. B. Transferee Information Required. If Tenant desires to assign its interest in this Lease or sublet the Premises, or transfer any interest of Tenant therein, or permit the use of the Premises by another party (hereinafter collectively referred to as a "Transfer"), Tenant shall give Landlord at least ten (10) days prior written notice of the proposed Transfer and of the terms of such proposed Transfer, including, but not limited to, the name and legal composition of the proposed -20- 21 transferee, a financial statement of the proposed transferee, the nature of the proposed transferee's business to be carried on in the Premises, the payment to be made or other consideration to be given to Tenant on account of the Transfer, and such other pertinent information as may be requested by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective transferee. C. Landlord's Rights. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein, or future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord. Accordingly, in the event Tenant seeks to Transfer its interest in this Lease or the Premises, Landlord shall have the following options, which may be exercised at its sole choice without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such proposed Transfer: (1) Except as otherwise set forth in Paragraph 25.D below, in the event of a proposed assignment of this Lease or a proposed sublease of the entire Premises for the remaining Lease Term, Landlord may elect to terminate this Lease effective as of the proposed effective date of such proposed assignment or sublease and release Tenant from any further liability hereunder accruing after such termination date by giving Tenant written notice of such termination within twenty (20) days after receipt by Landlord of Tenant's notice of intent to assign or sublease as provided above. If Landlord makes such election to terminate this Lease, Tenant shall surrender the Premises, in accordance with Paragraph 34, on or before the effective termination date; or (2) Landlord may consent to the proposed Transfer on the condition that Tenant agrees to pay to Landlord, as Additional Rent, fifty percent (50~) of any and all rents or other consideration (including key money) received by Tenant from the transferee by reason of such Transfer in excess of the rent payable by Tenant to Landlord under this Lease (less any brokerage commissions, tenant improvement costs, and advertising expenses incurred by Tenant in connection with the Transfer). Tenant expressly agrees that the foregoing is a reasonable condition for obtaining Landlord's consent to any Transfer; or (3) Landlord may reasonably withhold its consent to the proposed Transfer. D. Permitted Transfers. Notwithstanding the foregoing, Tenant may, without Landlord's prior written consent and without Subparagraph B above being applicable, assign its interest in the Lease or sublet the Premises or a portion thereof to (i) Tech Farm; (ii) a subsidiary, affiliate, division or corporation which controls or is controlled by or under common control with -21- 22 Tenant; (iii) a successor corporation related to Tenant by merger, consolidation, non-bankruptcy reorganization or government action; or (iv) a purchaser of substantially all of the Tenant's assets; provided that, in each instance described above, (a) the transferee (other than in the case of a sublease) assumes the obligations of the Tenant under this Lease in a written instrument delivered to Landlord; (b) the transferor tenant remains liable as a primary obligor for the obligations of Tenant under this Lease; and provided, further, in the case of (iii) and (iv) above, the tangible net worth (determined in accordance with generally accepted accounting principles) of the transferee tenant is no less than Tenant's tangible net worth immediately prior to the date of such Transfer. 26. Successors. The covenants and agreements contained in this Lease shall inure to the benefit of and be binding on the parties hereto and on their respective heirs, successors and assigns (to the extent the Lease is assignable). 27. Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been furnished to Tenant, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure. 28. Landlord Loan or Sale. Tenant agrees promptly following request by Landlord to (A) execute and deliver to Landlord any documents, including estoppel certificates presented to Tenant by Landlord, (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, specifying such modification and certifying that the Lease as so modified is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant~s knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults, if any, that are claimed, and (iii) evidencing the status of the Lease as may be required either by a lender making a loan to Landlord to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord and (B) to deliver to Landlord the financial statement of Tenant with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the last completed fiscal year all prepared in accordance with generally accepted accounting principles consistently applied. Landlord agrees to sign a confidentiality agreement with respect to Tenant's financial statements whereby none of the information contained in the statements can be released to any person or entity without first obtaining Tenant's consent and such person or entity signs a similar confidential agreement, provided, however, Landlord can release such information to its lender or potential lender to any respective purchaser of the Premises provided such person signs a similar confidentiality agreement. If Tenant becomes a public company, the financial statements filed with the SEC as part of a 10Q or 10K shall satisfy the foregoing requirement for delivery of a financial statement. Tenant's failure to deliver an estoppel certificate promptly following such request shall be an Event of Default under this Lease. Landlord shall not request Tenant to execute an estoppel certificate more often than twice in any twelve (12) month period. -22- 23 29. Surrender of Lease Not Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Landlord of any or all such subleases or subtenants. 30. Waiver. The waiver by Landlord or Tenant of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other covenant or condition herein contained. 31. General. A. Captions. The captions and paragraph headings used in this Lease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this Lease, or be used to interpret specific sections. The word(s) enclosed in quotation marks shall be construed as defined terms for purposes of this Lease. As used in this Lease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. B. Definition of Landlord. The term "Landlord" as used in this Lease, so far as the covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises, and in the event of any transfer or transfers of the title of such fee, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall after the date of such transfer or conveyance be freed and relieved of all liability with respect to performance of any covenants or obligations on the part of Landlord contained in this Lease, thereafter to be performed; provided that (i) any funds in the hands of Landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and (ii) the grantee assumes in writing the obligations of Landlord under this Lease to be performed after the date of the transfer or conveyance. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject as aforesaid, be binding upon each Landlord, its heirs, personal representatives, successors and assigns only during its respective period of ownership. C. Time of Essence. Time is of the essence for the performance of each term, covenant and condition of this Lease. D. Severability. In case any one or more of the provisions contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Lease shall be construed and enforced in accordance with the laws of the State of California. -23- 24 E. Joint and Several Liability. If Tenant is more than one person or entity, each such person or entity shall be jointly and severally liable for the obligations of Tenant hereunder. F. Law. The term "law" shall mean any judicial decision, statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Lease or the Premises or both, in effect at the Commencement Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., board of fire examiners, public utility or special district). G. Agent. As used herein the term "Agent" shall mean, with respect to either Landlord or Tenant, its respective agents, employees, contractors (and their subcontractors), and invitees (and in the case of Tenant, its subtenants). 32. Sign. Tenant shall not place or permit to be placed any sign or decoration on the Parcel or the exterior of the Building without the prior written consent of Landlord. Tenant, upon written notice by Landlord, shall immediately remove any sign or decoration that Tenant has placed or permitted to be placed on the land or the exterior of the Building without the prior written consent of Landlord, and if Tenant fails to so remove such sign or decoration within five (5) days after Landlord's written notice, Landlord may enter upon the Premises and remove said sign or decoration and Tenant agrees to pay Landlord, as additional rent upon demand, the cost of such removal. At the termination of this Lease, Tenant shall remove any sign which it has placed on the Parcel or Building and shall repair any damage caused by the installation or removal of such sign. Notwithstanding the foregoing, Tenant may; at its sole cost and expense, install its sign on the monument located on the Parcel in front of the building provided Tenant obtains all necessary governmental permits and complies with all governmental ordinances. 33. Interest on Past Due Obligations. Any Monthly Installment of rent or any other sum due from Tenant under this Lease which is received by Landlord after the date the same is due shall bear interest from said due date until paid, at an annual rate equal to the lesser of (the "Permitted Rate"): (1) ten percent (10%); or (2) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Section 13 and 13 (a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. Payment of such interest shall not excuse or cure any default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 34. Surrender of the Premises. On the last day of the term hereof, or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in their condition existing as of the Commencement Date of this Lease, ordinary wear and tear, fire or other casualty, and damage from the acts of God excepted, with the air conditioning and heating equipment serviced and repaired by a reputable and licensed service firm. Tenant shall remove all of Tenant's personal -24- 25 property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Tenant. Tenant, at its sole cost, shall repair any damage to the Premises caused by the removal of Tenant's personal property, machinery and equipment, which repair shall include, without limitation, the patching and filling of holes and repair of structural damage. If the Premises are not so surrendered at the termination of this Lease, Tenant shall undemnify, defend, protect and hold Landlord harmless from and against loss or liability resulting from delay by Tenant in so surrendering the Premises including without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 35. Authority. The undersigned parties hereby warrant that they have proper authority and are empowered to execute this Lease on behalf of Landlord and Tenant, respectively. 36. Public Record. This Lease is made subject to all matters of public record affecting title to the property of which the Premises are a part. 37. Brokers. Landlord and Tenant each represent and warrant to the other party that it has solely dealt with Richard B. Flynn and Grubb & Ellis Commercial Real Estate respecting this transaction. Landlord shall pay a real estate commission to Grubb & Ellis pursuant to the terms of a separate agreement. Each party agrees to indemnify and hold the other harmless from and against any brokerage commission or fee, obligation claim, damage (including attorneys' fees) paid or incurred respecting any broker claim (other than Grubb & Ellis) claiming through such party or with which/whom such party has dealt. It is hereby acknowledged that one or more of Landlord's partners may be real estate brokers. 38. Limitation on Landlord's Liability. Tenant, for itself and its successors and assigns (to the extent this Lease is assignable), hereby agrees that in the event of any actual, or alleged, breach or default by Landlord under this Lease that: A) If, as a consequence of a default by Landlord under this Lease, Tenant recovers a money judgment against Landlord, such judgment shall be satisfied only with the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Parcel and/or the Buildings, and out of rent or other income from such property, and out of any insurance proceeds, and out of cash proceeds received by Landlord from the prior sale or other disposition of all or any part of Landlord's right, title or interest in the Parcel and/or the Buildings and no partner or officer of any partner of Landlord shall be liable for any deficiency. B) No partner or officer of any partner of Landlord shall be sued or named as a party in a suit or action (except as may be necessary to secure jurisdiction of the partnership); C) No service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); -25- 26 D) No partner of Landlord shall be required to answer or otherwise plead to any service of process; E) No judgment will be taken against any partner of Landlord; F) Any judgment taken against any partner of Landlord may be vacated and set aside at any time nunc pro tune; G) No writ of execution will ever be levied-against the assets of any partner of Landlord; H) The covenants and agreements of Tenant set forth in this Section 38 shall be enforceable by Landlord and any partner of Landlord. 39. Hazardous Material. A. Definitions. As used herein, the term "Hazardous Material" shall mean any substance: (i) the presence of which requires investigation or remediation under any federal, state or local statutes, regulation, ordinance, order, action, policy or common law; (ii) which is or becomes defined "hazardous waste," "hazardous substance," pollutant or contaminant under any federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.) and/or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.); (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic, or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency, or instrumentality of the United States, the State of California or any political subdivision thereof; (iv) the presence of which on the Premises causes or threatens to cause a nuisance upon the Premises or to adjacent properties or poses or threatens to pose a hazard to the health or safety of persons on or about the Premises; (v) the presence of which on adjacent properties could constitute a trespass to Landlord or Tenant; (vi) without limitation which contains gasoline, diesel fuel, or other petroleum hydrocarbons; (vii) without limitation which contains polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde foam insulation; or (viii) without limitation radon gas. B. Landlord's Indemnity. Landlord shall indemnify, defend, protect and hold Tenant harmless from and against all liabilities, claims, penalties, fines, response costs and other expenses (including, but limited to, reasonable attorneys, fees and consultants, fees and costs) arising out of, resulting from, or caused by any Hazardous Material used, generated, discharged, transported to or from, stored or disposed of by Landlord or its Agents in, on, under, over, through or about the Premises and/or the surrounding real property. -26- 27 C. Permitted Use. Subject to the compliance by Tenant with the provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be permitted to use and store on the Premises those Hazardous Materials listed in EXHIBIT "C" attached hereto in the quantities attached set forth in EXHIBIT "C". Tenant shall also be permitted to use and store on the Premises standard office supplies in such quantities used in the normal course of general office use without complying with the provisions of Subparagraph D below. D. Hazardous Materials Management Plan. Prior to Tenant using, handling, transporting or storing any Hazardous Material at or about the Premises (including, without limitation, those listed in EXHIBIT "C"), Tenant shall submit to Landlord a Hazardous Materials Management Plan ("HMMP") for Landlord's review and approval, which approval shall not be unreasonably withheld. The HMMP shall describe: (i) the quantities of each material to be used, (ii) the purpose for which each material is to be used, (iii) the method of storage of each material, (iv) the method of transporting each material to and from the Premises and within the Premises, (v) the methods Tenant will employ to monitor the use of the material and to detect any leaks or potential hazards, and (vi) any other information any department of any governmental entity (city, state or federal) requires prior to the issuance of any required permit for the Premises or during Tenant's occupancy of the Premises. Landlord may, but shall have no obligation to review and approve the foregoing information and HMO, and such review and approval or failure to review and approve shall not act as an estoppel or otherwise waive Landlord's rights under this Lease or relieve Tenant of its obligations under this Lease. If Landlord determines in good faith by inspection of the Premises or review of the HMMP that the methods in use or described by Tenant do not meet standard industry practices to prevent or eliminate the existence of environmental hazards, then Tenant shall not use, handle, transport, or store such Hazardous Materials at or about the Premises unless and until such methods are upgraded to standard industry practices and added to an approved HMMP. Once approved by Landlord, Tenant shall strictly comply with the HMMP and shall not change its use, operations or procedures with respect to Hazardous Materials without submitting an amended HMMP for Landlord's review and approval as provided above. E. Use Restriction. Except as specifically allowed in Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to be used, stored, generated, discharged, transported to or from, or disposed of in or about the Premises, or any other land or improvements in the vicinity of the Premises. Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all Laws relating to the storage, use, generation, transport, discharge and disposal by Tenant or its Agents of any Hazardous Material. If the presence of any Hazardous Material on the Premises caused or permitted by Tenant or its Agents results in contamination of the Premises or any soil, air, ground or surface waters under, through, over, on, in or about the Premises, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and/or the surrounding real property to the condition existing prior to the appearance of such Hazardous Material. -27- 28 F. Tenant Indemnity. Tenant shall defend, protect, hold harmless and indemnify Landlord and its Agents and Lenders with respect to all actions, claims, losses (including, diminution in value of the Premises), fines, penalties, fees, (including, but not limited to, reasonable attorneys' and consultants' fees and costs) costs, damages, liabilities, remediation costs, investigation costs, response costs and other expenses arising out of, resulting from, or caused by any Hazardous Material used, generated discharged, transported to or from, stored, or disposed of by Tenant or its Agents in, on, under, over, through or about the Premises and/or the surrounding real property. Tenant shall not suffer any lien to be recorded against the Premises as a consequence for the disposal of any Hazardous Material on the Premises by Tenant or its Agents, including any so called state, federal or local "super fund" lien related to the "clean up" of any Hazardous Material in, over, on, under through, or about the Premises. G. Compliance. Tenant shall immediately notify Landlord of any inquiry, test, investigation, enforcement proceeding by or against Tenant or the Premises concerning any Hazardous Material. Subject to compliance with applicable Laws, any remediation plan prepared by or on behalf of Tenant must be submitted to Landlord prior to conducting any work pursuant to such plan and prior to submittal to any applicable government authority and shall be subject to Landlord's consent. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right to negotiate, defend, approve and appeal any action taken or order issued with regard to any Hazardous Material by any applicable governmental authority. H. Assignment and Subletting. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee's or subtenants' anticipated use of the Premises involves the storage, generation, discharge, transport, use or disposal of any Hazardous Material not permitted under Subparagraph C above; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender, or governmental authority to "clean up" or remediate any Hazardous Material and has failed to promptly do so; (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, generation, discharge, transport, disposal or storage of any material amount of Hazardous Material; provided that (ii) and (iii) will not apply in the case of a Fortune 500 Company. I. Surrender. Upon the expiration or earlier termination of the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the Premises that Tenant or its Agents introduced to the Premises. If Tenant fails to so surrender the Premises, Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all damages resulting from Tenant's failure to surrender the Premises as required by this Paragraph, including, without limitation, any actions, claims, losses, liabilities, fees (including, but not limited to, reasonable attorneys' fees and consultants' fees and costs), fines, costs, penalties, or damages in connection with the condition of the Premises including, without limitation, damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or rental value of the Premises by reason of the existence of any -28- 29 Hazardous Materials in, on, over, under, through or around the Premises as the direct result of the acts or omissions of Tenant or its Agents. J. Right to Appoint Consultant. Landlord shall have the right to appoint a consultant to conduct an investigation to determine whether any Hazardous Material is being used, generated, discharged, transported to or from, stored or disposed of in, on, over, through, or about the Premises, in compliance with the approved HMMP and all applicable Laws. If Tenant has violated any Law or covenant in this Lease regarding the use, storage or disposal of Hazardous Materials on or about the Premises, Tenant shall reimburse Landlord for the cost of such investigation. Tenant, at its expense, shall comply with all reasonable recommendations of the consultant required to conform Tenant's use, storage or disposal of Hazardous Materials to the requirements of applicable Law or to fulfill the obligations of Tenant hereunder. K. Holding Over. If any action of any kind is required to be taken by any governmental authority to clean-up, remove, remediate or monitor Hazardous Material (the presence of which is the result of the acts or omissions of Tenant or its Agents) and such action is not completed prior to the expiration or earlier termination of the Lease, Tenant shall be deemed to have impermissibly held over until such time as such required action is completed, and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation, damages occasioned by the inability to re-let the Premises or a reduction of the fair market and/or rental value of the Premises. L. Existing Environmental Reports. Tenant hereby acknowledges that it has received, read and reviewed the reports and test results described in Exhibit "D" attached hereto and made a part hereof (the "Existing Environmental Reports"). M. Provisions Survive Termination. The provisions of this Paragraph 39 shall survive the expiration or termination of this Lease. N. Controlling Provisions. The provisions of this Paragraph 39 are intended to govern the rights and liabilities of the Landlord and Tenant hereunder respecting Hazardous Materials to the exclusion of any other provisions in this Lease that might otherwise be deemed applicable. The provisions of this Paragraph 39 shall be controlling with respect to any provisions in this Lease that are inconsistent with this Paragraph 39. 40. Quiet Enjoyment. Landlord covenants that Tenant upon performing the terms, conditions and covenants of this Lease shall have the peaceful, quiet, possession, use and enjoyment of the Premises without interference on the part of Landlord or any party claiming by, through, or under Landlord and Landlord shall defend Tenant in such peaceful and quiet possession, use and enjoyment of the Premises against any such claims. -29- 30 IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. LANDLORD: TENANT: SOUTH BAY/FORTRAN, 3Dfx INTERACTIVE, a California limited partnership a California corporation SBC&D CO., INC., By: ______________________________ a California corporation Title: ___________________________ By: ______________________________ Date: ____________________________ Name: ____________________________ Title: ___________________________ Date: ____________________________ -30- 31 EXHIBIT "A" [description?] -31- 32 EXHIBIT "B" LEGAL DESCRIPTION: All that real property situate in the City of San Jose, County of Santa Clara, State of California, described as follows: Beginning at the Southwesterly corner of that certain 31.74 acre tract of land described in the deed from The first National Bank of San Jose, a corporation, to F. W. Zanker and Curtner Zanker, dated May 5, 1939, recorded May 8, 1939 in Book 934 Official Records, page 16, Santa Clara County Records, in the Northerly line Alviso-Milpitas Road, thence from said point of beginning N. 89 deg. 35' E. 630.30 feet to the Southeasterly corner thereof; thence along the Easterly line of said 31.74 acre tract for the three following courses and distances: N. 1 deg. 13' E. 768.90 feet, N. 0 deg. 57 E. 597.96- feet and N. 0 deg. 31' E. 149.97 feet to the Southeasterly corner of that certain 9.316 acre tract of land described in the deed from F. W. Zanker, et al, to B. S. Brazil, a single man, dated October 25, 1943, recorded November 16, 1943 in Book 1176 Official Records, page 21, Santa Clara County Records; thence S. Sg deg. 35' W. along the Southerly line of said 9.316 acre tract 651.78 feet to the Southwesterly corner thereof in the Westerly line of said 31.74 acre tract; thence S. 0 deg. 08' W. along said last mentioned line 1512.88 feet to the point of beginning. Excepting therefrom that portion; hereof conveyed to the City of San Jose, a municipal corporation, recorded September 2, 1S85 in Book J82B, page 17ig, Official Records, described as follows: Beginning at the Southeasterly corner of that certain 31.74 acre tract of land described in the deed from The First National Bank of San Jose, a corporation, to f. W. Zanker and Curtner Zanker, dated May 5, 1929, recorded May 8, 1939 in Book 934 Official Records, page 16, Santa Clara County Records, said point being on the Northerly line of Alviso-Milpitas Road, thence leaving said point of beginning along the Easterly line of said 31.74 acre parcel N. 1 deg. 1;' E. 30.00 feet to the true point of beginning of the parcel herein being described; thence leaving said true point of beginning and said Easterly line along the following courses and distances; from a tangent bearing of N. 8e deg. 47' 00" W. along a curve to the right with a radius of 50.00 feet, through a central angle of 126 deg. 52' 12. for an arc length of 110.71 feet to a point on reverse curvature; from a tangent bearing of N. 38 deg. 05' 12E. along a curve to the left with a radius of 50.00 feet, through a central angle of 36 deg. 52' 12" for an arc length of 32.18 feet; N. 1 deg. 13' (cent)0~ E. 361.13 feet; N. 0 deg. 57' 00~ E. 597.g3 feet; N. 0 deg. 31' 52- E. 18.6g feet; along a tangent curve to the left with a radius of 40.00 feet, through a central angle of 90 deg. 56' 58- for an arc length of 63.50 feet to a point on a line parallel with and distant 90.00 feet Southerly, measured at right angles from the Southerly line of that certain 9.316 acre parcel of land described 1n the deed from f. W. Zanker, et al, to B. S. Brazi1, recorded November 16, 1943 in Book 1176 of Official Records, at page 21, Santa Clara County Records; thence along said parallel line, S. 89 deg. 34' 54- W. 579.9g feet to a point on the Westerly line of said 31.74 acre parcel of land; thence leaving said parallel line along said Westerly line, N. -32- 33 0 deg. 06' 10- E. 90.00 feet to the Southwesterly corner of the hereinabove described 9.316 acre parcel; thence leaving said Westerly line along the Southerly line of said 9.316 acre parcel, N. 89 deg. 34' 54~ E. 651.24 feet to the Southeasterly corner thereof, said corner lying in said Easterly line of the hereinabove described 31.74 acre parcel; thence along said Easterly line the following course and distances: S. 0 deg. 31 52 W. 149.98 feet; S. 0 deg. 57' 00" W. 598.11 feet and S. 1 deg. 13' 00" W. 598.11 feet and S. 1 deg. 13' 00" W. 471.20 feet to the true point of beginning. ALSO EXCEPTING THEREFROM all that portion conveyed to the State of California by Grant Deed recorded August 31, 19g4 in 6Ook N 579, Page 2028, Official Records, described as follows: Being a portion of that certain parcel of land described in the Deed from Ray H. Collishaw and Earlyn R. Collishaw, husband and wife, to William L. Marocco, a single man, recorded May 4, 1982 in Book G 762 of Official Records at Page 218, Santa Clara County Records. Beginning at the southeast corner of said parcel conveyed to Marocco; thence from said Point of Beginning, along the southerly line of said parcel conveyed to Marocco N. 8g(degree) 01' 16" W. 626.45 feet to the southwest corner of said parcel conveyed to Marocco; thence along the westerly line of said parcel conveyed to Marocco N. 1(degree) 13 13 E. 227.77 feet; thence leaving said westerly line, from a tangent bearing of S. 67(degree) 46 42 E., along a curve to the right with a radius of 275.00 feet, through a central angle of 18(degree) 08' 37" for an arc length of 87.08 feet; thence S. cgo 38' 05 E., 103.64 feet: thence along a tangent curve to the left with a radius of 275.00 feet, through a central angle of 34(degree) 57' 21- for an arc length of 167.78 feet; thence S. 84(degree) 35' 25E. 318.58 feet to a point in the easterly line of said parcel conveyed to Marocco; thence along said easterly line S. 2(degree) 20 03' W., 31.97 feet to the Point of Beginning. AR8 No. 15-30-9 & 9.1 -33- 34 EXHIBIT "C" HAZARDOUS MATERIALS MANAGEMENT PLAN ("HMMP") (To be Provided by Tenant prior to Occupancy) -34- 35 EXHIBIT "D" 1. ATT report dated July 9, 1992: Preliminary (Phase I) Environmental Site Assessment Update for the Property at 4405 - 4445 Fortran Court, San Jose, CA (Project No. 929368). 2. SECOR International Incorporated report dated July 10, 1995: Phase I Environmental Site Assessment Report - 4405, 4415, 4425, 4435 and 4445 Fortran Drive, San Jose, CA (Job No. 70076-001-01). 3. SECOR International Incorporated report dated July 24, 1995: Technical Report Soil Sampling and Grab Groundwater Sampling - 4405-4445 Fortran Drive, San Jose, CA 4. ProTech Consulting and Engineering Asbestos Survey and Evaluation report dated October 25, 1995, Report #AA95-559, conducted at 4415 1445 Fortran Drive, San Jose, CA. 5. Clayton Environmental Consultants' export dated January 8, 1996, Site Visit and File Review for 4405 and 4413 Fortran Drive, San Jose, CA. (Project No. 63877.00). -35- 36 EXHIBIT C TENANT ESTOPPEL CERTIFICATE To: CarrAmerica Realty Corporation 1700 Pennsylvania Avenue, N.W. Washington, D.C. 2006 Attention: Tom Levy Re: Property Address: 4405-4445 Fortran Court San Jose, CA 95134 Premises at Property: 4435 Fortran Court (the "Premises") The undersigned tenant (the "Tenant") hereby certifies as of the date set forth below to you as follows: 1) Tenant is a tenant at the Property under a lease (the "Lease") dated August 7, 1996, for the Premises; the Lease has not been canceled, modified, assigned, extended or amended except as follows: N/A; and there are no other agreements, written or oral, affecting or relating to Tenant's lease of the Premises or any other space at the Property. 2) All base rent, rent escalations and additional rent under the Lease has been paid through N/A, 19___. There is no prepaid rent, except $70,025.00, and the amount of security deposit is $70,025.00. Tenant currently has no right to any future rent abatement under the Lease. Except increases in real estate taxes which may occur as a result of the sale of the property are subject to the limitations set forth in Section 7.C of the Lease and the rental abatement rights set forth in Section 2 of the Lease. 3) Lease will take possession of the Premises, consisting of 77,805 square feet, on May 1, 1997 and commence to pay rent on May 1, 1997. Base rent will be payable in the amount of $70,025.00 per month, and Tenant will be billed on a monthly basis for operating expenses actually incurred by the Landlord. 4) The Lease terminates on April 30, 2007, and Tenant has the following renewal option(s): none. The renewal options for the following periods have been exercised: N/A. 5) All work to be performed for Tenant under the Lease has been performed as required under the Lease and has been accepted by Tenant, except structural work referenced in Paragraph 2 of Lease, and all allowances to be paid to Tenant, including allowances for tenant improvements, moving expenses or other items, have been paid. C-1 37 6) The Lease is: (a) in full force and effect; (b) free from default and free from any event which could become a default under the Lease; and (c) Tenant has no claims against the landlord or offsets or defenses against rent, and there are no disputes with the landlord. 7) The Tenant has received no notice of prior sale, transfer or assignment, hypothecation or pledge of the Lease or of the rents payable thereunder, except: none. 8) Tenant shall take full possession of the Premises under the Lease dated August 7, 1996, on May 1, 1997, and Tenant has not assigned the Lease or sublet any part of the Premises, and Tenant is currently in possession of 31,572 square feet of the Premises under a Sublease dated July 31, 1996, with Reply Corporation. 9) The base year for pass-through of operating expenses and taxes is N/A, or the base amount for taxes is N/A, and the base amount for operating expenses is N/A. 10) The Tenant has the following expansion rights or options for the Property: none. 11) The Tenant has no rights or options to purchase the Property. 12) The Tenant has no right to remove any property from the Premises except for its personal property and trade fixtures. 13) The Tenant is not insolvent or bankrupt and is not contemplating seeking relief under any insolvency or bankruptcy statutes. The undersigned has executed this Estoppel Certificate with the knowledge and understanding that CarrAmerica Realty Corporation is acquiring the Property in reliance on this Estoppel Certificate and that the undersigned will be bound by this Estoppel Certificate. The statements contained herein may be relied upon by CarrAmerica Realty Corporation, and any mortgagee of the Property and their respective successors and assigns. Dated this 25th day of March 1997. 3Dfx Interactive, a California corporation By: ______________________________________ Title: ___________________________________ C-2 EX-10.6 8 INVESTORS' RIGHTS AGREEMENT DATED 9/12/96 1 EXHIBIT 10.6 INVESTORS' RIGHTS AGREEMENT This Investors' Rights Agreement is made and entered into as of September 12, 1996 by and among 3Dfx Interactive, Inc. (the "Company") the undersigned holders of capital stock or warrants to purchase capital stock of the Company (the "Investors") and the undersigned purchasers of Series C Preferred Stock of the Company (the "Purchasers"). The Investors and other holders of shares of the Company's Series A and Series B Preferred Stock, or warrants to purchase shares of Series A and Series B Preferred Stock, enjoying certain registration rights and rights regarding receipt of information pursuant to an Investors' Rights Agreement dated February 14, 1996 (the "Prior Agreement") and the Purchasers are sometimes collectively referred to as the "Shareholders". The names of the Investors and the Purchasers are set forth on the Schedule of Investors and Purchasers attached hereto as Schedule A. RECITALS: A. The Company will issue to the Purchasers an aggregate of up to 2,800,000 shares of Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement dated as of September 12, 1996, (the "Series C Agreement"). B. The Purchasers have required that certain registration and other rights be granted to them with respect to the securities of the Company to be acquired. C. The Investors hold the majority of the shares of Series A and Series B Preferred Stock of the Company, or warrants to purchase shares of Series A and Series B Preferred Stock of the Company, enjoying certain registration rights and rights regarding receipt of information pursuant to the Prior Agreement. The Investors hereby agree that all such rights under the Prior Agreement are hereby terminated and superseded by the rights provided under this Agreement, which Agreement supersedes and replaces the Prior Agreement in its entirety. 2 AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. Restrictions on Transfer; Registration Rights. 1.1 Definitions. As used herein: (a) The terms "register", "registered" and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of the effectiveness of such registration statement. (b) For the purposes hereof, the term "Registrable Securities" means shares of (i) any and all Common Stock of the Company issued or issuable upon conversion of shares of the Series A Preferred Stock of the Company issued pursuant to the Series A Preferred Stock Purchase Agreement dated as of March 13, 1995, which have not been previously resold to the public in a registered public offering, (ii) any and all Common Stock of the Company issued or issuable upon conversion of shares of the Series B Preferred Stock of the Company issued pursuant to the Series B Preferred Stock Purchase Agreement dated February 14, 1996, which have not been previously resold to the public in a registered public offering, (iii) any and all Common Stock of the Company issued or issuable upon conversion of shares of the Series C Preferred Stock of the Company issued pursuant to the Series C Agreement, which have not been previously resold to the public in a registered public offering, (iv) any and all Common Stock of the Company issued or issuable upon conversion of up to 87,500 shares of the Series A Preferred Stock of the Company issued or issuable upon exercise of a warrant to purchase shares of Series A Preferred Stock issued by the Company to Lighthouse Capital Partners, which have not been previously resold to the public in a registered public offering, (v) any and all Common Stock of the Company issued or issuable upon conversion of up to 336,817 shares of the Series B Preferred Stock of the Company issued or issuable upon exercise of warrants to purchase shares of Series B Preferred Stock which have been issued by the Company to MMC\GATX Partnership No. I, Silicon Valley Bank and Taiwan Semiconductor Manufacturing Corporation, which have not been previously resold to the public in a registered public offering, (vi) stock issued with respect to or in any exchange for or in replacement -2- 3 of stock included in subparagraphs (i), (ii), (iii), (iv) and (v) above which have not been previously resold to the public in a registered public offering, and (vii) stock issued in respect of the stock referred to in (i), (ii), (iii), (iv), (v) and (vi) above as a result of a stock split, stock dividend or the like, which have not been previously resold to the public in a registered public offering. (c) The terms "Holder" or "Holders" mean any person or persons to whom Registrable Securities were originally issued and who execute this Agreement or qualifying transferees under Section 3 hereof who hold Registrable Securities. (d) The term "Initiating Holders" means any Holder or Holders of in the aggregate at least 40% of the Registrable Securities which have not been previously resold to the public in a registered public offering. (e) The term "Majority Holders" means holders of a majority of Registrable Securities included in a particular registration. 1.2 Requested Registration. (a) Request for Registration. In case the Company shall receive from the Initiating Holders a written request that the Company effect any registration with respect to all or a part of the Registrable Securities, the Company will: (i) within ten (10) days after its receipt thereof give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its best efforts to effect such registration (including, without limitation, preparation of a registration statement and prospectus complying as to form with the requirements of the Securities Act, the execution of an undertaking to file post-effective amendments, appropriate qualifications under the applicable blue sky or other state securities laws and appropriate compliance with exemptive regulations issued under the Securities Act and any other governmental requirements or regulations) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as is specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within 20 days after receipt of such written notice from the Company; -3- 4 provided, that the Company shall not be obligated to take any action to effect such registration pursuant to this Section 1.2: (A) Prior to the earlier of (1) March 3, 1999, or (2) 270 days following the effective date of the Company's first registered offering to the general public of its securities for its own account; or (B) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration; or (C) After the Company has effected two such registrations pursuant to this subsection 1.2(a) and such registrations have been declared or ordered effective for the period set forth in Section 1.6(a); or (D) If the Registrable Securities to be registered have an anticipated offering price to the public of less than $5,000,000. Subject to the foregoing clauses (A) through (D), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practical, but in any event within ninety (90) days after receipt of the request or requests of the Initiating Holders; provided, however, that if such request is made prior to the completion of the Company's initial public offering of securities, and if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors it would be seriously detrimental to the Company for such registration statement to be filed at the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall be entitled to delay the filing of such registration statement not more than once for an additional period of up to one hundred and twenty (120) days. (b) Underwriting. If the Majority Holders intend to distribute the Registrable Securities covered by their request by means of an under writing, they shall so advise the Company as a part of their request made pursuant to Section 1.2 and the Company shall include such information in the written notice referred to in subsection 1.2(a)(i). The right of any Holder to registration pursuant to Section 1.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by the Majority Holders and such Holder) to the extent provided herein. The Company shall (together with all Holders proposing to distribute their securities through such -4- 5 underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Majority Holders, provided, however, that the managing underwriter shall be approved by the Company, which approval shall not be unreasonably withheld. Notwithstanding any other provision of this Section 1.2, if the underwriter advises the Majority Holders in writing that marketing factors require a limitation of the number of shares to be underwritten, the Majority Holders shall so advise all Holders of Registrable Securities who have elected to participate in such offering, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all such Holders thereof in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders. If any Holder of Registrable Securities disapproves of the terms of the underwriting, he may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. Any Registrable Securities which are excluded from the underwriting by reason of the underwriter's marketing limitation or withdrawn from such underwriting shall be withdrawn from such registration. If the underwriter has not limited the number of Registrable Securities to be underwritten, the Company may include securities for its own account (or for the account of employees and other holders, at the Company's sole discretion) in such registration if the underwriter so agrees and if the number of Registrable Securities which would otherwise have been included in such registration and underwriting will not thereby be limited by the underwriter. 1.3 Company Registration. (a) Right to Include. If at any time or from time to time, the Company proposes to register any of its securities, for its own account or the account of any of its shareholders other than the Holders, (other than a registration relating solely to employee stock option or purchase plans, or a registration relating solely to an SEC Rule 145 transaction, or a registration on any other form, other than Form S-1, S-2, S-3, SB-2 or any successor to such form which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities) the Company will: (i) promptly give to each Holder written notice thereof; and (ii) include in such registration (and any related qualification under blue sky laws or other compliance with applicable laws), and in any underwriting involved therein, all the Registrable Securities specified in a -5- 6 written request or requests, made within 20 days after receipt of such written notice from the Company, by any Holder or Holders to be included in any such registration, except as set forth in subsection 1.3(b) below. (b) Underwriting. If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 1.3(a)(i). In such event the right of any Holder to registration pursuant to Section 1.3 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 1.3, if the underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the underwriter may limit the number of Registrable Securities to be included in the registration and underwriting (i) completely, in the case of the Company's initial public offering, or (ii) to not less than 20% of the shares to be included in any other registration that is solely for the account of the Company. In the event of a cutback by the under writers of the number of Registrable Securities to be included in the registration and underwriting, the Company shall advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all of such Holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 1.4 Form S-3. After its initial public offering, the Company shall use its best efforts to qualify for registration on Form S-3 or any comparable or successor form. After the Company has qualified for the use of Form S-3, Holders of the outstanding Registrable Securities shall have the right to request up to two (2) registrations on Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended method of disposition of Shares by such Holders), subject only to the following: -6- 7 (a) The Company shall not be required to effect a registration pursuant to this Section 1.4 within 180 days of the effective date of any registration referred to in Sections 1.2 or 1.3 above. (b) The Company shall not be required to effect a registration pursuant to this Section 1.4 unless the Holder or Holders requesting registration propose to dispose of shares of Registrable Securities having an aggregate disposition price (before deduction of underwriting discounts and expenses of sale) of at least $1,000,000. (c) The Company shall not be required to effect more than one registration pursuant to this Section 1.4 in any consecutive 12 month period. The Company shall promptly give written notice to all Holders of Registrable Securities of the receipt of a request for registration pursuant to this Section 1.4 and shall provide a reasonable opportunity for other Holders to participate in the registration, provided that if the registration is for an under written offering, the terms of subsection 1.2(b) shall apply to all participants in such offering. Subject to the foregoing, the Company will use its best efforts to effect as promptly as practicable the registration of all shares of Registrable Securities on Form S-3 to the extent requested by the Holder or Holders thereof for purposes of disposition; provided, however, that if the Company shall furnish to such Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgement of the Board of Directors it would be seriously detrimental to the Company for such registration statement to be filed at the date filing would be required and it is therefore essential to defer the filing of such registration statement, the Company shall be entitled to delay the filing of such registration statement for such a period that the Board determines in good faith to be necessary, which in no event shall exceed, one hundred and twenty (120) days. Any registration pursuant to this Section 1.4 shall not be counted as a registration pursuant to Section 1.2. 1.5 Expenses of Registration. All expenses incurred in connection with any registration, qualification or compliance pursuant to this Section 1, including without limitation, all registration, filing and qualification fees, printing expenses, exchange or NASDAQ listing fees, fees and disbursements of counsel for the Company and fees and expenses of any special audits incidental to or required by such registration, shall be borne by the Company except as follows: -7- 8 (a) The Company shall not be required to pay for expenses of any registration proceeding begun pursuant to Section 1.2 or 1.4, the request for which has been subsequently withdrawn by the Majority Holders (other than as a result of the Company's deferral), in which such case, such expenses shall be borne by the Holders requesting inclusion in such registration; provided, however, that in lieu of paying such expenses the Majority Holders may elect to forfeit their right to request one registration pursuant to Section 1.2; provided further, however, that if at the time of such withdrawal the Majority Holders have learned of a material adverse change in the business, condition or prospects of the Company from that known to the Majority Holders at the time of their request and have withdrawn the request with reasonable promptness following disclosure by the Company of such change, then the Holders shall not be required to pay any such expenses and shall retain their rights to such registration pursuant to Section 1.2. (b) The Company shall not be required to pay fees of legal counsel of a Holder except for a single counsel acting on behalf of all selling Holders (which counsel shall also be counsel to the Company unless counsel to the Company has a conflict of interest with respect to the representation of any selling Holder or the underwriters object to the selling Holders' representation by Company counsel). (c) The Company shall not be required to pay underwriters' fees, discounts or commissions relating to the Registrable Securities. 1.6 Registration Procedures. In the case of each registration, qualification or compliance effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense the Company will: (a) Keep such registration, qualification or compliance pursuant to Sections 1.2, 1.3 or 1.4 effective for a period of 180 days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; (b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. -8- 9 (c) Furnish to the Holders such numbers of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them; (d) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act or the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (e) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such United States jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; (f) Cause all such Registrable Securities registered under this Section 1 to be listed on each securities exchange or reporting system on which similar securities issued by the Company are then listed; and (g) Furnish, at the request of any Holder requesting registration of Registrable Securities pursuant to this Section 1, on the date that such Registrable Securities are delivered to the underwriters for sale in connection with such registration, if such securities are being sold through underwriters or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities, and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. -9- 10 1.7 Indemnification. (a) The Company will indemnify and hold harmless each Holder of Registrable Securities, each of its officers, directors and partners, and each person controlling such Holder, with respect to which such registration, qualification or compliance has been effected pursuant to this Agreement, and each underwriter, if any, and each person who controls any underwriter of the Registrable Securities held by or issuable to such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any preliminary or final prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged violation by the Company relating to action or inaction required of the Company in connection with any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and will reimburse (on an as incurred basis) each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company in an instrument duly executed by such Holder or underwriter specifically for use therein, and provided further that the agreement of the Company to indemnify any underwriter and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter, from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). (b) Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify and hold harmless -10- 11 the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any preliminary or final prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse (on an as incurred basis) the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company in an instrument duly executed by such Holder specifically for use therein, and provided further that the agreement of the Holder to indemnify any underwriter and any person who controls such underwriter contained herein with respect to any such preliminary prospectus shall not inure to the benefit of any underwriter, from whom the person asserting any such claim, loss, damage, liability or action purchased the stock which is the subject thereof, if at or prior to the written confirmation of the sale of such stock, a copy of the prospectus (or the prospectus as amended or supplemented) was not sent or delivered to such person, excluding the documents incorporated therein by reference, and the untrue statement or omission of a material fact contained in such preliminary prospectus was corrected in the prospectus (or the prospectus as amended or supplemented). Notwithstanding the foregoing, in no event shall the indemnification provided by any Holder hereunder exceed the gross proceeds received by such Holder for the sale of such Holder's securities pursuant to such registration. (c) Each party entitled to indemnification under this Section 1.7 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought. The Indemnified Party shall promptly permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided -11- 12 that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably be withheld). The Indemnified Party may participate in such defense and hire counsel at such party's own expense (or at the Indemnifying Party's expense, in the event that a conflict of interest exists between Indemnifying Party's counsel and the Indemnified Party's counsel). The failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless and only to the extent that such failure is materially prejudicial to an Indemnifying Party's ability to defend such action. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Any Indemnified Party shall reasonably cooperate with the Indemnifying Party in the defense of any claim or litigation brought against such Indemnified Party. If the indemnification provided for in this Section 1.7 is for any reason not available to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to therein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as will as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. 1.8 Lock-Up Provision. Upon receipt of a written request by the Company or by its underwriters, the Holders shall not sell, sell short, grant an option to buy, or otherwise dispose of shares of the Company's Common Stock or other securities (except for any such shares included in the registration) for a period of one hundred and twenty (120) days following the effective date of the initial registration of the Company's securities (other than any transfer of shares as a bona fide gift or gifts, or by will or intestacy or, if the Holder is a -12- 13 partnership or corporation, any distribution by such partnership or corporation to its partners or shareholders); provided, however, that such Holder shall have no obligation to enter into the agreement described in this Section 1.8 unless all executive officers and directors of the Company and all other Holders and holders of other registration rights from the Company enter into similar agreements. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said 120-day period. 1.9 Information by Holder. The Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration, qualification or compliance referred to herein. 1.10 Rule 144 Reporting. (a) With a view to making available to Holders of Registrable Securities the benefits of certain rules and regulations of the Securities and Exchange Commission (the "SEC") which may permit the sale of the Registrable Securities to the public without registration, at all times after 90 days after the effective date of the first registration filed by the Company for an offering of its securities to the general public the Company agrees to: (i) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 under the Securities Act; (ii) File with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (iii) So long as a Holder owns any Registrable Securities, to furnish to such Holder forthwith upon such Holder's request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after 90 days after the effective date of the first registration statement filed by the Company for an offering of its securities to the public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such Holder may reasonably -13- 14 request in availing itself of any rule or regulation of the SEC allowing such Holder to sell any such securities without registration. 1.11 Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of the Holders of a majority of the outstanding Registrable Securities, enter into any agreement with any holder or prospective holder of any securities of the Company which would allow such holder or prospective holder (a) to include such securities in any registration filed under Section 1.2, 1.3 or 1.4 hereof, unless under the terms of such agreement, such holder or prospective holder may include such securities in any such registration only to the extent that the inclusion of its securities will not reduce the amount of the Registrable Securities of the Holders which is included or (b) to make a demand registration which (i) could result in such registration statement being declared effective prior to the earlier of either of the dates set forth in subsection 1.2(a)(ii)(A) or (ii) would result in the registration of such parties' securities to the exclusion of any securities requested to be included in such registration under Section 1.3 hereof. 1.12 Termination. The rights of a Holder under this Agreement shall terminate on the earlier to occur of (a) the sixth anniversary of the closing of the Company's first registered public offering of its securities, or (b) the date on which a Holder can sell all of its Registrable Securities without registration pursuant to Rule 144 within a three (3) month period, unless at the time the Holder's Registrable Securities represent more than one percent (1%) of the outstanding capital stock of the Company. 2. Covenants of the Company. 2.1 Financial Information. So long as a Shareholder (together with any permitted assigns who are affiliates) continues to hold at least 25,000 shares of Preferred Stock or shares of Common Stock issued upon conversion of Preferred Stock or any combination of the foregoing (collectively, the "Securities"), the Company will furnish the following information to the Shareholder: (a) Annual Financials. As soon as practicable after the end of each fiscal year, and in any event within 120 days thereafter, the Company will provide the Shareholder with consolidated balance sheets of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of operations and consolidated statements of cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance -14- 15 with generally accepted accounting principles, all in reasonable detail, certified by independent public auditors of recognized national standing selected by the Company; provided, however, that until the Company shall have revenues in excess of $10,000,000, such financial statements may be reviewed but not audited. (b) Quarterly Financials. As soon as practicable after the end of each fiscal quarter (except the fourth fiscal quarter), and in any event within 45 days thereafter, the Company will provide the Shareholder with consolidated balance sheets of the Company and its subsidiaries, if any, as at the end of such fiscal quarter, and consolidated statements of operations and consolidated statements of cash flows of the Company and its subsidiaries, if any, for such quarter, prepared in accordance with generally accepted accounting principles (except for required footnotes and for minor year-end adjustments), all in reasonable detail, certified by the chief financial officer of the Company. 2.2 Additional Information. So long as a Shareholder (together with permitted assigns who are affiliates) continues to hold at least 250,000 shares of Preferred Stock, the Company shall provide such Shareholder with copies of any information provided to members of the Company's Board of Directors. 2.3 Confidentiality of Information. All information obtained by a Shareholder pursuant to Section 2.1 and 2.2 shall be deemed proprietary and confidential to the Company and will not be disclosed by a Shareholder to any person or entity without the prior written consent of the Company. This restriction shall not apply to information which is (i) previously known or thereafter becomes known to the public, (ii) received by a Shareholder on a non-confidential basis from other sources or (iii) disclosed pursuant to a governmental regulation or order, provided that prior to disclosure the disclosing party notifies the Company of such proposed disclosure in order to permit the Company to seek confidential treatment of such information. 2.4 Employee Stock Purchase and Option Agreements. The Company agrees that it will utilize, in connection with any stock purchase or stock option agreements entered into with officers, directors, employees or consultants pursuant to equity incentive plans adopted by the Board of Directors of the Company, vesting provisions providing in substance that such stock or options shall vest at the rate of 25% of such shares one year after the option grant date (which will be no earlier than the date of hire or appointment) and 1/48th of the shares monthly thereafter; provided, however, such vesting -15- 16 rate may be changed or accelerated if unanimously approved by the Company's Board of Directors. In addition, each such stock purchase or stock option agreement shall contain a "market stand-off" provision, pursuant to which the recipient of stock pursuant to such agreement will agree, upon request, not to sell or otherwise transfer any securities of the Company during a period of up to 120 days following the effective date of the initial registration statement pursuant to which the Company registers shares of its Common Stock for sale to the public and any other registration statement filed within three years of such initial statement. 2.5 Termination of Covenants. The Company's obligation to deliver the information required under subsections 2.1 (a) and (b) and under Section 2.2 above shall terminate upon the date on which the Company is required to file a report with the SEC pursuant to Section 13(a) of the Exchange Act by reason of the Company having registered any of its securities pursuant to Section 12(g) of the Exchange Act. 2.6 Attendance at Board Meetings. As long as Chase Venture Capital Associates, L.P., formerly known as Chemical Venture Capital Associates, A California Limited Partnership ("CVCA") and/or any affiliate (the "Major Purchaser") hold at least 800,000 shares of Securities, Major Purchaser (or its representative) shall have the right to attend all meetings of the Board of Directors in a nonvoting observer capacity, to receive notice of such meetings and to receive the information provided by the Company to the Board of Directors; provided, however, that the Company may require as a condition precedent to Major Purchaser's rights under this Section 2.6 that each person proposing to attend any meeting of the Board of Directors and each person to have access to any of the information provided by the Company to the Board of Directors shall agree to be bound by Section 2.3; and provided further that the Company reserves the right not to provide information and to exclude such Major Purchaser (or its representative) from any meeting or portion thereof if delivery of such information or attendance at such meeting by such Major Purchaser (or its representative) would adversely affect the attorney-client privilege between the Company and its counsel, as determined in good faith by the Board of Directors based upon an opinion of counsel. The rights of the Major Purchaser under this Section 2.6 shall terminate upon the date on which the Company is required to file a report with the SEC pursuant to Section 13(a) of the Exchange Act by reason of the Company having registered any of its securities pursuant to Section 12(g) of the Exchange Act. -16- 17 3. Right to Maintain. 3.1 "New Securities". For purposes of this Section 3, the term "New Securities" shall mean shares of Common Stock, Preferred Stock or any other class of capital stock of the Company, whether or not now authorized, securities of any type that are convertible into shares of such capital stock, and options, warrants or rights to acquire shares of such capital stock. Notwithstanding the foregoing, the term "New Securities" will not include (a) securities issuable upon conversion of the Series A, Series B and Series C Preferred Stock; (b) securities issued in connection with bona fide equipment lease or working capital debt financings with lending institutions; (c) securities offered to the public pursuant to a registration statement filed under the Securities Act; (d) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation; (e) shares of Common Stock (or related options or warrants) issued or issuable at any time to employees or consultants of the Company for compensation purposes, pursuant to any stock offering, plan or arrangement approved by the Board of Directors; (f) securities issued upon exercise or conversion of options, warrants and other convertible securities outstanding on the date hereof and described in the Series C Agreement or the Schedules thereto, including those securities sold pursuant to the Series C Agreement; (g) shares of Common Stock or Preferred Stock issued in connection with any stock split, stock dividend or recapitalization by the Company; and (h) any security if holders of at least a majority of the outstanding shares of Series A, Series B and Series C Preferred Stock consent in writing that the rights under this Section 3 shall not apply to such securities. 3.2 Grant of Rights. Subject to the terms specified in this Section 3, the Company hereby grants to (a) each Shareholder the right of first refusal to purchase a portion of any issue of New Securities which the Company hereafter may from time to time propose to issue and sell as shall maintain the Shareholder's pro rata percentage ownership of the Company's capital stock. The "pro rata" percentage ownership of a Shareholder is calculated by dividing (i) the number of shares of Common Stock held by the Shareholder plus the total number of shares of Common Stock issuable upon the conversion of all Preferred Stock then held by the Shareholder by (ii) the total number of shares of Common Stock then outstanding, including shares issuable upon conversion of any Preferred Stock. -17- 18 3.3 Procedure. (a) In the event the Company proposes to undertake an issuance of New Securities, it shall give the Shareholders written notice of its intention, describing the type of New Securities, the proposed purchasers, the price and all other material terms upon which the Company proposes to issue the same. A Shareholder shall have 15 days from the date of receipt of any such notice to agree to purchase up to its pro rata share of such New Securities for the price and upon the terms specified in the Company's notice by giving written notice to the Company to such effect and stating therein the quantity of New Securities to be purchased. (b) In the event a Shareholder fails to exercise its right to purchase its pro rata share of the New Securities within such 15 day period, the Company shall have 90 days thereafter to sell or enter into an agreement to sell any New Securities not purchased by Shareholders exercising their rights at a price and upon terms no more favorable to the purchaser than the terms specified in the Company's notice to the Shareholders, after which 90 day period the Company shall not thereafter sell such New Securities without first offering a portion to the Shareholders in accordance with this Section 3. 3.4 Termination of Rights. The rights granted under this Section 3 shall expire (a) as to all Shareholders, upon the closing of a public offering which, under the terms of the Company's Articles of Incorporation as then in effect, shall cause the automatic conversion of all shares of the Company's Preferred Stock into Common Stock and (b) as to any Shareholder if such Shareholder fails to exercise its right to purchase its pro rata share of the New Securities as provided in this Section 3 in an offering of New Securities in which the holders of a majority of the Registrable Securities exercise their rights to purchase their pro rata shares of such New Securities, and such failure was not at the written request of the Company. 4. Assignment of Rights. The rights granted pursuant to this Agreement may be assigned by a Shareholder or its transferee upon sale or transfer (other than a sale to the public) of at least 25,000 shares of Registrable Securities (as adjusted for stock dividends, stock splits, recapitalizations and the like) held by a Shareholder, or in connection with any transfer or assignment by a Shareholder of any number of shares to any partner, retired partner or shareholder of such Shareholder or any transfer to spouses and ancestors, lineal descendants and siblings of such partners or shareholders or spouses who acquire Registrable Securities by gift, -18- 19 will or intestate succession, provided that such rights may not be assigned to a transferee which the Company reasonably believes is a competitor or intends to become a competitor of the Company and provided further that the Company is given prompt notice of such transfer and any such transferee shall agree to become subject to the obligations of the Shareholders under this Agreement. 5. Miscellaneous. 5.1 Amendment or Waiver. Any term of this Agreement may be amended and the observance of any such term may be waived (either generally or in a particular instance and either retroactively or prospectively) with the written consent of the Company and Holders holding at least a majority of the outstanding Registrable Securities. Any amendment or waiver effected in accordance with this paragraph shall be binding upon the parties hereto and their successors and assigns; provided that no amendment or modification may discriminate against a holder of Registrable Securities without such holder's consent. 5.2 Governing Law. This Agreement shall be governed in all respects by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. 5.3 Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with respect to the subject hereof and it supersedes, merges, and renders void any and all prior understandings and/or agreements, written or oral, with respect to such subject matter. 5.4 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be personally delivered, mailed by certified or registered mail, postage prepaid, or delivered by overnight delivery or express courier, addressed to the Holders at their addresses shown on the records of the Company or, to the Company, at its principal executive office, or at such other address as the Company or any Holder shall hereafter furnish in writing. All notices that are mailed shall be deemed delivered five (5) days after deposit in the United States mail. 5.5 Severability. In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. -19- 20 5.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 5.7 Attorney's Fees. If any legal action is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorney's fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled. 5.8 SBIC Matters. Each Shareholder agrees to take whatever action may be required in order to carry out the purposes and effects of those certain side letter agreements between the Company and each of Chase Venture Capital Associates, L.P., formerly known as Chemical Venture Capital Associates, A California Limited Partnership, and Norwest Equity Partners V, A Minnesota Limited Liability Partnership, in the forms attached to the Series C Agreement as Exhibits D and E; provided that no Shareholder shall be required to take any action if it would have a material and adverse effect on such Shareholder. 5.9 Confidentiality. The Company and the Shareholders shall not use Intel Corporation's ("Intel") or its affiliates' names or refer to Intel or its affiliates directly or indirectly in connection with Intel's or its affiliates' relationship with the Company in an advertisement, news release or professional or trade publication, or in any other manner, unless otherwise required by law, regulation, executive order, order or decree of any court or governmental authority or with Intel's prior written consent. The Company and the Shareholders agree that there will be no press release or other public statement issued by either party relating to this Agreement, the Series C Agreement, the Co-Sale Agreement or any other agreement entered into between the Company and Intel or the transactions contemplated hereby or thereby unless required by law. If the Company or any Shareholder determines that it is required by law to file this Agreement or any such other agreements with the SEC, it shall, a reasonable time before making any such filing, consult with Intel regarding such filing and, if Intel reasonably requests, shall file with the SEC a request seeking confidential treatment for such portions of those agreements as may be reasonably requested by Intel. -20- 21 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. 3DFX INTERACTIVE, INC. By:______________________________________ Title:___________________________________ PURCHASERS: _________________________________________ [print name of Purchaser] By:______________________________________ By:______________________________________ By:______________________________________ Title:___________________________________ Investors' Rights Agreement Signature Page -21- 22 INVESTORS: _______________________________________ [print name of Investor] By:____________________________________ By:____________________________________ By:____________________________________ Title:_________________________________ Investors' Rights Agreement Signature Page -22- 23 Schedule A Investors Holding a Majority of the Registrable Securities under the Prior Agreement. U.S. Venture Partners IV, L.P. Second Ventures II, L.P. USVP Entrepreneur Partners II, L.P. Venrock Associates II, L.P. Venrock Associates Norwest Equity Partners V Chase Venture Capital Associates, L.P., (formerly known as Chemical Venture Capital Associates) Other Holders of Registrable Securities under the Prior Agreement Charter Ventures II, L.P. Gordon Campbell Frank Madren Gary Martin Darryl Foster Jon H. Beedle & Sandra L. Beedle Family Trust DTD 6/12/91 John Montgomery Richard Christopher Stephanie C. Dorris Henri Jarrat George E. Miller, Jr. Stephen J. Zelencik David J. Fisher William A. Bennett & Karen L. Bennett Revocable Trust DTD 6-30-88 Leslie T. Harlan Marc A. Friend Adam C. Joseph Phillip H. Ribbs Stephen H. Ribbs and Sylvie Ribbs Kurt P. Preising and Theresa O. Preising Western Widgets C.N.C. Inc. -23- 24 Marver Living Trust DTD 12/24/92 James D. Marver, Trustee GCA Investments 96 Mitsui & Co., Ltd. Mitsui Comtek Corp. Gregory Sollers Bernard V. and Theresa V. Vonderschmitt Joint Declaration of Trust S.C. Cubed Investment Partnership Sobrato 1979 Revocable Trust Eddie Kawamura Brian J. Currie Marc E. Jones Marian Klein Koji Morihiro Richard Stubblefield David E. Scott Jatinder Makker Henry O'Hara George S. Taylor John Payne Jeffrey A. Thomas Ivonne Valdes Donald Bell Russell Devore Holders of Warrants exercisable into Registrable Securities Lighthouse Capital Partners, L.P. MMC/GATX Partnership No. 1 Taiwan Semiconductor Manufacturing Corporation Silicon Valley Bank Transferees of Registrable Securities no longer enjoying rights as Registrable Securities under the Prior Agreement and this Agreement Michael F. Hornig Greg J. Moran Leslie J. Hauser Robert G. Pipkin Investors' Rights Agreement Signature Page -24- 25 Jeffrey P. Kellman James K. O'Brien John J. and Janice K. Dorris Douglas A. Westley Purchasers. U.S. Venture Partners IV, L.P. Second Ventures II, L.P. USVP Entrepreneur Partners II, L.P. Venrock Associates II, L.P. Venrock Associates Charter Ventures II L.P. Norwest Equity Partners V Chase Venture Capital Associates, L.P. Intel Corporation Donald Bell E.L. Gelbach Steve Zelencik Michael Reddon Henri Jarrat Sherman Cunningham Gary Martin Stephanie Dorris Gregory Hedman GCA Investments 96 Eddie Kawamura -25- 26 AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT This Amendment No. 1 (the "Amendment") to the Investors' Rights Agreement dated as of September 12, 1996 is made and entered into as of November 25, 1996 by and among 3Dfx Interactive, Inc. (the "Company"), the holders of a majority of the issued and outstanding Registrable Securities (as defined in the Investors' Rights Agreement, the "Agreement") of the Company and certain purchasers of the Series C Preferred Stock of the Company (individually, a "Purchaser" and, collectively, the "Purchasers"). This Amendment is intended to be an amendment to the Agreement, the purpose of which is to grant registration rights to the Purchasers. This Amendment shall become effective as to the Company and all Holders when signed by the Company and by Holders holding a majority of the Registrable Securities then outstanding. All capitalized terms used, but not defined, herein shall have the same meanings ascribed to them in the Agreement. A copy of the Agreement is attached hereto as Exhibit A. RECITALS A. The Company will issue to the Purchasers up to 812,248 shares of Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement dated September 12, 1996, as amended as of on or about November 25, 1996. B. The Purchasers have required that certain registration and other rights be granted to them with respect to the securities of the Company to be acquired. C. The Company wishes to obtain the consent of the Holders of a majority of Registrable Securities currently outstanding to amend the Agreement to provide registration rights the Purchasers with respect to up to 812,248 shares of Series C Preferred Stock and to waive certain rights to maintain as set forth in Section 3 of the Agreement. D. The Company and Holders of a majority of Registrable Securities now outstanding wish to amend Recital A of the Agreement as set forth below to permit the grant of such registration rights to the Purchasers and waive certain rights to maintain as set forth in Section 3 of the Agreement. 1 27 AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. Amendment of Recital A. Recital A of the Agreement is amended to read in full as follows: A. The Company will issue to the Purchasers an aggregate of up to 3,333,333 shares of Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement dated as of September 12, 1996, as amended as of on or about November 25, 1996 (the "Series C Agreement"). 2. Waiver of Rights. The Company and the holders of a majority of Registrable Securities hereby waive all rights pursuant to the provisions of Section 3 of the Agreement with respect to the issuance and sale of shares of Series C Preferred Stock to the Purchasers. 3. Effect of Amendment; Counterparts. Except as amended as set forth in this Amendment, the Agreement shall continue in full force and effect. This Amendment may be executed in counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Notwithstanding anything in the Agreement to the contrary, each Purchaser shall become a party to the Agreement upon full execution of this Amendment by the Company, Holders of a majority of the Registrable Securities then outstanding and such Purchaser. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. 3DFX INTERACTIVE, INC. By:________________________ Title:_____________________ PURCHASER: By:________________________ Title:_____________________ 2 28 HOLDERS: U.S. Venture Partners IV, L.P. By Presidio Management Group IV, L.P. Its General Partner By_________________________________________ Title______________________________________ Address: 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025 Second Ventures II, L.P. By Presidio Management Group IV, L.P. Its General Partner By_________________________________________ Title______________________________________ Address: 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025 USVP Entrepreneur Partners II, L.P. By Presidio Management Group IV, L.P. Its General Partner By_________________________________________ Title______________________________________ Address: 2180 Sand Hill Road, Suite 300 Menlo Park, CA 94025 [SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT] 3 29 Venrock Associates By ------------------------------------- Title General Partner ---------------------------------- Address: 755 Page Mill Road Palo Alto, CA 94304 Venrock Associates II, L.P. By ------------------------------------- Title General Partner ---------------------------------- Address: 755 Page Mill Road Palo Alto, CA 94304 Charter Ventures II, L.P. By ------------------------------------- Its ------------------------------------ By ------------------------------------- Title ---------------------------------- Address: 525 University Avenue, Suite 1500 Palo Alto, CA 94301 [SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT] 4 30 Mitsui Comtek Corp. By________________________________________ Title_____________________________________ Address 12980 Saratoga Avenue Saratoga, CA 95070 Mitsui & Co., Ltd. By________________________________________ Title_____________________________________ Address C/o Mitsui Comtek Corp. 12980 Saratoga Avenue Saratoga, CA 95070 Norwest Equity Partners V, a Minnesota Limited Liability Partnership By: Itasca Partners V, L.L.P., General Partner By________________________________________ George Still, Jr., Partner Address: 245 Lytton Ave., Suite 250, Palo Alto, California 94301-1426 [SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT] 5 31 Chase Venture Capital Associates, L.P., (formerly known as Chemical Venture Capital Associates, A California Limited Partnership) By: Chase Venture Partners (formerly known as Chemical Venture Partners), Its General Partner By_______________________________________ Title____________________________________ Address: 380 Madison Avenue, 12th Floor New York, New York 10017 Intel Corporation By_______________________________________ Title____________________________________ Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 [SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT] 6 32 SEGA Enterprises, Ltd. By____________________________________ Title_________________________________ Address 2-12, Haneda 1-Chome Ohta-Ku, Tokyo 144, Japan Williams Bally/Midway By____________________________________ Title_________________________________ Address 3401 North California Avenue Chicago, IL 60618-5899 UMAX Data Systems By____________________________________ Title_________________________________ Address 8F., 68, Sec. 3, Nanking East Road Taipei, Taiwan, R.O.C. [SIGNATURE PAGE TO AMENDMENT NO. 1 TO INVESTORS' RIGHTS AGREEMENT] 7 33 EXHIBIT A [Attach Investors' Rights Agreement] 8 34 AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT This Amendment No. 2 (the "Amendment") to the Investors' Rights Agreement dated as of September 12, 1996, as amended as of November 25, 1996, is made and entered into as of December 18, 1996 by and among 3Dfx Interactive, Inc. (the "Company"), the holders of a majority of the issued and outstanding Registrable Securities (as defined in the foregoing Investors' Rights Agreement, the "Agreement") of the Company and certain purchasers of the Series C Preferred Stock of the Company (individually, a "Purchaser" and, collectively, the "Purchasers"). This Amendment is intended to be an amendment to the Agreement, the purpose of which is to grant registration rights to the Purchasers. This Amendment shall become effective as to the Company and all Holders when signed by the Company and by Holders holding a majority of the Registrable Securities then outstanding. All capitalized terms used, but not defined, herein shall have the same meanings ascribed to them in the Agreement. A copy of the Agreement, as amended, is attached hereto as Exhibit A. RECITALS A. The Company will issue to the Purchasers up to 161,948 shares of Series C Preferred Stock in a Third Closing (as defined in that certain Series C Preferred Stock Purchase Agreement dated September 12, 1996, as amended as of November 25, 1996 and on or about December 18, 1996, collectively, the "Series C Agreement") pursuant to the Series C Agreement. B. The Purchasers have required that certain registration and other rights be granted to them with respect to the securities of the Company to be acquired. C. The Company wishes to obtain the consent of the Holders of a majority of Registrable Securities currently outstanding to amend the Agreement to provide registration rights to the Purchasers with respect to up to 161,948 shares of Series C Preferred Stock sold in the Third Closing and to waive certain rights to maintain as set forth in Section 3 of the Agreement. D. The Company and Holders of a majority of Registrable Securities now outstanding wish to amend Recital A of the Agreement as set forth below to permit the grant of such registration rights to the Purchasers and waive certain rights to maintain as set forth in Section 3 of the Agreement. 1 35 AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. Amendment of Recital A. Recital A of the Agreement is amended to read in full as follows: A. The Company will issue to the Purchasers an aggregate of up to 3,333,333 shares of Series C Preferred Stock pursuant to a Series C Preferred Stock Purchase Agreement dated as of September 12, 1996, as amended as of November 25, 1996 and on or about December 18, 1996 (the "Series C Agreement"). 2. Waiver of Rights. The Company and the holders of a majority of Registrable Securities hereby waive all rights pursuant to the provisions of Section 3 of the Agreement with respect to (i) the issuance by the Company to Simon Szeto, a sole proprietorship doing business as SYMTEK, for $1.00 of a warrant to purchase 40,000 shares of Series C Preferred Stock at $3.75 per share (the "SYMTEK Warrant"), (ii) the issuance by the Company to Stanford University for $1.00 of a warrant to purchase 10,000 shares of Series C Preferred Stock at $3.75 per share (the "Stanford Warrant") and (iii) the issuance by the Company of up to 161,948 shares of Series C Preferred Stock at $3.75 per share in a Third Closing pursuant to the Series C Agreement. 3. Effect of Amendment; Counterparts. Except as amended as set forth in this Amendment, the Agreement shall continue in full force and effect. This Amendment may be executed in counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Notwithstanding anything in the Agreement to the contrary, each Purchaser shall become a party to the Agreement upon full execution of this Amendment by the Company, Holders of a majority of the Registrable Securities then outstanding and such Purchaser. 2 36 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. 3DFX INTERACTIVE, INC. By:________________________ Title:_____________________ PURCHASER: By:________________________ Title:_____________________ [SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT] 3 37 HOLDERS: U.S. Venture Partners IV, L.P. By Presidio Management Group IV, L.P. Its General Partner By_________________________________________ Title______________________________________ Address: 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 Second Ventures II, L.P. By Presidio Management Group IV, L.P. Its General Partner By_________________________________________ Title______________________________________ Address: 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 USVP Entrepreneur Partners II, L.P. By Presidio Management Group IV, L.P. Its General Partner By_________________________________________ Title______________________________________ Address: 2180 Sand Hill Road Suite 300 Menlo Park, CA 94025 [SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT] 4 38 Venrock Associates By -------------------------------- Title General Partner ----------------------------- Address: 755 Page Mill Road Palo Alto, CA 94304 Venrock Associates II, L.P. By -------------------------------- Title General Partner ----------------------------- Address: 755 Page Mill Road Palo Alto, CA 94304 [SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT] 5 39 Norwest Equity Partners V, a Minnesota Limited Liability Partnership By: Itasca Partners V, L.L.P., General Partner By________________________________________ George Still, Jr., Partner Address: 245 Lytton Ave., Suite 250, Palo Alto, California 94301-1426 Chase Venture Capital Associates, L.P., (formerly known as Chemical Venture Capital Associates, A California Limited Partnership) By: Chase Venture Partners (formerly known as Chemical Venture Partners), Its General Partner By________________________________________ Title_____________________________________ Address: 380 Madison Ave., 12th Floor New York, New York 10017 Intel Corporation By________________________________________ Title_____________________________________ Address: 2200 Mission College Blvd. Santa Clara, CA 95052-8119 [SIGNATURE PAGE TO AMENDMENT NO. 2 TO INVESTORS' RIGHTS AGREEMENT] 6 40 EXHIBIT A [Attach Investors' Rights Agreement] 7 41 AMENDMENT NO. 3 TO INVESTORS' RIGHTS AGREEMENT This Amendment No. 3 (the "Amendment") to the Investors' Rights Agreement dated as of September 12, 1996, as amended as of November 25, 1996, as amended December 18, 1996, is made and entered into as of March 27, 1997 by and among 3Dfx Interactive, Inc. (the "Company"), the holders of a majority of the outstanding Registrable Securities (as defined in the foregoing Investors' Rights Agreement, the "Agreement") of the Company. This Amendment is intended to be an amendment to the Agreement to amend the lock-up provisions of the Agreement. This Amendment shall become effective as to the Company and all Holders as of the date hereof. All capitalized terms used, but not defined, herein shall have the same meanings ascribed to them in the Agreement. RECITALS A. The Company is currently contemplating the registration of shares of its Common Stock for sale to the public. B. In connection with such registration, the underwriters have advised the Company that current market conditions require the lock up of shares held by the Holders be extended until the later of (i) 180 days after the effective date of the Registration Statement or (ii) the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997, rather than 120 days. C. The Company wishes to obtain the consent of the Holders of a majority of Registrable Securities currently outstanding to amend Section 1.8 of the Agreement with respect to such lock-up provisions. AGREEMENT NOW, THEREFORE, in consideration of the foregoing and of the mutual promises and covenants contained herein, the parties agree as follows: 1. Section 1.8 of the Agreement is hereby amended to read in its entirety as follows, with the changes thereto underlined: "1.8 Lock-Up Provision. Upon receipt of a written request by the Company or by its underwriters, the Holders shall not sell, sell short, grant an option to buy, or otherwise dispose of shares of the Company's Common Stock or other securities (except for any such shares included in the registration) until the later of (i) one hundred and eighty (180) days after the effective date of the Registration Statement or (ii) the open of market on the third trading day following the date of public disclosure of the Company's financial results for the fiscal year ending December 31, 1997 (the "Lock-Up Period") (other than any transfer of shares as a bona fide gift or gifts, or by will or intestacy or, if the Holder is a partnership or corporation, any distribution by such partnership or corporation to its 42 partners or shareholders provided that the distributees thereof agree in writing to be bound by the terms of this Lock-Up Agreement, or with the prior written consent of the managing underwriter); provided, however, that such Holder shall have no obligation to enter into the agreement described in this Section unless all executive officers and directors of the Company and all other Holders and holders of other registration rights from the Company enter into similar agreements. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said Lock-Up Period." 2. Except as amended as set forth in this Amendment, the Agreement shall continue in full force and effect. This Amendment may be executed in counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date and year first above written. 3Dfx INTERACTIVE, INC. By: ____________________________________ Title: _________________________________ ________________________________________ Greg Ballard JON H. BEEDLE & SANDRA L. BEEDLE FAMILY TRUST DATED 6/12/91 By: ____________________________________ BELL FAMILY TRUST By: ____________________________________ -2- 43 Donald Bell WILLIAM A. BENNETT & KAREN L. BENNETT REVOCABLE TRUST DTD 6/30/88 By: ____________________________________ ________________________________________ Lise J. Buyer ________________________________________ Gordon Campbell GENE PEARCE CARTER AND PATRICIA JO-ANN CARTER, TRUSTEES, CARTER FAMILY TRUST By: ____________________________________ By: ____________________________________ CHARTER VENTURES II. L.P. By: ____________________________________ Title: _________________________________ -3- 44 CHASE VENTURE CAPITAL ASSOCIATES, L.P. By: ____________________________________ Title: _________________________________ CHEMICAL VENTURE CAPITAL ASSOCIATES By: ____________________________________ Title: _________________________________ ________________________________________ Richard E. Christopher ________________________________________ Sherman Cunningham ________________________________________ Brian J. Currie ________________________________________ Russell Devore ________________________________________ John J. and Janice K. Dorris -4- 45 _______________________________________ Stephanie C. Dorris _______________________________________ David J. Fisher _______________________________________ Darryl Foster _______________________________________ Marc A. Friend EDWARD L. GELBACH, TRUSTEE OF THE EDWARD L. GELBACH 1987 TRUST By: ___________________________________ Title: ________________________________ _______________________________________ Leslie T. Harlan _______________________________________ Leslie J. Hauser _______________________________________ Greogry J. Hedman -5- 46 _______________________________________ Michael F. Hornig INTEL CORPORATION By: ___________________________________ Title: ________________________________ _______________________________________ Henri Jarrat STEPHEN C. JOHNSON & MARTHA W. JOHNSON, TRUSTEES, JOHNSON FAMILY TRUST By: ___________________________________ _______________________________________ Marc E. Jones _______________________________________ Adam C. Joseph _______________________________________ Eddie Kawamura _______________________________________ Jeffrey P. Kellman -6- 47 _______________________________________ Marian Klein _______________________________________ Frank S. Madren _______________________________________ Jatinder Makker _______________________________________ Gary F. Martin MARVER LIVING TRUST DTD 12/24/92, JAMES D. MARVER, TRUSTEE By: ___________________________________ _______________________________________ George E. Miller, Jr. _______________________________________ Greg J. Moran _______________________________________ Koji Morihiro -7- 48 NORWEST EQUITY PARTNERS V By _____________________________________ Title __________________________________ ________________________________________ James K. O'Brien ________________________________________ Henry O'Hara ________________________________________ John Payne ________________________________________ Robert G. Pipkin ________________________________________ P. Kurt & Theresa O. Preising ________________________________________ Lawrence F. Probst III ________________________________________ Stephen M. Race -8- 49 ________________________________________ Michael D. Redden ________________________________________ Phillip H. Ribbs ________________________________________ Stephen H. & Sylvie Ribbs S.C. CUBED INVESTMENT PARTNERSHIP By _____________________________________ Title __________________________________ ________________________________________ Jan B. Schwartz ________________________________________ David E. Scott SEGA ENTERPRISES, LTD. By _____________________________________ Title __________________________________ -9- 50 THE SOBRATO 1979 REVOCABLE TRUST By _____________________________________ Title __________________________________ ________________________________________ Gregory Sollers ________________________________________ Lauree A. Stangel ________________________________________ Bernard Stolar ________________________________________ Dolores Stone ________________________________________ Richard Stubblefield ________________________________________ George S. Taylor ________________________________________ Jeffrey A. Thomas -10- 51 ________________________________________ Dennis Thorley ________________________________________ John J. Tretton III UMAX DATA SYSTEMS, INC. By _____________________________________ Title __________________________________ ________________________________________ Ivonne Valdes VENROCK ASSOCIATES By _____________________________________ Title __________________________________ VENROCK ASSOCIATES II, L.P. By _____________________________________ Title __________________________________ -11- 52 BERNARD V. AND THERESA V. VONDERSCMITT JOINT DECLARATION OF TRUST DATED 01/04/96 By _____________________________________ Title __________________________________ WESTERN WIDGETS C.N.C. INC. By _____________________________________ Title __________________________________ ________________________________________ Douglas A. Westley ________________________________________ Stephen J. Zelencik MITSUI & CO., LTD., MITSUI COMTEK CORPORATION By _____________________________________ Title __________________________________ -12- 53 ________________________________________ John Montgomery ________________________________________ Linda P. Montgomery GCA INVESTMENTS 96 By _____________________________________ Title __________________________________ USVP ENTREPRENUER PARTNERS II, L.P. SECOND VENTURES II, L.P. U.S. VENTURE PARTNERS IV, L.P. By _____________________________________ Title __________________________________ LIGHTHOUSE CAPITAL PARTNERS, L.P. By _____________________________________ Title __________________________________ MMC/GATX PARTNERSHIP NO. 1 By _____________________________________ Title __________________________________ -13- 54 SILICON VALLEY BANK By _____________________________________ Title __________________________________ TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY, LTD. By _____________________________________ Title __________________________________ -14- EX-10.8 9 FORM OF RESTRICTED STOCK PURCHASE AGREEMENT 1 EXHIBIT 10.8 RESTRICTED STOCK PURCHASE AGREEMENT THIS AGREEMENT is made as of the __th day of _______, 199_, by and between 3Dfx Interactive Inc., a California corporation (the "Company"), and ____________ (the "Purchaser"). In consideration of the mutual covenants and representations herein set forth, the Company and Purchaser agree as follows: 1. Purchase and Sale of Stock. 1.1 Purchase of Stock. Subject to the terms and conditions of this Agreement, the Company hereby agrees to sell to Purchaser and Purchaser agrees to purchase from the Company at the Closing an aggregate of _______ shares of the Company's Common Stock (the "Stock") at a price of $.__ per share, for an aggregate purchase price of $________. The shares of Stock shall be purchased by delivery of Purchaser's full recourse promissory note in the principal amount of $________ in substantially the form of Exhibit A attached hereto (the "Note"). 1.2 Security for Note. As security for the payment of the Note and any renewal or modification thereof, Purchaser hereby pledges and grants to the Company a security interest in all of the Stock pursuant to a Security Agreement in substantially the form attached hereto as Exhibit B (the "Security Agreement"). As part of this pledge, Purchaser will sign and deliver to the Secretary of the Company ("Escrow Agent") a Stock Assignment duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit C (the "Assignment"), together with the certificate or certificates evidencing the Stock; the Assignment and the certificate or certificates evidencing the Stock are to be held in escrow by the Escrow Agent pursuant to an Escrow Agreement in substantially the form attached hereto as Exhibit D (the "Escrow Agreement-) for use if, as and when required pursuant to the Security Agreement. 2. Closing. The purchase and sale of the Stock shall occur at a Closing to be held on the date hereof (the "Closing Date"). The Closing will take place at the principal office of the Company or at such other place as shall be designated by the Company. At the Closing, Purchaser shall deliver to the Company the Note and the Company will issue the Stock registered in the name of Purchaser. In addition, the Purchaser shall sign and deliver the Security Agreement, the Assignment and the Escrow Agreement. 2 3. Purchase Option. 3.1 Grant of Purchase Option. Beginning on the Closing Date, the Stock shall be subject to the right and option of the Company to repurchase the Stock (the "Purchase Option") as set forth in this Section 3. In the event Purchaser's employment by or consulting relationship with the Company (including a parent or subsidiary of the Company) shall cease for any reason, or no reason, with or without cause, including death, disability or involuntary termination ("Termination"), the Company shall have the right, as provided in Section 3.2 hereof, to purchase from Purchaser or his personal representative, as the case may be, at the purchase price of $____ per share (the "Option Price"), all of the Stock that has not been released from the Purchase Option in accordance with the following schedule: (a) On __________, 199_, one-eighth (1/8th) of the shares of the Stock. (______ shares) shall be released from the Purchase Option; (b) At the end of each full month elapsing after __________, 199_, an additional one forty-second (1/42nd) of the remaining _______ shares of Stock (______ shares) will be released from the Purchase Option. 3.2 Exercise of Purchase Option. Within ninety (90) days following Termination, the Company shall notify Purchaser by written notice delivered or mailed as provided in Section 9.3 as to whether it wishes to purchase the Stock pursuant to exercise of the Purchase Option. If the Company (or its assignees) elects to purchase the Stock hereunder, it shall specify a date (which shall not be later than thirty (30) days from the date of the above described notice) and a place for the closing of the transaction. At such closing, the Company (or its assignees) shall tender payment for the Stock and the certificates representing the Stock so purchased shall be canceled. Purchaser hereby authorizes and directs the Secretary or Transfer Agent of the Company to transfer the Stock as to which the Purchase Option has been exercised from Purchaser to the Company (or its assignees). The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company, or by check, or both. 3.3 No Limit on Rights. Nothing in this Agreement shall affect in any manner whatsoever the right or power of the Company, or a parent or subsidiary of the Company, to terminate Purchaser's employment or consulting relationship, for any reason, with or without cause, subject to Section 3.4 below. 3.4 Escrow of Stock. Purchaser agrees at the Closing hereunder, to deliver to and deposit with the Escrow Agent named in the Escrow Agreement of even date and delivered herewith, the certificate or certificates evidencing the Stock and the -2- 3 duly executed Assignments. Such documents are to be held by the Escrow Agent until delivered pursuant to the terms of such Escrow Agreement. Shares of the Stock which are subject to the Purchase Option shall not be transferable by the Purchaser. 4. Restriction on Transfer: Rights of First Refusal. 4.1 Rights of First Refusal. Before any shares of Stock registered in the name of Purchaser may be sold or transferred (including transfer by operation of law other than as excepted pursuant to Section 4.2 hereof), Purchaser must first obtain the written consent of the Company. If such written consent is not given, then the Company or, if the Company desires, the other shareholders of the Company, shall have a right of first refusal to purchase such shares for the same price and on the same terms and conditions offered to such prospective purchaser, in accordance with the procedures set forth below (the "Rights of First Refusal"). If the proposed price per share is to be other than in cash, then an equivalent cash value shall be determined in good faith by the Board of Directors of the Company. If a transfer other than a voluntary sale is proposed to be made, then the price per share for purposes of the Rights of First Refusal shall be determined by the mutual agreement of Purchaser and the Company or, if no agreement can be reached, the price shall be the fair market value of such shares, as determined in good faith by the Company's Board of Directors. Prior to any sale or transfer of any shares of the Stock, Purchaser, or the legal representative of Purchaser, shall promptly deliver to the Secretary of the Company a written notice of the price and other terms and conditions of the offer by the prospective purchaser, the identity of the prospective purchaser, and, in the case of a sale, Purchaser's bona fide intention to sell or dispose of such shares together with a copy of a written agreement between Purchaser and the prospective purchaser conditioned only upon the satisfaction of the procedures set forth in these Rights of First Refusal. If the Company does not give its written consent to such transfer, then the Company (or its assignees) shall, for thirty (30) days after such notice from Purchaser, have the right under this Section 4 to purchase some or all such shares, as set forth herein. After the expiration of the Rights of First Refusal, or upon the written consent of the Company to the proposed transfer, Purchaser may sell or transfer the shares specified in the notice to the Company, on the terms and conditions specified in such notice; provided, however, that the sale must be consummated within three (3) months after the date of the notice and that all shares sold or transferred shall remain subject to the provisions and restrictions of this Agreement and shall carry a legend to that effect. If the Rights of First Refusal under this Section 4 are not exercised but Purchaser fails to consummate such sale on the same terms and conditions as set forth -3- 4 in the notice to the Company within three (3) months after the date of the notice, then such Rights of First Refusal shall be reinstated. 4.2 Termination: Exceptions. The provisions of this Section 4 shall terminate on the closing date of an underwritten public offering of Common Stock of the Company. The provisions of Section 4.1 shall not apply to a transfer of any shares of Stock by Purchaser, either during his lifetime or on death to his ancestors, descendants or spouse, or any custodian or trustee for the account of Purchaser or Purchaser's ancestors, descendants or spouse; provided, in each such case a transferee shall receive and hold such shares subject to the provisions and restrictions on transfer of this Agreement and there shall be no further transfer of such shares except in accordance herewith. 4.3 Effect of Transfers Not in Compliance. The Company shall not be required to transfer on its books any shares of Stock of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or the Security Agreement, or to treat as owner of such shares, or to accord the right to vote as such owner or to pay dividends to, any transferee to whom such shares shall have been so transferred. 5. Stock Splits. etc. If, from time to time during the term of the Purchase Option or Rights of First Refusal as provided in Sections 3 and 4 hereof, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding securities of the Company or if there is any consolidation, merger or sale of all, or substantially all, of the assets of the Company, then in such event any and all new, substituted or additional securities to which Purchaser is entitled by reason of his ownership of Stock shall be immediately subject to the Purchase Option and Rights of First Refusal and be included in the term "Stock" for all purposes of this Agreement with the same force and effect as the shares of Stock presently subject to this Agreement. 6. Legends. All certificates representing any shares of Stock of the Company subject to the provisions of this Agreement shall have endorsed thereon substantially the following legends: (a) "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS UPON AND OBLIGATIONS WITH RESPECT TO TRANSFER AND RIGHTS OF REPURCHASE AND RIGHTS OF FIRST REFUSAL AS SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY." -4- 5 (b) "THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED." (c) Any legend required under applicable state securities laws. 7. Investment Intent: Covenant. In purchasing the Stock, Purchaser represents to the Company as follows: (a) Purchaser has had an opportunity to discuss the business prospects and business plan of the Company with the officers and directors of the Company. Purchaser has a preexisting personal or business relationship with the Company or one of its officers, directors or controlling persons and/or by reason of his business or financial experience he has the capacity to protect his own interests in connection with the transactions contemplated by this Agreement. Purchaser further acknowledges that the Stock is highly speculative and involves a high degree of risk, and represents and warrants that he is able, without impairing his financial condition, to hold the Stock for an indefinite period of time and suffer a complete loss of his investment therein. (b) Purchaser is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of said Stock or with any present intention of distributing or selling said Stock and he does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him to sell said Stock. Purchaser understands that the Stock has not been registered under the Securities Act of 1933, as amended, (the "Act") and may not be sold or otherwise disposed of except pursuant to an effective Registration Statement filed under the Act or pursuant to an exemption from the registration requirements of such Act. Purchaser acknowledges that the Company is under no obligation to register the Stock under the Act on his behalf. Purchaser represents and warrants that he understands that the Stock constitutes restricted securities within the meaning of Rule 144 promulgated under the Act; that the exemption from registration under Rule 144 will not be available in any event for at least two years from the date of purchase and payment for the Stock, and even then will not be available unless the terms and conditions of Rule 144 are complied with and will be subject to the limitations on amount set forth therein. (c) Without limiting the representations and warranties set forth above, Purchaser agrees he will not make any transfer of all or any part of the Stock -5- 6 unless (i) there is a Registration Statement under the Act in effect with respect to such transfer and such transfer is made in accordance therewith, or (ii) Purchaser has furnished the Company an opinion of counsel satisfactory to the Company and its counsel to the effect that such transfer will not require registration under the Act. Purchaser agrees that, prior to the closing of the Company's initial public offering registered under the Act, he will not transfer any of such securities in a public offering without the Company's prior consent, even if he is otherwise permitted to transfer them pursuant to Rule 144(k) under the Act. 8. Lock-up Agreement. In the event the Company sells any of its securities in an underwritten initial public offering pursuant to a registration filed pursuant to the Act, and in connection with each registered offering under the Act within three (3) years of such initial offering, Purchaser agrees (but only if each officer and director of the Company also agrees), upon request from the Company or the managing underwriter of such initial or other public offering, not to sell, make any short sale of, loan, grant any option for the purchase of, or otherwise dispose of, any of the Stock, without the prior written consent of the Company or such underwriter, as the case may be, for such period of time (not to exceed one hundred twenty (120) days) from the effective date of such registration as the Company or the underwriter may specify. Purchaser further agrees that the Company may place stop-transfer notations with the transfer agent of the Stock to enforce this provision. 9. Miscellaneous. 9.1 Further Assurances. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement, including, if applicable, execution of the Consent of Spouse attached hereto as Exhibit E. 9.2 Entire Agreement. This Agreement, including any exhibits, is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior oral and written understandings of the parties. 9.3 Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at his address shown on the Company's employment records and to the Company at the address of its principal corporate offices (attention: President) or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 9.4 Assignment of Rights: Binding Upon Successors. The Company may assign its rights and delegate its duties under Sections 3 and/or 4 hereof. This -6- 7 Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Purchaser, his heirs, executors, administrators, successors and assigns. 9.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents to be wholly performed within the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. 3DFX INTERACTIVE, INC. a California corporation By:______________________________________ Title:___________________________________ PURCHASER _________________________________________ [Name of Purchaser] Address [Address of Purchaser] -7- 8 EXHIBIT A FULL RECOURSE PROMISSORY NOTE $________ Sunnyvale, California ___________, 199_ For value received, the undersigned (the "Maker") promises to pay to 3Dfx Interactive, Inc., a California corporation (the "Company"), or order, at its principal office, the principal sum of ____________ Dollars ($________) without interest. Said principal shall be due as follows: This Note shall be due and payable on __________, 199_. Notwithstanding the foregoing, this Note shall be immediately due and payable upon the earlier of the following.: (a) any termination of the employment or association between the undersigned and the Company or (b) the merger of the Company with or into another corporation, in which the Company is not the surviving corporation, or the sale of all or substantially all of the assets of the Company. All payments are to be made in lawful money of the United States of America. The privilege is reserved to prepay any portion of the Note at any time. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The Maker waives presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note is secured by a pledge of certain shares of the Company's Common Stock pursuant to a Security Agreement between the Company and the Maker of even date herewith, and is subject to all the provisions thereof. This Note is also subject to the terms of a Restricted Stock Purchase Agreement between the Company and the Maker of even date herewith. The holder of this Note shall have full recourse against the Maker, and shall not be required to proceed against the collateral security pledged to secure this Note in the event of default. ______________________________ [Name of Purchaser] 9 EXHIBIT B SECURITY AGREEMENT THIS SECURITY AGREEMENT is made as of the __th day of _______, 199_ between 3Dfx Interactive, Inc., a California corporation ("Pledgee" or the "Company"), and ____________ ("Pledgor"). Recitals Pledgor purchased an aggregate of _______ shares of Pledgee's Common Stock (the "Stock") under a Restricted Stock Purchase Agreement dated _______, 199_ (the "Purchase Agreement"), between Pledgor and Pledgee. As payment for the Stock, Pledgor delivered a promissory note (the "Note") in the total principal amount of _________. The Note and the obligations hereunder are as set forth in Exhibit A to the Purchase Agreement. NOW THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In order to secure Pledgor's obligation to pay the Note in full, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of the Stock (herein sometimes referred to as the "Collateral") represented by certificate number _______. The pledged Stock (together with an executed blank stock assignment for use in transferring all or a portion of the Stock to Pledgee if, as and when required pursuant to this Security Agreement) shall be delivered to the Secretary of Pledgee, or such other person designated by the Company ("Escrow Agent") to be held pursuant to an Escrow Agreement in the form of Exhibit D to the Purchase Agreement (the "Escrow Agreement") as security for the repayment of the Note, and any extensions or renewals thereof. 2. Pledgor's Representations and Covenants. To induce Pledgee to enter into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Stock is not subject to any encumbrances, defenses and liens other than the security interest granted hereunder, -1- 10 and Pledgor will not further encumber the Stock in any manner without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G"), Pledgor agrees to cooperate with Pledgee in making any amendment to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Stock pledged hereunder. 4. Stock Adjustments. In the event that during the term of the pledge any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee and Escrow Agent under the terms of this Security Agreement and the Escrow Agreement in the same manner as the Stock originally pledged hereunder. In the event of substitution of such securities, Pledgor and Pledgee shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Stock" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of this pledge, subscription warrants or other rights or options shall be issued in connection with the pledged Stock, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock or other securities so acquired by Pledgor as it relates to the pledged Stock then held by Escrow Agent shall be immediately delivered to Escrow Agent, to be held under the terms of this Security Agreement in the same manner as the Stock pledged. 6. Default. Pledgor shall be deemed to be in default of the Note and of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of ten (10) days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Purchase Agreement or contained in this Security Agreement for a period of ten (10) days after written notice thereof from Pledgee. -2- 11 In the case of an event of default, as set forth above, Pledgee shall have the right to accelerate payment of the Note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue its remedies under the California Commercial Code. 7. Withdrawal or Substitution of Collateral. Until the Note has been paid in full, Pledgor shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 8. Term. The within pledge of Stock shall continue until the payment of all indebtedness secured hereby, at which time the remaining pledged Stock shall be promptly delivered to Pledgor, subject to the terms of any other agreement between Pledgor and Pledgee. 9. Insolvency. Pledgor agrees that if a bankruptcy or insolvency proceeding is instituted by or against him, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the case of default. 10. Escrow Agent Liability. The liability of the Escrow Agent shall be limited as provided in the Escrow Agreement. 11. Miscellaneous. (a) Invalidity of Particular Provisions. Pledgor and Pledgee agree that the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein contained unenforceable or invalid. (b) Successors or Assigns. Pledgor and Pledgee agree that all of the terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. (c) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California as applied to contracts between California residents to be wholly performed within the State of California. -3- 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. "PLEDGEE" 3DFX INTERACTIVE, INC. a California corporation By:_________________________________________ Title:______________________________________ PURCHASER ____________________________________________ [Name of Purchaser] Address [Address of Purchaser] -4- 13 EXHIBIT D ESCROW AGREEMENT _______________, 199_ Secretary 3Dfx Interactive, Inc. 4435 Fortran Drive San Jose, California 95134 Dear Sir or Madam: As Escrow Agent for both 3Dfx Interactive, Inc., a California corporation (the "Company"), and the undersigned purchaser of stock of the Company (the "Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Purchase Agreement, dated as of _______, 199_ (the "Agreement"), to which a copy of this Escrow Agreement is attached as Exhibit D, in accordance with the following instructions: 1. Pledge of Stock. Purchaser has pledged an aggregate of ____________ shares of the Company's Common Stock (the "Stock") to the Company pursuant to a Security Agreement in the form of Exhibit B to the Agreement between Purchaser and the Company of even date herewith (the "Security Agreement") as security for the performance of Purchaser's obligations to the Company under a note (the "Note") delivered to the Company in connection with the purchase of the Stock. This pledge shall continue until the Note has been paid in full. 2. Delivery Upon Default. If an Event of Default shall occur under the Security Agreement or the Note, you shall, within ten (10) days of receipt of a written request of an authorized officer of the Company given to you and Purchaser, deliver the certificate evidencing the Stock and the stock assignments to the Company to enable the Company to exercise its rights as a secured party under the Commercial Code of the State of California. 3. Exercise of Purchase Option. In the event the Company and/or any assignee of the Company (referred to collectively for convenience herein as the "Company") exercises the Purchase Option set forth in the Agreement, the Company shall give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably 14 authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. At the closing, you are directed (a) to date the stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (by check or by cancellation of any debt owed by Purchaser to the Company) for the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 4. Deposit of Certificates. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing the Stock to be held by you hereunder and any additions and substitutions to said shares as defined in the Agreement and the Security Agreement. Purchaser does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities all documents necessary or appropriate to make such securities negotiable and to complete any transaction herein contemplated, including but not limited to the filing with the Department of Corporations of the State of California of an Application for Consent to Transfer Securities Subject to Legend or Escrow Condition Pursuant to Section 25151 of the California Corporate Securities Law of 1968, if required. Subject to the provisions of this Section 3, Purchaser shall exercise all rights and privileges of a shareholder of the Company while the Stock is held by you. 5. Term. This escrow shall commence upon the date hereof and shall terminate five (5) years and one month from the date hereof or earlier if the Company shall give you notice that the Note has been paid in full and the Shares are no longer subject to the Purchase Option. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder. 6. Provisions Applicable to Escrow Agent. With respect to your performance of your obligations, the following terms shall apply: (a) Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. (b) You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as -2- 15 attorney-in-fact for Purchaser while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. (c) You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. (d) You shall not be liable in any respect on account of the identity, authorities or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. (e) You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. (f) Your responsibilities and rights as Escrow Agent hereunder shall pass to any successor Secretary and/or Assistant Secretary of the Company. (g) If you reasonably require other or further instruments in connection with this Escrow Agreement or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. (h) It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such disputes shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction, but you shall be under no duty whatsoever to institute or defend any such proceedings. (i) By signing this Escrow Agreement, you become a party hereto only for the purpose of said Escrow Agreement; you do not become a party to the Agreement or the Security Agreement. -3- 16 7. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to Purchaser at his address shown on the Company's employment records and to you and the Company at the address of its principal corporate offices (attention: Secretary and attention: President, respectively) or at such other address as such party may designate by ten (10) days prior written notice to the other parties hereto. 8. Successors and Assigns. This instrument shall be binding upon and inure to the benefit of the parties hereto, and their respective successors and permitted assigns. Very truly yours, 3DFX INTERACTIVE, INC. a California corporation By:____________________________ Title: Secretary PURCHASER: _______________________________ [Signature of Purchaser] ESCROW AGENT: _______________________________ -4- 17 EXHIBIT C ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I, ____________, hereby sell, assign and transfer unto_____________________________________________________(__________) shares of the Common Stock of 3Dfx Interactive, Inc., standing in my name on the books of said corporation represented by Certificate No. ____ herewith and do hereby irrevocably constitute and appoint to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: __________, 199_ Signature: _____________________________ [Signature of Purchaser] This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and 3Dfx Interactive, Inc., dated __________, 199_. INSTRUCTION: PLEASE DO NOT FILL IN ANY BLANKS OTHER THAN THE SIGNATURE LINE. 18 EXHIBIT E CONSENT OF SPOUSE I, _______________, spouse of ___________, have read and approved the foregoing Restricted Stock Purchase Agreement and the exhibits thereto (the "Agreement"). In consideration of the Company's granting my spouse the right to purchase the Stock as set forth in the Agreement, I hereby agree to be irrevocably bound by the Agreement and further agree that any community property or other such interest shall be similarly bound by the Agreement. I hereby appoint my spouse as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. Dated:______________________, 199_ ______________________________ Spouse of Purchaser EX-10.9 10 TECHNOLOGY DEVELOPMENT AGREEMENT W/SEGA 1 EXHIBIT 10.9 TECHNOLOGY DEVELOPMENT AND LICENSE AGREEMENT This Technology Development and License Agreement (the "AGREEMENT") is made and entered into as of February 28, 1997 (the "EFFECTIVE DATE"), by and between Sega Enterprises, Ltd., a Japanese corporation having its principal place of business at 212, Haneda 1-Chome, Ohta-ku, Tokyo 194, Japan ("SEGA") and 3Dfx Interactive, Inc. ("3DFX"), a California corporation having its principal place of business at 4435 Fortran Drive, San Jose, California 95134. RECITALS WHEREAS, Sega is in the business of developing, marketing, and distributing video games for both coin-operated arcade and consumer markets, video game consoles, peripherals and various other products and services, throughout the world; WHEREAS, 3Dfx is in the business of creating advanced 3D graphics accelerators, including semiconductor chips, hardware, and software, for both coin-operated arcade and consumer video game markets throughout the world; WHEREAS, Sega desires that 3Dfx develop for Sega a semiconductor 3D graphics accelerator [*], and that 3Dfx license to Sega on a limited exclusive basis the manufacturing rights thereto, including without limitation for Sega's use with, and distribution in, Sega's forthcoming consumer video game console product, [*] WHEREAS, 3Dfx is willing to promote the [*] Console video game architecture in connection with 3Dfx's 3D graphics technology; WHEREAS, Sega desires that 3Dfx provide assistance to qualify 3Dfx and Sega designated foundries to produce the 3D accelerator [*] in commercial quantities; WHEREAS, Sega desires to obtain certain licenses from 3Dfx for certain interface software for the 3Dfx graphic accelerator [*] and certain hardware to enable manufacturing and support; and WHEREAS, 3Dfx is willing to perform the development, grant the licenses, and provide the other assistance required by Sega in connection with such 3Dfx graphics accelerator [*]: *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 1 2 IT IS THEREFORE AGREED AS FOLLOWS: 1. DEFINITIONS Unless otherwise defined or stated, "days" shall mean calendars days, "including" shall mean "including without limitation", and the following terms shall have the meanings stated below: 1.1 "ALPHA VERSION [*]" means a preliminary version of the [*] Graphics [*] with functionality sufficiently complete and usable to enable hardware and software engineers to operate, test and evaluate for further production, and integration, as further set forth in the Specifications. 1.2 "ARCADE TOOL BOX" means 3Dfx's proprietary arcade game developer software toolbox. 1.3 [*] 1.4 "BETA VERSION [*]" means a preliminary version of the [*] Graphics [*] with functionality complete and usable in all material respects, but which is not in a form intended for production in commercial volumes, as further set forth in the Specifications. 1.5 [*] 1.6 "[*] GRAPHICS [*]" means the 3D graphic accelerator [*] as provided to Sega for use in the [*] Console, as set forth in the Specifications, [*] 1.7 "[*] GRAPHICS [*] TECHNOLOGY" means any and all inventions, works of authorship, technology, know-how, algorithms, methods, processes, procedures, work-arounds and Intellectual Property Rights relating to the [*] Graphics [*], exclusive of the Sega Deliverables, Sega Foundry Deliverables, the [*] Console Technology, and all associated documentation and all related modifications and derivative works and all Intellectual Property Rights related thereto. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 2 3 1.8 "[*] MASK DATA SET" means the manufacturing database and mask level information to be delivered by 3Dfx to a Sega Foundry or the 3Dfx Foundry to allow such foundry to manufacture the [*] Graphics [*], as further set forth in Schedule 1.8. 1.9 [*] 1.10 "DELIVERABLES" means the deliverable items specified for each Milestone on the Development Schedule. 1.11 "DEVELOPMENT SCHEDULE" means the schedule for the completion of the Milestones and acceptance of Deliverables as set forth in Schedule 1.10. 1.12 [*] 1.13 "[*] CONSOLE" means a video game console code-named [*], under development by Sega, including all components, enhancements, plug-ins, attachments, controllers, input and output devices, cables, connectors, peripherals and upgrades as further defined in Schedule 1.12. 1.14 "[*] CONSOLE TECHNOLOGY" means any and all inventions, works of authorship, technology, know-how, algorithms, methods, processes, procedures, work-arounds and Intellectual Property Rights relating to the [*] Console. 1.15 "[*] CONSOLE UNIT" means each [*] Graphics [*] purchased by Sega from the 3Dfx Foundry or a Sega Foundry for use by Sega in a [*] Console, [*] 1.16 "FOUR CORNER MANUFACTURING PROCESS TEST" means the industry standard four corner testing process to be used to test the Production Version [*] produced by the Sega Foundry as further specified in Schedule 1.15. 1.17 "INTELLECTUAL PROPERTY RIGHTS" means any and all rights existing now or in the future under patent law, copyright law, industrial design rights law, semiconductor chip and mask work protection law, moral rights law, trade secret law, trademark law, unfair competition law, publicity rights law, privacy rights law, and any and all similar proprietary rights, and any and all renewals, extensions, and restorations thereof, now or *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 3 4 hereafter in force and effect worldwide, including, without limitation, in the United States and Japan. 1.18 "MILESTONE" means an individual task or set of tasks to be completed by a certain date as described in the Development Schedule. 1.19 "NET ROYALTIES" means: (i) with respect to per unit royalties, nondefective per unit amounts reduced by two percent (2%) to take into account demonstration, internal use, free or sample products, any defective products, returns, credits, costs of collection; and (ii) with respect to royalties based on Reference Cost, per unit royalties, net of any royalties which would be due on (A) a reasonable number of demonstration, free, or sample products, and (B) returns of defective products; all of the foregoing net of Japanese or other withholding taxes. 1.20 [*] 1.21 "PRODUCTION VERSION [*]" means the [*] Graphics [*] in the form intended for production in commercial volume by a 3Dfx Foundry or by a Sega Foundry utilizing the [*] Mask Data Set provided by 3Dfx. 1.22 "SEGA ACCEPTANCE DATE" means the date that Sega first accepts the Production Version [*] manufactured by the initial Sega Foundry pursuant to Section 2.3(a)(iii). 1.23 "SEGA FOUNDRY" means a Sega-designated semiconductor manufacturing foundry approved by the parties to manufacture the [*] Graphics [*] in commercial volume in accordance with the provisions of Section 2.3. 1.24 "SEGA FOUNDRY CELL LIBRARIES" means the cell libraries and other design information of a proposed Sega Foundry, required by 3Dfx to qualify the fabrication process used at a proposed Sega Foundry and to create the 3Dfx Mask Data Set to be provided to such Sega Foundry, as further set forth in Schedule 1.24. The Sega Foundry Cell Libraries must relate to a fabrication process sufficiently advanced and sophisticated to manufacture the [*] Graphics [*]. 1.25 "SEGA FOUNDRY DELIVERABLES" means, collectively, the Sega Foundry Design Rules and Sega Foundry Cell Libraries. 1.26 "SEGA FOUNDRY DESIGN RULES" means the specifications, including (but not limited to) design rules, spice models, and process parameters of a proposed Sega Foundry, reasonably required by 3Dfx pursuant to Section 2.3 below, to qualify the *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 4 5 fabrication process used at a proposed Sega Foundry and to create the 3Dfx Mask Data Set, as further set forth in Schedule 1.26. The Sega Foundry Design Rules must relate to a fabrication process sufficiently advanced and sophisticated to manufacture the [*] Graphics [*]. 1.27 "SEGA PRODUCTS" [*] 1.28 "SOURCE CODE" means computer programs, instructions and related material written in a human-readable source language in form capable of serving as the input to a compiler or assembler program, and in form capable of being modified, supported and enhanced by programmers reasonably familiar with the source language. 1.29 "SPECIFICATIONS" or "PRO FORMA SPECIFICATIONS" means the descriptions of the technical requirements, component parts, features, functionality, performance criteria, operating conditions, interfaces, data transfer, processing parameters, and protocols, associated with the [*] Graphics [*], as set forth in Schedule 1.29. 1.30 "TEST VECTORS" means the test vectors to be supplied by 3Dfx and approved by Sega (such approval not to be withheld unreasonably) and used to test specific functionality of the Alpha, Beta, and Production Version [*]s, as set forth in the Specifications, Schedule 1.30. 1.31. "VERIFICATION TEST GAMES" means the sample games used to test the Alpha, Beta, and Production Version [*], as set forth in the Specifications, Schedule 1.31. 1.32 "3DFX FOUNDRY" means the semiconductor manufacturing facility designated by 3Dfx in Schedule 1.32 to manufacture the [*] Graphics [*] under this Agreement. 1.32 "3DFX GLIDE API" means 3Dfx's proprietary graphics accelerator API, as set forth on Schedule 1.33. 1.33 "3DFX GLIDE INTERNALS" means the 3Dfx Glide Software exclusive of the 3Dfx Glide API. 1.34 "3DFX GLIDE SOFTWARE" means 3Dfx's graphics accelerator driver software, together with all associated documentation provided by 3Dfx including, but not limited to, the [*] Glide Programming Manual. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 5 6 2. DEVELOPMENT AND PROCESS QUALIFICATION PHASE 2.1 DEVELOPMENT. In accordance with the terms of this Section 2, 3Dfx shall develop the [*] Graphics [*] for manufacture in commercial volume by the 3Dfx Foundry and the Sega Foundry on Sega's behalf, and to complete all Milestones specified in the Development Schedule. Subject to 3Dfx completing the Milestones set forth in the Development Schedule, and Sega's acceptance thereof, Sega shall pay 3Dfx the engineering services charges as provided in Section 2.8. 2.2 [*] GRAPHICS [*] MANUFACTURED BY THE 3DFX FOUNDRY. (a) DELIVERY OF MILESTONE DELIVERABLES. 3Dfx shall complete and deliver to Sega, in accordance with the Development Schedule, the Alpha Version [*], the Beta Version [*] and the Production Version [*], all manufactured by the 3Dfx Foundry under the direction of 3Dfx, for Sega's acceptance testing in accordance with the acceptance procedure set forth in Section 2.2(b) below. Prior to each delivery, 3Dfx shall have completed all required testing applicable to such Deliverables to ensure material compliance with all applicable Specifications. (b) ACCEPTANCE TESTING. (i) ACCEPTANCE STANDARDS. Following receipt of the Deliverables for each Milestone, Sega shall have twenty-one (21) calendar days (the "VERIFICATION PERIOD") in which to use commercially reasonable efforts to review, examine and verify such Deliverables and notify 3Dfx of any material failure thereof to meet the applicable Specifications (a "DELIVERABLE FAILURE"). (A) ALPHA AND BETA VERSION ACCEPTANCE STANDARDS. The Alpha and Beta Version [*]s will each be deemed to have met the applicable Specifications and be accepted by Sega if (i) the Verification Test Games run successfully with each of the Alpha and the Beta Version [*]s in a Sega-approved personal computer test environment, [*], which shall be tested on the [*] Console; and (ii) the applicable set of the Test Vectors runs successfully with each of the Alpha and the Beta Version [*]s. (B) PRODUCTION VERSION ACCEPTANCE STANDARDS. The Production Version will be deemed to have met the applicable Specifications and be accepted by Sega if it satisfies the Beta Version Acceptance Standard set forth above and performs in accordance with the Specifications as verified by the Four Corner Manufacturing Process Test. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 6 7 (ii) ACCEPTANCE PROCEDURE. Sega agrees to use commercially reasonable efforts to detect any Deliverable Failure during the Verification Period, and if Sega discovers any Deliverable Failure, it shall promptly provide 3Dfx with written notice of such Deliverable Failure, including all information reasonably available regarding such Deliverable Failure. Upon receipt of such notice, 3Dfx shall use best efforts, at 3Dfx's sole cost and expense, to correct any such Deliverable Failure and to resubmit the corrected applicable Deliverables to Sega as soon as commercially and technically practicable, but in all cases within one hundred (100) days following Sega's notification of a Deliverable Failure. If Sega does not provide 3Dfx with notice of a Deliverable Failure within the Verification Period, the applicable Deliverable shall be deemed accepted by Sega. Subject to Sections 2.2(b)(iii) and 2.2(b)(iv) below, 3Dfx shall repeat the process of correction and resubmission of an applicable Deliverable, subject to additional Verification Periods, until Sega's acceptance. The parties agree that any failure by Sega to discover and notify 3Dfx of defects within any Verification Period shall not negate any of 3Dfx's representations or warranties, nor waive any of Sega's rights or remedies. (iii) EXCLUSIVE REMEDIES FOR ALPHA VERSION [*] DELAY. (A) PLACEMENT OF SEGA ENGINEERS. In the event that (1) 3Dfx fails to deliver the Alpha Version [*] (the "ALPHA DELIVERY DATE" as scheduled in accordance with the Development Schedule) and has not shipped the [*] Mask Data Set for the Alpha Version [*] to the 3Dfx Foundry within sixty (60) days of the Alpha Delivery Date, or (2) 3Dfx delivers the Alpha Version [*] on or before the Alpha Delivery Date, Sega has informed 3Dfx of a Deliverable Failure, and 3Dfx has not shipped the [*] Mask Data Set for the corrected Alpha Version [*] to the 3Dfx Foundry within sixty (60) days of such notification, then Sega may require 3Dfx to allow a team of Sega engineers to assist the 3Dfx * Graphics [*] design team. 3Dfx will, however, retain the control of the management of the development obligations under this Agreement. [*] Sega engineers may be placed on-site at the [*] development team location (the "3DFX FACILITIES") until the Production Version [*] for the Sega Foundry is accepted by Sega in accordance with Section 2.3(a)(iii), unless otherwise requested by 3Dfx and agreed to by Sega. 3Dfx shall cooperate regarding the placement of Sega engineers at the 3Dfx Facilities, including, but not limited to, the provision at 3Dfx's expense of sufficient office and lab facilities, personal computers, and workstations. Sega shall be responsible for salary or other compensation of such Sega engineers. (B) 3DFX HOUSE RULES. While working at the 3Dfx Facilities, all Sega engineers and other personnel shall: (i) at all times comply with all of 3Dfx's safety, security and mutually agreed confidentiality policies and procedures; and *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 7 8 (ii) limit their activities solely to assisting 3Dfx in the development of the [*] Graphics [*]. Sega will maintain its standard general liability insurance to protect against covered damages, costs or fees (including reasonable attorney's fees) arising out of or relating to any property damage, bodily injury, sickness, disease or death, caused directly by any negligent act or omission of any Sega personnel while on premises at the 3Dfx Facility, and will name 3Dfx as an additional insured under such issuance. All such Sega personnel shall execute confidentiality agreements reasonably acceptable to Sega and 3Dfx. (C) ALPHA TERMINATION REMEDY. In the event that 3Dfx fails to deliver the Alpha Version [*], in compliance with the Specifications and acceptance criteria thereof, within one hundred (100) days of the Alpha Delivery Date, then Sega in its sole discretion may: (i) terminate the requirement that 3Dfx develop the Alpha Version [*]; or (ii) determine that 3Dfx should continue its efforts to correct the Alpha Version [*] by a date determined by Sega. In the event that Sega elects to terminate the Alpha Version development as provided above, [*]. Provided that throughout the Alpha Version [*] development, until completed or terminated as provided above, 3Dfx provides commercially reasonable efforts to complete such development, the remedies set forth in this Section 2(b)(iii) shall be Sega's exclusive remedy for delays in Alpha Version [*] development. (iv) ADDITIONAL REMEDIES: BETA VERSION [*]. If Sega does not accept the Beta Version [*] pursuant to the procedure set forth in Section 2.2(b)(ii) by [*] then Sega shall have additional remedies as follows: (A) RECOUPMENT OF EXPENSES. Sega may recoup out of any advances or royalties owed to 3Dfx Sega's expenses incurred in relation to 2.2(b)(iii)(A); and (B) REDUCTION OF MANUFACTURING ROYALTY. Sega may reduce the Manufacturing Royalty to be paid by Sega to 3Dfx for the first [*] Console Units under Section 4.1 hereof, such reduction to be in the amount of [*] U.S. for each [*] Console Unit; and (C) FREE COST REDUCTION PROJECT. Sega may require 3Dfx to perform, at no cost or expense to Sega, the work necessary to complete the first "Cost Reduction Project", as defined in Section 2.4 hereof; and *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 8 9 (D) PLACEMENT OF SEGA ENGINEERS. Subject to the conditions of Section 2.2(b)(iii)(B), Sega may require 3Dfx to allow a team of Sega engineers to assist the [*] [*] [*] [*] design team, whether or not Sega has done so previously pursuant to Section 2.2(b)(iii). 3Dfx will, however, retain the control of the management of the development obligations under this Agreement. [*] such Sega engineers may be placed on-site at the [*] Facilities until the Production Version [*] for the Sega Foundry is accepted by Sega in accordance with Section 2.3(a)(iii), unless otherwise requested by 3Dfx and agreed to by Sega. 3Dfx shall cooperate regarding the placement of Sega engineers at the 3Dfx Facilities, including, but not limited to, the provision at 3Dfx's expense of sufficient office and lab facilities, personal computers, and workstations. Sega shall be responsible for salary or other compensation of such Sega engineers. (E) TERMINATION FOR BETA DELAY. In the event that Sega has not accepted the Beta Version [*] by [*], [*] then Sega may terminate the Agreement without obligation to make any further payments of any kind to 3Dfx and seek recovery of damages caused to Sega by the delay in the delivery of the Beta Version [*], provided, however, that any term of this Agreement notwithstanding, 3Dfx's liability to Sega for such damages shall not exceed [*] the engineering services charges paid by Sega to 3Dfx under this Agreement. In addition, if Sega terminates the Agreement as provided above, Sega may exercise the rights described in Section 3.2(e). Provided that throughout the Beta Version [*] development, until completed or terminated as provided above, 3Dfx provides commercially reasonable efforts, including without limitation, that 3Dfx makes no reductions in staffing or other resources, to complete such development, the remedies set forth in this Section 2.2(b)(iv) shall be Sega's exclusive remedy for delays in Beta version [*] development. In the event that 3Dfx does not provide commercially reasonable efforts, by (for example) reducing staffing or other resources, or otherwise, to complete such development, the remedies set forth in this Section 2.2(b)(iv) shall cease to be exclusive. 2.3 DEVELOPMENT TARGETED FOR SEGA FOUNDRY. (a) SEGA FOUNDRY QUALIFICATION. Sega shall have the right to designate a Sega Foundry to manufacture the [*] Graphics [*], subject only to such Sega Foundry satisfying reasonable requirements for qualification to manufacture. As set forth in this Section 2.3, 3Dfx shall timely evaluate, in accordance with the Development Schedule, or as otherwise agreed in writing by the parties, the reasonable requirements for the proposed Sega Foundry to manufacture the [*] Graphics [*] on a commercial basis, and, 3Dfx will promptly review and reasonably qualify the Sega Foundry to manufacture the [*] Graphics [*]. (i) EVALUATION OF PROPOSED SEGA FOUNDRY DELIVERABLES. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 9 10 Within a reasonable time after the Effective Date, Sega shall cause the proposed Sega Foundry to deliver to 3Dfx the Sega Foundry Deliverables. Within a reasonable time of receipt thereof, subject to the Development Schedule, 3Dfx shall commence evaluating the fabrication process set forth in the Sega Foundry Design Rules to determine whether such process is adequate to manufacture the [*] Graphics [*] in a form that functions in conformance with the Specifications. 3Dfx shall complete the evaluation of the fabrication and quality assurance process [*] provided that 3Dfx receives reasonable cooperation from the proposed Sega Foundry. As part of such evaluation process, 3Dfx may require, at 3Dfx's expense, (A) that the proposed Sega Foundry allow 3Dfx to send its personnel to visit the proposed Sega Foundry facilities (subject to 3Dfx's agreement to reasonable confidentiality and security procedures), and (B) that the proposed Sega Foundry manufacture and provide to 3Dfx for evaluation certain 3Dfx specified semiconductor chips. If qualification of the proposed Sega Foundry is feasible, 3Dfx shall use reasonable efforts to assist the proposed Sega Foundry achieving qualification. If qualification of the proposed Sega Foundry is not feasible, Sega shall propose an alternative Sega Foundry, and the parties shall repeat the foregoing evaluation process (including, if necessary Sega's proposal of additional Sega Foundries), until, with 3Dfx's reasonable assistance, a proposed Sega Foundry is deemed qualified. (ii) PORT OF [*] GRAPHICS [*] TO PROPOSED SEGA FOUNDRY. Within a reasonable time of 3Dfx providing written notice to Sega that it is probable that the proposed Sega Foundry will be able to manufacture the [*] Graphics [*] in a form that functions in conformance with the Specifications, 3Dfx shall commence porting the [*] Graphics [*] to the manufacturing process specified in the Sega Foundry Design Rules for the proposed Sega Foundry. Such porting may include 3Dfx, at its sole discretion, incorporating the Sega Foundry Cell Libraries into the * Mask Data Set to be used by the proposed Sega Foundry. (iii) ACCEPTANCE OF PRODUCTION VERSION. Upon completion of such port, 3Dfx shall deliver the [*] Mask Data Set directly to the proposed Sega Foundry for the sole purpose of allowing such proposed Sega Foundry to fabricate the Production Version [*] on a trial basis. No [*] Mask Data Set will be provided to Sega. Sega will use commercially reasonable efforts to cause the proposed Sega Foundry to provide samples of the Production Version [*] to 3Dfx no later than the date specified in the Development Schedule for the Production Version acceptance testing in accordance with Section 2.2(b) above. Upon Sega's providing written notice to 3Dfx of Sega's acceptance of such Production Version [*] manufactured by such proposed Sega Foundry, the proposed Sega Foundry shall be deemed a Sega Foundry. (iv) FOUNDRY AGREEMENT. As part of the qualification process, 3Dfx will require and Sega will cause each proposed Sega Foundry to execute confidentiality and/or foundry manufacturing agreements in a form to be negotiated in good faith between Sega and 3Dfx, covering the proposed Sega Foundry's use of the *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 10 11 [*] Mask Data Set and other 3Dfx Confidential Information, and the manufacturing of the [*] Graphics [*]. Such agreements shall contain terms at least as protective of 3Dfx's Intellectual Property Rights as the terms and conditions of this Agreement, and shall include a term allowing 3Dfx reasonable rights to audit the Sega Foundry's records of units of the [*] Graphics [*] shipped to Sega. (e) PROPOSED SEGA FOUNDRY DELAYS. Any delay, except for delays caused by 3Dfx, in a proposed Sega Foundry delivering the Sega Foundry Deliverables or other evaluation materials, or the Production Version [*]s, to 3Dfx, shall, at 3Dfx's discretion and upon written notice to Sega, result in an extension of all directly affected Milestone completion dates set forth on the Development Schedule by a period of time less than or equal to such delay. (f) ADDITIONAL SEGA FOUNDRY OR PROCESS QUALIFICATION. (i) SEGA REQUEST, PAYMENT AND PERFORMANCE. Sega may request in writing that the parties arrange for [*] Sega Foundry to manufacture the [*] Graphics [*]. In such event, Sega shall pay 3Dfx an engineering services charge, to be negotiated in good faith by the parties, for 3Dfx to perform an evaluation and qualification of such proposed Sega Foundry (such engineering services charge to be at least as favorable to Sega as the lowest amount charged by 3Dfx for similar work, and not to exceed a reasonable price). All such evaluation and qualification work shall be performed in accordance with the provisions of this Section 2.3. [*] (ii) QUALIFICATION OF NEW PROCESS AS A COST REDUCTION PROJECT. If the manufacturing process set for the in the Sega Foundry Design Rules for the proposed Sega Foundry is reasonably considered by 3Dfx to be a new process generation from either (A) the current fabrication process in use at the 3Dfx Foundry for the manufacture of the [*] Graphics [*]s, or (B) the fabrication process described in the Sega Foundry Design Rules for the initial Sega Foundry, then any such additional evaluation and qualification work performed by 3Dfx under this subsection (f) shall be counted as a Cost Reduction Project under Section 2.4 below. 2.4 COST REDUCTION DESIGN EFFORTS. [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 11 12 [*] 2.5 DOCUMENTATION FOR [*] GRAPHICS CHIPSET. 3Dfx hereby agrees to prepare and deliver to Sega, in accordance with Schedule 2.5 ("Documentation Requirements") and the Milestones set forth on the Development Schedule for 3Dfx's draft and final versions of the [*] Glide Programming Reference Manual. 3Dfx shall be responsible and bear all costs for translating the [*] Glide Programming Reference Manual from English to Japanese. 3Dfx shall deliver the final English version of the [*] Glide Programming Reference Manual simultaneously to both Sega and 3Dfx's Japanese translator. Sega shall be responsible for the English to Japanese tranlsations of all other documents (including the Specifications) that 3Dfx is obligated to deliver to Sega under this Agreement. At no additional cost to Sega, 3Dfx shall review for accuracy the first version of the first Japanese translation Sega prepares of the Specifications, and 3Dfx shall make timely, written recommendations to Sega regarding changes and corrections to be made thereto. Subject to the licenses granted by 3Dfx to Sega, 3Dfx shall be the owner of all such derivative works of all documents provided to Sega under this Agreement (including the [*] Glide Programming Reference Manual and the Specifications), including any such derivative works prepared by Sega. For the duration of the license granted to Sega in Section 3.2, 3Dfx grants a non-exclusive, royalty-free license to Sega (i) to use, reproduce, modify, and create derivative works of the [*] Glide Programming Reference Manual and Specifications for all permitted uses under this Agreement in connection with the licenses granted to Sega under Section 3, and (ii) to distribute with Sega Products the [*] Glide Programming Reference Manual and derivative works thereof prepared by Sega. Sega herby assigns to 3Dfx all right, title, and *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 12 13 interest in and to any derivative works prepared by Sega of the [*] Glide Programming Reference Manual and the Specifications, and agrees to execute all documents and assist 3Dfx in all actions necessary to implement such assignment. 2.6 [*] DEVELOPMENT BOARDS. Upon Sega's order and request, and subject to 3Dfx's standard sales terms and conditions, 3Dfx shall supply Sega, within sixty (60) days of Sega's order, up to [*] at a cost of the lesser of: (i) [*] per board or (ii) the lowest 3Dfx customer price irrespective of volume. All such [*] shall contain [*] and shall otherwise meet or exceed the specifications listed in Schedule 2.6. 2.7 SPECIFICATIONS AND DESIGN REVIEW. The Pro Forma Specifications shall be attached hereto as Schedule 1.29 as of the Effective Date of this Agreement. Within five (5) days following the Effective Date, 3Dfx shall deliver to Sega the Specifications, which shall in all material respects be consistent with the Pro Forma Specifications. No changes to the Specifications shall be made unless agreed to in writing by the parties. On or before [*], the parties shall meet to discuss any proposed changes to the Specifications for Beta Version production (the "BETA DESIGN REVIEW"). During the Beta Design Review and for seven (7) days thereafter, the parties agree to negotiate in good faith any changes to be made to the Specifications which would not reasonably cause any material increase in the cost or difficulty of, or the time required to complete, 3Dfx's development effort; and (iii) 3Dfx and Sega shall negotiate in good faith to reach agreement regarding any increase in cost (based upon most-favored pricing) or schedule (based upon commercial best efforts) arising from changes not covered by Subsection (ii) above. 2.8 PAYMENT OF ENGINEERING SERVICES CHARGES FOR DEVELOPMENT PHASE. As full and complete consideration (except for any contingent payments under Section 2.9) for the development by 3Dfx of the [*] Graphics [*], completion by 3Dfx of all of its development tasks and obligations under this Agreement, Sega shall pay to 3Dfx interim payments totaling the sum of [*] in engineering services charges according to the following Milestone schedule: *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 13 14 MILESTONE INTERIM PAYMENT Signing of Agreement between Sega and 3Dfx $ 1,550,000 U.S. [*] [*] [*] [*] [*] [*] [*] [*] All interim payments above shall be due within twenty-one (21) days following the date of Sega's acceptance of each Milestone. Sega and 3Dfx agree that the above payments include full compensation to 3Dfx for the production and delivery to Sega, both at 3Dfx's expense, following Sega's acceptance of the relevant Deliverables, of all Alpha, Beta, and Production Version [*] samples, [*] The Alpha, Beta, and Production Version [*] Samples may be manufactured by either the Sega or 3Dfx Foundry and shall be delivered according to the development Schedule. Sega may order additional Alpha, Beta, or Production Version [*] samples from any remaining prototype wafers, at a cost not to exceed 3Dfx's actual costs. [*] 2.9 ON-TIME DELIVERY BONUS. With respect to each of the specified versions of the [*] Graphics [*] listed below, Sega shall pay 3Dfx a bonus for on-time delivery ("On-Time Delivery Bonus"), in the amounts listed below, provided that: (a) 3Dfx delivers all Deliverables relating to such versions in acceptable form on or before the Milestone delivery data specified in the Development Schedule; and (b) Sega accepts such Deliverables upon the initial submission and testing of such Deliverables under Section 2.2. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 14 15 DELIVERABLE ON-TIME DELIVERY BONUS [*] [*] [*] [*] Any On-Time delivery Bonuses earned by 3Dfx shall be paid to 3Dfx within twenty-one (21) days of Sega's acceptance of each Deliverable. 3. LICENSES TO [*] GRAPHICS CHIPSET AND RELATED SOFTWARE 3.1 OWNERSHIP. As between the parties hereto, and subject to the licenses granted to Sega herein, 3Dfx shall retain ownership of all of its existing 3D graphics technology, the 3Dfx Glide Software, [*], and the Arcade Toolbox, in existence as of the Effective Date of this Agreement, the [*] Graphics [*] Technology, the Alpha, Beta, and Production Versions, the [*] Graphics [*] Technology, the Alpha, Beta, and Production Versions, the [*] Graphics [*], the Specifications, the [*] Mask Data Set (exclusive of the Sega Foundry Deliverables), and all associated documentation and all related modifications and derivative works, and all Intellectual Property Rights related thereto (the "3Dfx Technology"). Subject to 3Dfx's rights to the 3Dfx Technology, Sega shall retain all rights to the [*] Console Technology, the Sega Deliverables (as defined in Section 3.4(a)), and all associated documentation and all related modifications and derivative works, and all Intellectual Property Rights related thereto. Sega grants 3Dfx no license of any kind in or to the [*] Console Technology. 3.2 [*] GRAPHICS [*] LICENSE (a) GRANT OF LICENSE. 3Dfx hereby grants to Sega, and Sega hereby accepts, a royalty-bearing, worldwide license, including a license under, all Intellectual Property Rights owned or licensable by 3Dfx; [*] (b) LIMITATIONS AND RESERVATION OF RIGHTS. Sega shall not, and shall not cause or authorize any third party, including but not limited to a Sega Foundry, to sell, lease, license, sublicense, or otherwise provide the [*] Graphics [*] as stand- *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 15 16 alone components. Sega shall not reverse engineer, nor authorize a third party to reverse engineer, the [*] Graphics [*] or * Mask Data Set to determine the internal functioning of the [*] Graphics [*]. No license or right is granted, by implication or otherwise to Sega, under any Intellectual Property Rights now or hereafter owned or controlled by 3Dfx except for licenses and rights expressly granted in this Agreement. (c) LIMITED EXCLUSIVITY CONFERRED ON SEGA. [*] (d) LIMITED EXCLUSIVITY CONFERRED ON 3DFX. Sega hereby agrees that, for a period of three (3) years following the Sega Acceptance Date, provided that 3Dfx is not in breach of its obligations under this Agreement, Sega will not incorporate any 3D video graphics accelerator other than the [*] Graphics [*] into the [*] Console. (e) LIMITED COVENANT OF NONASSERTION. (i) COVENANT. 3Dfx will not assert against Sega any claim of infringement or misappropriation of its Intellectual Property Rights embodied in the technical information concerning how the [*] Graphics [*] communicates with the [*] Console or other Sega products, such as external communications protocols or bus specifications, [*] (ii) LIMITATION. Without limitation of the licenses granted by 3Dfx to Sega, and as provided under this Section 3.2(e), 3Dfx reserves and retains the right to assert against Sega claims of infringement or misappropriation of any of 3Dfx's Intellectual Property Rights (including Intellectual Property Rights in the [*] Interface *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 16 17 Information). The covenant of non-assertion set forth in this Section 3.2(e) does not constitute a license to Sega or any third party of any 3Dfx Intellectual Property Rights in the [*] Graphics [*] or the individual [*] or [*], except as otherwise provided in this Section 3.2. 3.3 SOFTWARE LICENSES. (a) 3DFX GLIDE AND [*] SOFTWARE. (i) LICENSE GRANTS BY 3DFX. 3Dfx hereby grants to Sega, and Sega hereby accepts, a nonexclusive, royalty-free, worldwide license including a license under all Intellectual Property Rights owned or licensable by 3Dfx: (i) to use and copy the Source Code of the 3Dfx Glide Software and [*] for internal use solely in the development, manufacture and support of Sega Products, (ii) to use, copy, distribute, and sublicense to third parties, under a standard form software license agreement at least as protective of 3Dfx's rights in the Driver Software as the terms and conditions of this Agreement, the rights to use, copy, and distribute the Driver Software in binary form solely for use in connection with Sega Products; and (iii) to adapt, modify, customize, or otherwise transform the 3Dfx Glide Internals solely for use with Sega Products; provided that (A) no such adaptations, customizations, modifications or transformations alter, change, modify, or otherwise affect the operation or functioning of the 3Dfx Glide API, and (B) that Sega agrees to make such adaptations, customizations, modifications and transformations available to 3Dfx as provided under subsection (ii)(C) below. (ii) LIMITATIONS. (A) Sega may not use, and may not authorize a third party to use, the Source Code of the 3Dfx Glide Software to reverse engineer the [*] Graphics [*]; (B) Sega shall have no right to transfer, sublicense or otherwise convey the Source Code of the 3Dfx Glide Software to any third party; and (C) Sega agrees that, provided 3Dfx is not in breach of this Agreement, Sega shall deliver to 3Dfx on an "as is" basis copies of Source Code for all adaptations, customization, modifications, transformations, or derivative works of the 3Dfx Glide API developed by Sega with 3Dfx's consent; and Sega grants, and 3Dfx hereby accepts, a nonexclusive, nontransferable, license to use, copy, modify, distribute and make derivative works from any adaptations, modifications, or other changes to the 3Dfx Glide API, made by Sega. The parties agree to negotiate in good faith regarding the possibility of delivery by Sega and licensing to 3Dfx of any adaptations, modifications, or other changes to the 3Dfx Glide Internals, made by Sega. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 17 18 (b) ARCADE TOOL BOX. 3Dfx hereby grants to Sega, and Sega hereby accepts, a nonexclusive, royalty-free, unrestricted, worldwide license to adapt, modify, customize, or otherwise transform, and to distribute and sublicense the Arcade Tool Box, including without limitation, the Source Code thereof. Except as otherwise agreed in writing, 3Dfx will have no obligation to provide Sega or any sublicensee of Sega with support for the Arcade Tool Box or any enhancements, improvements or modifications to the Arcade Tool Box. (c) EVALUATION OF 3DFX GLIDE API FOR [*] CONSOLE. Sega agrees to promptly evaluate the 3Dfx Glide API after delivery thereof for use as a standard graphics API for use with the [*] Graphics [*] in the [*] Console. Sega shall advise 3Dfx of its decision regarding the Glide API no latter than the date specified on the Development Schedule. [*] (d) DRIVER SOFTWARE SUPPORT. For a period [*] Sega's acceptance of the Production Version, 3Dfx, at no additional cost to Sega, will provide Sega with maintenance and technical support for the unmodified Driver Software to enable Sega to support its [*] Console customers in accordance with the Driver Software Support Profile attached as Schedule 3.3(d). Such maintenance and support shall include: all changes, upgrades, or enhancements to the Driver Software developed *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 18 19 and made available in the ordinary course of business by 3Dfx and 3Dfx's prompt correction of all material errors known by 3Dfx or brought to its attention by Sega or third parties. 3Dfx shall have no obligation to support Sega customers directly. 3.4 SEGA DELIVERABLES AND SEGA FOUNDRY DELIVERABLES. (a) OWNERSHIP AND LICENSE TO SEGA DELIVERABLES. As between the parties hereto, Sega shall retain ownership of all Sega technology, designs, specifications, code, interfaces and protocols (collectively, "SEGA DELIVERABLES") it supplies to 3Dfx for development of the [*] Graphics [*], including all Intellectual Property Rights related thereto, whether or not embodied in the [*] Console, [*] Console Technology, or Sega Foundry Deliverables. Sega grants, and 3Dfx accepts, a limited, non-exclusive license solely during the term of this Agreement, to use internally the Sega Deliverables solely to develop and support the [*] Graphics [*] for Sega, and otherwise perform its obligations hereunder. (b) SEGA FOUNDRY DELIVERABLE LICENSE. Subject to the terms and conditions of this Agreement and a Foundry Agreement as specified in Section 2.3(a)(iv), Sega agrees to cause the Sega Foundry to grant 3Dfx a worldwide, non-exclusive, non-transferable, royalty-free license to (i) use the Sega Foundry Deliverables solely to qualify the Sega Foundry under Section 2.3, and (ii) incorporate the Sega Foundry Deliverables into the [*] Graphics [*] and resulting [*] Mask Data set solely to provide same to the Sega Foundry to manufacture such [*] Graphics [*] on behalf of Sega. (c) LICENSE RELATING TO SEGA ENGINEERS. With respect to any developments, improvements, inventions, enhancements or discoveries ("FIXES") made by Sega engineers at the 3Dfx Facilities pursuant to Section 2.2(b)(iii)(A) or Section 2.2(b)(iv)(D), which are provided to 3Dfx and reduced to a writing, Sega hereby grants to 3Dfx a limited, non-exclusive, worldwide, royalty-free, perpetual, irrevocable license including a license under all Intellectual Property Rights owned by Sega and embodied in the Fixes (i) to use, reproduce, modify, and make derivative works of such Fixes, (ii) subject to the restrictions of this Agreement, to manufacture, have manufactured, distribute, and sublicense the Fixes, and derivatives thereof, as embodied in the * Graphics [*] or derivatives thereof; and (iii) the unlimited right to sublicense to third parties (with the right to further sublicense to any level of tiers) all of the rights set forth in subsections (i) and (ii) immediately above. 3.5 PROPRIETARY MARKS AND MARKING REQUIREMENTS. Subject to Sega's prior written approval as to form, size and location, which approval shall not be unreasonably withheld, Sega will not delete or alter in any material manner the Intellectual Property Rights markings of 3Dfx, and its suppliers, if any, appearing on or in any 3Dfx product delivered to Sega. Sega agrees to (i) reproduce and display such markings on each copy it *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 19 20 makes of any 3Dfx product, and (ii) place in the documentation accompanying the [*] Console the phrase: "3D graphics accelerated by 3Dfx." 4. [*] MANUFACTURING ROYALTIES 4.1 [*] CONSOLE MANUFACTURING ROYALTIES. As consideration for the license to manufacture and distribute the [*] Graphics [*] as a component of the [*] Console, Sega shall pay Net Royalties to 3Dfx, based upon the cumulative volume of [*] Units ("MANUFACTURING ROYALTIES"), according to the following schedule: NUMBER OF [*] UNITS MANUFACTURING ROYALTY [*] [*] 4.2 [*] CONSOLE ROYALTY PREPAYMENT. Within thirty (30) days following the Sega Acceptance Date, Sega shall pay to 3Dfx a royalty advance in the amount of [*] U.S. (the "FIRST ADVANCE"), to be credited against the Manufacturing Royalties due in the aggregate under Sections 4.1 and 4.4. Thereafter, on the first anniversary of the Sega Acceptance Date, if the aggregate amount of the First Advance plus all additional Manufacturing Royalties payable by Sega to 3Dfx under Sections 4.1 and 4.4 combined is less than a total of [*] U.S., then Sega shall pay 3Dfx an additional royalty advance (the "SECOND ADVANCE") in an amount such that the total of the First Advance, the Manufacturing Royalties paid as of the first anniversary of the Sega Acceptance Date, and the Second Advance is equal to [*] U.S. If the applicable per unit Manufacturing Royalty is reduced pursuant to Section 2.2(b)(iv) for late delivery by 3Dfx of the Beta Version, then the First Advance required under this Section 4.2 shall be reduced to [*] U.S., and the threshold amount for purposes of any Second Advance shall be reduced to [*] U.S. 4.3 3DFX REFERENCE COSTS. 3Dfx shall publish, not less than once each calendar quarter, a reference cost [*] such reference cost to be based on the then-current lowest purchase price that 3Dfx pays to the 3Dfx Foundry or that 3Dfx is quoted from the Sega Foundry (the "REFERENCE COST"). For a period of three (3) years from the date of Sega's acceptance of the Production Version *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 20 21 [*], 3Dfx shall establish the Reference Cost once each calendar quarter, based upon the lowest purchase price paid by any third party to 3Dfx [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 21 22 [*] 4.5 PAYMENT TERMS, REPORTING, AND AUDITS (a) PAYMENT TERMS. (i) [*] CONSOLE ROYALTIES. Sega shall make all payments due to 3Dfx under Section 4.1 within forty-five (45) days of the end of each calendar quarter based on the number of [*] Units purchased and accepted by Sega during each calendar quarter. [*] (iii) INTEREST. Payments made after the due date shall bear interest at one percent (1%) over the prime rate offered by the Bank of America. (b) PAYMENT REPORTS AND RECORDS. Within forty-five (45) days after the close of each quarter ending March 31, June 30, September 30 and December 31, Sega will deliver to 3Dfx a report which will provide all information reasonably necessary for computation and/or confirmation of (i) the payments, if any, due or credited to 3Dfx for such quarterly period, and (ii) the number of [*] Consoles manufactured in such quarterly period and the number of [*] Graphics [*]s incorporated into [*] Games. Sega will maintain reasonable records to support payments required under this Agreement, regarding purchases of the [*] Units and manufacture of [*] Consoles and the use of [*] Graphics [*]s in [*] Games. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 22 23 (c) AUDIT. At 3Dfx's sole cost and expense (except as provided below), an internationally recognized independent certified public accounting firm selected by 3Dfx, subject to Sega's reasonable approval and consent and execution of a confidentiality agreement acceptable to Sega, may, upon reasonable notice and during normal business hours, inspect the records of Sega on which such reports are based no more than once annually during this Agreement to determine any over payments or underpayments. If, upon performing such audit, it is determined that Sega has underpaid 3Dfx by an amount greater than five percent (5%) of the payments due 3Dfx in the period being audited, Sega will bear all reasonable expenses and costs of such audit and shall immediately make full payment of the shortfall, plus interest at one percent (1%) over the prime rate offered by the Bank of America. Sega shall be entitled to all reports and work papers of the auditor and any overpayment shall be corrected promptly via a refund by 3Dfx, or at Sega's sole option, via a credit against future Sega payments. 5. LICENSES TO SEGA [*] GAMES 5.1 PORTING OF SEGA GAMES. Sega and 3Dfx agree to the terms and conditions of this Section 5 regarding the possible porting to the 3Dfx Glide API, and the possible bundling by 3Dfx with 3Dfx hardware, of certain coin-operated arcade or consumer console video game software, which is owned or licensable by Sega and not subject to any conflicting grant of rights in favor of any third parties ("SEGA GAMES"), for distribution by 3Dfx solely as bundled product in the personal computer ("[*]") market. 3Dfx hereby acknowledges that Sega has previously granted to Sega Entertainment the right of first refusal to port certain Sega video games for use on [*] hardware. (a) GRANT OF LICENSE. Provided that 3Dfx maintains its 3D technology [*] graphics product at performance levels equal to or exceeding the performance of competitive products, Sega agrees to offer 3Dfx a nonexclusive, nontransferable, royalty-free license, to be exercised by 3Dfx in its sole discretion at its sole expense, to port up to [*] Sega Games each year for a period of three years from the date of this Agreement (the "PORTABLE SEGA GAMES"), solely to port such Portable Sega Games to the then-current 3Dfx Glide API solely for release as bundled, retail [*] software products bundled with 3Dfx [*]-based graphics hardware products. Sega shall consider in good faith any selection request of 3Dfx as to the Portable Sega Games to be ported, provided that the final decision with respect to such selection shall be Sega's, in its sole discretion. Sega may, in its sole discretion and in lieu of the foregoing license to 3Dfx, port up to [*] Portable Sega Games per year, porting them to the then-current 3Dfx Glide API for release by 3Dfx solely as bundled retail [*] Software products bundled with 3Dfx [*]-based graphics hardware products. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 23 24 (b) OPTIMIZATION EFFORTS. U.S. Each party agrees that whenever it is the party undertaking the porting of Portable Sega Games under this Section 5, it shall use diligent efforts to optimize the ported Portable Sega Games for advanced features of the 3Dfx [*] graphics product, and to maintain optimizations or functions specific to the * Graphics [*] provided that such functions are supported in the then-current 3Dfx [*] graphics product. 5.2 BUNDLING RIGHTS. During the term of the rights granted under this Section 5, Sega shall offer 3Dfx a right of first negotiation for the rights to bundle Sega Games other than the Portable Sega Games with 3Dfx [*] graphics hardware. The Sega Games covered by this Section 5.2 shall be limited to Sega Games that Sega has the right to port to [*] hardware and bundle, and as to which the right of negotiation hereunder does not conflict with any other rights granted by Sega to third parties. (a) With respect to any covered Sega Products, 3Dfx's right of first negotiation shall commence upon the earlier of Sega's public announcement, which shall be copied to 3Dfx, or notice to 3Dfx, of its intention to release such Sega Game for the [*] market. The parties agree to negotiate in good faith for thirty (30) days following Sega's announcement notice, provided that if the parties are unable to reach agreement during such thirty-day period, Sega may negotiate with and contract with any other party for bundling of the applicable Sega Game. Sega's obligation to negotiate during the thirty-day period is conditioned upon 3Dfx providing Sega with an acknowledgment of interest within seven (7) days after 3Dfx's receipt of Sega's announcement or notice. (b) If, within six (6) months after Sega's announcement or notice as to any covered Sega Game (and provided that 3Dfx gave Sega notice of its interest pursuant to Section 5.2(a)), Sega has not contracted for the bundling of such Sega Game, and Sega it not under any conflicting obligations to any third party, and Sega receives an offer from a third party to bundle such Sega Game with [*] hardware utilizing 3Dfx graphics products, Sega will (unless prohibited by the terms of the pending offer or any other obligations) allow 3Dfx the opportunity to meet or better the pending offer and negotiate with Sega for fifteen (15) days to reach agreement. If the parties do not reach agreement within 15 days, Sega shall have no further obligation to negotiate with 3Dfx as to such Sega Game. 5.4 TERMS OF LICENSE. The rights granted under this Section 5 shall commence upon the Sega Acceptance Date and shall continue, subject to the terms hereof, for three years. 5.6 INDEPENDENT OBLIGATIONS. Each party acknowledges that this Section 5 is intended as an independent agreement and in no event will the performance or breach of *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 24 25 this Section 5 affect in any way the parties' performance or obligations under the other terms of this Agreement. In the event of a breach of this Section 5, the non-breaching party's right to terminate shall only operate to terminate this Section 5 without any effect on the other terms of this Agreement. Any claim for damages for breach under this Section 5 shall be limited by Section 8.5.2. 6. DESIGN INTEGRATION, 3DFX TECHNICAL SUPPORT, AND UPDATES. 6.1 [*] CONSOLE DESIGN INTEGRATION. 3Dfx shall provide reasonable consultation and assistance to Sega, and Sega's third-party component developers, at no charge, for the integration of the [*] Graphics [*] into the [*] Console. The scope of such consultation and assistance shall include, upon Sega's request, periodic telephonic, e-mail, and written consultation, and [*] engineering assistance at locations designated by Sega. Sega agrees to pay 3Dfx's reasonable travel and accommodation expenses for on-site assistance, and 3Dfx's engineering services charges at 3Dfx's most-favored customer rates for [*] engineering assistance [*]. 6.2 TECHNICAL SUPPORT. For [*] after Sega's acceptance of the Production Version [*], 3Dfx shall provide technical, quality assurance, and engineering assistance to Sega with respect to the [*] Graphics [*] in accordance with the 3Dfx [*] Support Profile to be negotiated in good faith between the parties, in connection with supporting Sega's [*] Console customers; provided, however, that 3Dfx has no obligation to provide any support for additional [*] terms for a fee to be negotiated in good faith, provided that Sega is then continuing to ship substantial commercial quantities of Sega Products which incorporate the [*] Graphics [*]. 6.3 FOUNDRY SUPPORT. 3Dfx shall use commercially reasonable efforts to provide assistance to the 3Dfx Foundry and Sega Foundries to enable the 3Dfx Foundry and Sega Foundries to meet the cost and yield targets defined in Schedule 6.3. 6.4 NO UPDATES. Without limiting 3Dfx's warranty, support and other obligations under this Agreement, 3Dfx has no obligation to deliver to Sega updates, improvements, modifications, or further developments relating to the [*] Graphics [*] unless pursuant to a Cost Reduction Project or as otherwise agreed by the parties in writing. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 25 26 7. PURCHASING Sega shall purchase all units of the [*] Graphics [*] required to manufacture the [*] Console [*] from the Sega Foundries or the 3Dfx Foundry. 3Dfx makes no warranty or representation as to the price per unit quantity of units available, or quality of manufacture, of [*] Graphics [*] manufactured by the Sega Foundries or the 3Dfx Foundry. All purchases by Sega of units of the [*] Graphics [*] shall be subject to the terms and conditions of separate agreements reached by and between Sega and the foundries; provided, however, that 3Dfx will take all steps required to authorize the 3Dfx Foundry and qualified Sega Foundries to sell units of the [*] Graphics [*] to Sega. 8. REPRESENTATIONS, WARRANTIES AND GENERAL COVENANTS 8.1 REPRESENTATIONS AND WARRANTIES OF 3DFX. 3Dfx covenants, represents and warrants all of the following: 8.1.1 Beginning on the date of Sega's acceptance of the Production Version [*], continuing [*] (the "WARRANTY PERIOD"), the [*] Graphics [*], and all Deliverables, portions or components related thereto shall be free of material defects and operate in all material respects in conformance with the Specifications and other requirements of this Agreement (any failure thereof, a "DESIGN DEFECT"). In the event that Sega notifies 3Dfx of any Design Defects, 3Dfx shall use best efforts to diligently correct any such nonconformities by (i) revising the [*] Mask Data Set and providing such revised [*] Mask Data Set to the 3Dfx Foundry and the Sega Foundries, and (ii) providing to Sega software work-arounds or patches for existing defective [*] Graphics [*]s. If, as a result of Design Defects, Sega replaces defective [*], whether in Sega's possession or by recall, 3Dfx shall pay the 3Dfx Foundry or Sega Foundries for all manufacturing and shipping costs in order to deliver to Sega royalty-free, corrected replacements for such [*]; provided, however, that 3Dfx shall have no replacement liability with regard to Design Defects which Sega detected during its testing of the [*] Console internally or by independent prospective and actual software developers for the [*] Console, and which Sega did not report to 3Dfx upon detection. Except as provided above, 3Dfx shall not be responsible for the cost of any product recall, for replacement of defective [*] Graphics [*]s or components thereof, nor for a refund of any royalties paid by Sega. 3Dfx shall not be liable to Sega for manufacturing defects caused by the 3Dfx Foundry or Sega Foundries, nor the costs for any product recall or replacement of any [*] Graphics [*] resulting therefrom. The remedies set forth in this Section shall be Sega's sole and exclusive remedy for Design Defects. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 26 27 8.1.2 The [*] Graphics [*] will conform to the Specifications, and all components of the * Graphics [*] will operate together as an integrated subsystem. [*] 8.1.3 The [*] Graphics [*] as provided by 3Dfx will not contain any undocumented material features of any kind whatsoever. 8.1.4 All services rendered by 3Dfx in connection with this Agreement shall be provided in a timely manner in accordance with the highest professional standards and practices, and 3Dfx's personnel performing such work shall have the requisite expertise and ability to perform the tasks assigned to them. 8.1.5 3Dfx has full authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and this Agreement will not violate any other agreement to which 3Dfx is or becomes a party nor any law, court order or decree to which 3Dfx is subject. 8.1.6 The [*] Graphics [*] shall not infringe the Intellectual Property Rights, exclusive of patent rights, of any third party as may now or in the future exist, and 3Dfx has the right to grant all of the licenses to Sega hereunder, free from all claims, liens, security interests or other encumbrances. To the best of 3Dfx's knowledge, the [*] Graphics [*] shall not infringe the patent rights of any third party as may now or in the future exist. 3Dfx shall not place on any of such software any liens, security interests or other encumbrances that would in any manner affect Sega's licenses under this Agreement. 8.1.7 Neither the [*] Graphics [*], nor the Driver Software (nor any portion thereof) contains or shall contain, at the time of installation, any timer, clock, counter, or other limiting design or routine, nor (to the best of 3Dfx's knowledge) any virus, that causes or could cause any Sega Product (or any portion thereof) to become erased, inoperable, impaired, or otherwise incapable of being used in the full manner for which it was designed and licensed (including, without limitation, any design or routine that would impede copying thereof) after being used or copied a certain number of times, or after the lapse of a certain period of time, or after the occurrence or lapse of any similar triggering factor or event. Furthermore, neither the [*] Graphics [*] nor Driver Software contains or shall contain, any virus, limiting design, or routine that causes or *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 27 28 could cause them or any of them to become erased, inoperable, impaired, or otherwise incapable of being used in the full manner for which it was designed and licensed pursuant to this Agreement solely because it has been installed on or moved to a hardware unit or system that has a serial number, model number, or other identification different from the identification of the one on which it was originally installed. 8.1.8 The [*] Graphics [*] and Driver Software developed by 3Dfx will not abruptly end or provide invalid or incorrect results during operation prior to, on or after January 1, 2000, or when given a valid date containing century, year, month, and day. For purposes hereof, a failure to "operate accurately" exists if any one or more of the following properties or capabilities is lacking: (i) execution of calculations using dates with a four-digit year; (ii) functionality (including both on-line and batch) including, but not limited to, entry, inquiry, maintenance, and update, to support four-digit year processing; (iii) interfaces and reports that support four-digit year processing; (iv) successful transition, without human intervention, into the year 2000 using the correct system date (e.g., 01104/2000); (v) after transition to the year 2000, continued processing with a four-digit year without human intervention; (vi) calculation of leap year correctly; and (vii) provision of correct results in forward and backward data calculation spanning century boundaries, including the conversion of previous years currently stored as two digits. 8.1.9 Except for any license or other payments to be made by 3Dfx for certain inbound elements of the 3Dfx Technology, no fees, licenses or commissions are due or payable to any broker, finder, or other third party in connection with this Agreement. 8.2 REPRESENTATIONS AND WARRANTIES OF SEGA. Sega convenants, represents and warrants all of the following: 8.2.1 Sega has full corporate authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby, and this Agreement will not violate any other agreement to which Sega is or becomes a party nor any law, court order or decree to which Sega is subject. 8.2.2 All technology, designs, specifications, code, interfaces and protocols developed internally by Sega, licensed by Sega to 3Dfx hereunder, and which are incorporated into [*] Graphics [*], do not infringe the Intellectual Property Rights, exclusive of patent rights, of any third party when incorporated into Sega Products, and Sega has the right to grant all of the licenses to 3Dfx hereunder, free from all claims, liens, security interests or other encumbrances. To the best of Sega's knowledge, all technology, designs, specifications, code, interfaces and protocols developed internally by Sega, licensed by Sega to 3Dfx hereunder, and which are *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 28 29 [*]=CONFIDENTIAL TREATMENT REQUESTED incorporated into [*] Graphics [*], do not infringe the patent rights of any third party when incorporated into Sega Products. 8.3 GENERAL COVENANTS. Neither party shall make representations, warranties, or guarantees to anyone with respect to the specifications, features, capabilities or operations of the other's products or services that are inconsistent with or in addition to this Agreement and such other party's published literature. Neither party shall make modifications, enhancements or changes to the other's products except as permitted hereunder nor shall it permit any of its respective agents, employees, or representatives to make any such modifications, enhancements or changes without the other's prior written consent. EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES ANY REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. 8.4 LIMITATIONS OF LIABILITY. 8.4.1 EXCEPT AS OTHERWISE SPECIFIED IN THIS AGREEMENT, NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, INCIDENTAL, OR EXEMPLARY DAMAGES (INCLUDING WITHOUT LIMITATION, LOST PROFITS, LOSS OF ANTICIPATED BUSINESS, LOSS OF DATA, OR BUSINESS LOSSES) EVEN IF SUCH DAMAGES ARE FORESEEABLE, AND EVEN IF THE BREACHING PARTY HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING. THE LIMITS OF THIS SECTION 8.4.1 SHALL NOT PRECLUDE CLAIMS FOR ACTUAL AND DIRECT DAMAGES, INCLUDING WITHOUT LIMITATION EXPENSES AND CHARGES INCURRED BY A PARTY AS A RESULT OF THE OTHER PARTY'S BREACH AND EXPENSES AND CHARGES TO MITIGATE DAMAGES RESULTING FROM THE OTHER PARTY'S BREACH. 8.4.2 SUBJECT TO THE LIMITATIONS OF SECTION 8.4.1 ABOVE, AND EXCEPT WITH RESPECT TO INDEMNIFICATION UNDER SECTIONS 9.1 AND 9.2, CLAIMS ARISING FROM INTENTIONAL BREACH, WILLFUL OR INTENTIONAL MISCONDUCT OR GROSS NEGLIGENCE, EACH PARTY'S LIABILITY TO THE OTHER FOR DAMAGES CLAIMS SHALL BE LIMITED TO [*]. 8.5 SURVIVAL. The covenants, representations and warranties contained in this Section 8 shall survive the termination or expiration of this Agreement. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 29 30 9. INDEMNIFICATION AND INSURANCE 9.1 INDEMNIFICATION BY 3DFX. Subject to the terms of Section 9.3 below, 3Dfx shall defend, indemnify and hold Sega harmless from and against any and all losses, damages, liability, and reasonable attorneys', expert witness, or court fees and costs, and any other reasonable costs and expenses arising from any claims, demands, suits, causes of action, or any other action brought by any third party alleging infringement of any Intellectual Property Right. In the defense or settlement of any claim for Intellectual Property Rights infringement, 3Dfx may obtain for Sega and all customers and users of affected Sega Products the right to continue using and licensing the allegedly infringing materials, or replace or modify same so that they become non-infringing, provided that 3Dfx pays all costs incurred by Sega associated with such replacement or modification and any modifications required to other components. 9.2 INDEMNIFICATION BY SEGA. Subject to the terms of Section 9.3 below, Sega shall indemnify and hold 3Dfx harmless from and against any and all losses, damages, liability, reasonable attorneys', expert witness, or court fees and costs, and any other reasonable costs and expenses arising from any claims, demands, suits, causes of action, or any other action brought by any third party alleging infringement of any Intellectual Property Right other than as a result of 3Dfx's exercise of its rights under the license granted under Section 3.4(c), but excluding any claim which is covered by 3Dfx's indemnification of Sega in Section 9.1. In the defense or settlement of any claim for Intellectual Property Rights infringement, Sega may obtain for 3Dfx the right to continue using and licensing the allegedly infringing materials, or replace or modify same so that they become non-infringing. Notwithstanding any provision in this Agreement to the contrary, Sega shall have no liability or obligation to 3Dfx with respect to a court judgment that an exploitation or use of anything provided by Sega to 3Dfx hereunder, in combination with any 3Dfx Technology, infringes any Intellectual Property Rights of any third party, provided that such exploitation or use alone (not in combination with any 3Dfx Technology) would not infringe such third party's Intellectual Property Rights. 9.3 INDEMNIFICATION PROCEDURES. Neither party will have any obligation to indemnify the other party under Section 9.1 or 9.2, as the case may be, unless: (A) the indemnifying party is promptly notified of a potential claim by the party seeking indemnification; (B) the indemnifying party has sole control of the defense and settlement (subject to reasonable consent of the indemnified party) of the claims sought to be indemnified; and (C) the party seeking indemnification provides the indemnifying party with reasonable assistance, at the indemnifying party's expense, in the defense and settlement of the claim sought to be indemnified. Each party shall have the right to participate in the defense and/or settlement of such actions or proceedings at their own expense with counsel of their own choosing. 30 31 9.4 INSURANCE OBLIGATIONS. Throughout the term of this Agreement and for two (2) years thereafter, 3Dfx shall purchase and maintain (and shall pay all premiums and deductibles related to) commercial liability insurance, including errors and omissions insurance, and products liability (with a vendor's endorsement in favor of Sega) naming Sega as an additional insured and stipulating that the coverage afforded additional insureds is primary and any insurance maintained by additional insureds shall be excess only and non-contributing with the coverage provided under that policy. Sega agrees it shall maintain product liability coverage with respect to its distribution of [*] Units. 10. TERM AND TERMINATION 10.1 TERM. the terms of this Agreement shall commence upon the Effective Date and shall continue in full force and effect until terminated as provided in Section 10.2 below. 10.2 TERMINATION. The parties shall have the right to terminate this Agreement in whole or in part as follows: 10.2.1 Provided that, during the Development Phase, 3Dfx provides commercially reasonable efforts, including without limitation that 3Dfx makes no reductions in staffing or other resources, to complete such development. Sega may terminate this Agreement in whole or in part based upon a development failure by 3Dfx only as provided in Section 2; 10.2.2 Sega may terminate if 3Dfx materially breaches any of its other obligations under this Agreement (except with respect to Section 5 and except as otherwise provided in Section 2) and 3Dfx may terminate if Sega materially breaches any of its obligations under this Agreement (except with respect to Section 5) and such breach shall continue uncured for a period of forty-five (45) days after the breaching party's receipt of written notice from the non-breaching party; 10.2.3 Either party may terminate in the event of the filing by or against the other party of a proceeding under any bankruptcy or similar law, unless such proceeding is dismissed, within forty-five (45) days from the date of filing; the making by the other party of a proceeding for dissolution or liquidation, unless such proceeding is dismissed within forty-five (45) days from the date of filing; the appointment of a receiver, trustee or custodian for all or part of the assets of the other party, unless such appointment or application is revoked or dismissed within forty-five (45)days from the date thereof; the attempt by the other party to make any adjustment, settlement or extension of its debts with its creditors generally; or the insolvency of the other party. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 31 32 10.2.4 Under no circumstances, including the pendency of any dispute, may 3Dfx terminate, suspend or limit its performance hereunder or withhold or disable any Deliverables unless and until Sega has agreed in writing to such termination, suspension or limitation or until a court of competent jurisdiction orders otherwise; provided, however, that during that time, Sega continues to pay any undisputed charges required to be paid under Section 2 of this Agreement. 10.3 EFFECT OF TERMINATION 10.3.1 EFFECT OF TERMINATION FOR DEVELOPMENT FAILURE. Upon termination of this Agreement under Section 10.2.1, all rights and obligations of the parties under this Agreement, including all licenses granted to either party hereunder, shall terminate, except for the rights and obligations of the parties under Sections 3.2(f) (Limited Covenant of Nonassertion), 10 (Term and Termination), and 12 (Confidentiality) which shall survive the termination of this Agreement. Except as necessary to fulfill the surviving terms, each party shall immediately return to the other all Confidential Information, Deliverables and technology, including without limitation the Sega Technology and 3Dfx Technology. 10.3.2 EFFECT OF TERMINATION FOR BREACH. (a) SEGA'S BREACH. Upon any termination of this Agreement under Sections 10.2.2 or 10.2.3 for Sega's breach, all licenses granted to Sega under Section 3 (Licenses) shall terminate as provided in subsection (b) below and each party shall immediately return to the other all Confidential Information, Deliverables and technology, including without limitation the Sega Technology and 3Dfx Technology. All licenses granted by Sega to third parties shall survive according to their terms, and any licenses granted to 3Dfx under Section 5.2 (License to Bundle Sega [*] Games, if any) shall survive according to their terms. (b) SEGA TRANSITION PROCEDURE. After termination due to Sega's breach: (i) Sega can continue to utilize [*] [*] in its inventory to manufacture [*] Consoles, [*] and distribute [*] until its inventory of [*] and such finished products is exhausted, provided that Sega has paid all undisputed royalty amounts owed in relation to such chips and products; (ii) The licensee in Section 3.2(a) to the [*] Graphics [*] will terminate on the later of (a) Sega's receipt of all orders for [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 32 33 placed prior to the effective date of termination of this Agreement, or (b) Sega's receipt of one final order of [*] within one month of the effective date of termination of this Agreement, provided, however that Sega pays all undisputed royalties owed in relation to such chips and provided that Sega can utilize the chips in the manufacture of [*] Consoles, [*] [*], utilizing such chips until its inventory of [*] and [*]s and such finished products is exhausted, provided that Sega has paid all undisputed royalty amounts owed in relation to such chips and products. (iv) The license in Section 3.3 to the 3Dfx Glide and [*] will terminate [*] after Sega's last shipment of [*] Consoles, [*] . Any sublicenses granted to third parties will continue indefinitely provided that the third parties are in compliance with the terms of the sublicense. (c) 3DFX'S BREACH. Upon any termination of this Agreement under Sections 10.2.2 or 10.2.3 for 3Dfx's breach or 3Dfx's financial condition, all licenses granted to Sega under Section 3 (Licenses) shall survive according to their terms; provided, however, that the limited exclusivity granted to 3Dfx under Subsection 3.2(e) shall terminate immediately. The limited exclusivity in favor of Sega under Subsection 3.2(d) shall survive such termination provided Sega is distributing [*] Graphics [*]s, and only as long as Sega is distributing [*] Graphics [*]s in commercial quantities. (d) SURVIVALS. Upon any termination of this Agreement under Section 10.2.2 or 10.2.23, the rights and obligations of the parties under Sections 4 ([*] Manufacturing Royalties), 8 (Warranties, General Covenants and Limitations of Liability), 9 (Indemnification and Insurance), 10 (Term and Termination), 12 (Confidentiality), and 13 (General Provisions), shall survive such termination, provided that in the event of termination resulting from 3Dfx's breach, Sega shall be entitled to offset against any Manufacturing Royalties all of its damages arising directly from such breach. 11. TAX, DUTIES AND OTHER CHARGES Sega shall be solely responsible for any sales, use, gross receipts, value-added, excise, property or other tax, tariff, duty or assessment and income taxes and related interest and penalties collected, levied or imposed by national governments, state or provincial governments, local governments, or any subdivision of the foregoing and arising out of or related to the amounts paid to 3Dfx by Sega hereunder with the exception of taxes on 3Dfx's net income. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 33 34 12. CONFIDENTIALITY 12.1 PRIORITY OVER PRIOR NDA. The terms of this Agreement shall supersede and replace control in the event of any conflict between any and all terms or provisions of a previously executed non-disclosure agreement between the parties with respect to the subject matter of this Agreement. 12.2 DEFINITION. 3Dfx and Sega acknowledge that, in the course of performing their respective obligations hereunder, each may obtain information relating to the other and the other's products that is of a confidential and proprietary nature to such other party ("CONFIDENTIAL INFORMATION"). Such Confidential Information includes without limitation the [*] Graphics [*] Technology, the Source Code of the Driver Software, the Sega Deliverables, Fixes, [*] Console Technology, the Sega Foundry Deliverables, trade secrets, know-how, formulas, compositions of matter, inventions, techniques, processes, programs, diagrams, schematics, technical information, customer and financial information, sales and marketing plans and the terms of this Agreement. 12.3 CONFIDENTIALITY OBLIGATION. Each of Sega and 3Dfx agrees, that it will (a) use the other party's Confidential Information only in connection with fulfilling its obligations and exercising its rights and licenses under this Agreement; (b) hold the other party's Confidential Information in strict confidence and exercise due care with respect to its handling and protection, consistent with its own policies concerning protection of its care, (c) not disclose, divulge, or publish the other party's Confidential Information except to such of its responsible employees, subcontractors, sublicenses and consultants (collectively, "PERSONNEL") who have a bona fide need to know to the extent necessary to fulfill such party's obligations under this Agreement; and (d) instruct all such Personnel not to disclose the other party's Confidential Information to third parties, without the prior written permission of the other party. Each party shall require all Personnel who shall come into contact with the Confidential Information of the other party to execute a confidentiality agreement at least as protective of the rights in such Confidential Information as the terms and conditions of this Agreement, prior to such Personnel being given access to any Confidential Information. 12.4 EXCEPTIONS. The obligations set forth in Section 12.3 above will not apply to either party's Confidential Information which (i) is or becomes public knowledge without the fault or action of the recipient party, or the breach of any confidentiality obligation; (ii) the recipient party can document was independently developed by it without use of Confidential Information of the other party; or (iii) the recipient party can document was already known to it prior to the receipt of the other party's Confidential Information. *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 34 35 12.5 DISCLOSURE UNDER THE LAW. If either party is required to disclose any Confidential Information pursuant to an order under law, it shall use its reasonable efforts to give the party owning the Confidential Information sufficient notice of such required disclosure to allow the party owning the Confidential Information reasonable opportunity to object to and take necessary legal action to prevent such disclosure. 13. GENERAL PROVISIONS 13.1 JOINT PRESS RELEASE. The parties agree to issue a joint press release regarding the relationship contemplated by this Agreement, and shall mutually agree on the contact and timing thereof. 13.2 NON-SOLICITATION OF EMPLOYEES. During the term of this Agreement and for a period of one (1) year after any expiration or termination of this Agreement for any reason other than 3Dfx's breach, both parties' agreement not to directly solicit for employment any employee or independent contractor of the other party involved in the development, sale or marketing of the subject matter of this Agreement. Such prohibition shall not extend to advertisements customarily placed in media circulated to the public. 13.3 ASSIGNMENT. Neither party shall assign or otherwise transfer this Agreement in whole or in part, or any of the rights and obligations hereunder, either voluntarily or by operation of law, except to its subsidiaries or affiliates in which such party has at least a fifty percent (50%) equity interest or voting control, while the party has such equity interest or voting control, without the prior written consent of the other, which consent shall not be withheld unreasonably. In the event that either party merges with another corporation, the merging party shall cause the corporation resulting from such merger to be bound by, and assume the obligations of, this Agreement. 13.4 FORCE MAJEURE. Neither Sega nor 3Dfx shall be deemed to be in default or have breached any provision of this Agreement solely as a result of any delay, failure in performance or interruption of service resulting directly or indirectly from any act of God, civil or military authority, civil disturbance, war, laws, regulations, acts or orders of any government or agency or official thereof, or any other occurrences beyond the party's reasonable control. 13.5 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 13.6 WAIVER. No waiver of any provision of this Agreement or of any rights or obligations of either party hereunder shall be effective unless in writing and signed by the 35 36 party or parties waiving compliance, and any such waiver shall be effective only in the specific instance and for the specific purpose stated in such writing. 13.7 NOTICES. Except as otherwise specified herein, all notices, requests, demands or communications required hereunder shall be in writing, delivered personally, or sent by first class mail, postage prepaid, or by completed facsimile or e-mail transmission to the parties at their respective addresses first set forth in this Agreement (or at such other address as shall be given in writing by either of the parties to the other in accordance with this Section 13.7). All notices, requests, demands, orders or communications shall be deemed effective upon receipt in accordance with this Section 13.7. 13.8 NO JOINT VENTURE. The execution and delivery of this Agreement shall not be deemed to confer any rights or remedies upon, nor obligate any of the parties hereto, to any person or entity other than such parties. Nothing in this Agreement shall cause or be deemed to cause the parties to be partners or joint venturers with, or agent or employees of, each other. The parties are independent contractors, and neither party shall have any right or power to create any obligation or responsibility on behalf of the other party. 13.9 GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall not be governed by the United Nations Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded by the parties hereto. This Agreement shall be governed by, and construed and enforced in accordance with the laws of the State of California regardless of the choice of law rules of such state or any other jurisdiction. All disputes arising out of this Agreement shall be subject to the exclusive jurisdiction of either the state or federal courts located in San Jose, California, and the parties agree and submit to the personal and exclusive jurisdiction and venue of these courts. 13.10 ENTIRE AGREEMENT. No representations, warranties or agreements, oral or written, express or implied, have been made to any party hereto, except as expressly provided herein. This Agreement shall be binding upon the respective parties hereto and their permitted successors and permitted assigns. In the event that any provision hereof is found invalid or unenforceable pursuant to judicial decree or decision, the remainder of this Agreement shall remain valid and enforceable according to its terms. This Agreement constitutes the entire understanding and agreement between the parties regarding the subject matter of this Agreement, and supersedes all other prior written and oral communications regarding this transaction, and may not be altered, modified or amended except by a written amendment executed by both parties. 36 37 IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute this Agreement as of the date set forth below. SEGA ENTERPRISES LTD. By: . . . . . . . . . . . . . . . . . . . . . . . . Name: . . . . . . . . . . . . . . . . . . . . . . . . Title: . . . . . . . . . . . . . . . . . . . . . . . . Date: . . . . . . . . . . . . . . . . . . . . . . . . 3DFX INTERACTIVE, INC. By: . . . . . . . . . . . . . . . . . . . . . . . . Name: . . . . . . . . . . . . . . . . . . . . . . . . Title: . . . . . . . . . . . . . . . . . . . . . . . . Date: . . . . . . . . . . . . . . . . . . . . . . . . 37 38 SCHEDULE 1.29 [*] -[*] FEATURES AND SPECIFICATIONS- FBI-2 Revision 1.5
Alpha Beta Production Requirement Specification Specification Specification Additional Notes [*] * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Page 1 *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 39 [*] = CONFIDENTIAL TREATMENT REQUESTED [*] * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Page 2 *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 40 [*] = CONFIDENTIAL TREATMENT REQUESTED [*] * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
TMU-2 - ------------------------------------------------------------------------------- *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Page 3 41
TMU-2 Alpha Beta Production Requirement Specification Specification Specification Notes [*] * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Page 4 42 [*] * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Page 5 43 SEGA CONFIDENTIAL SCHEDULE 2.1 [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Page 1 44 SEGA CONFIDENTIAL [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Page 2 45 SEGA CONFIDENTIAL [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Page 3 46 [*] = CONFIDENTIAL TREATMENT REQUESTED SCHEDULE 2.2 [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 47 [*] = CONFIDENTIAL TREATMENT REQUESTED BETA (USABLE FORMAT AND SUFFICIENT CONTENT) [*]
*CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 48 SCHEDULE 2.5 DOCUMENTATION REQUIREMENTS [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 49 SCHEDULE 2.6 VOODOO GRAPHICS(TM) PART NO. [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 50 SCHEDULE 3.3(D) DRIVER SOFTWARE SUPPORT PROFILE 3Dfx shall provide technical support to Sega for the Driver Software, including that 3Dfx shall use its best efforts to provide prompt response to and correction of all reported bugs, errors or defects. Bugs, errors and defects will be classified and corrected as follows: "Severity 1" means bugs or errors in the Driver Software which may cause loss of data or system crashes. 3Dfx shall commence investigation and correction of each Severity 1 bug or error within one (1) business day after receipt from Sega of a report of such bug or error (or if 3Dfx otherwise becomes aware of same) and shall continuously devote available resources of not less than one full time individual (including extended hours) every day until such bug or error is corrected. "Severity 2" means bugs or errors which impair the operation of a major feature. 3Dfx shall commence investigation or correction of such Severity 2 bug or error (or if 3Dfx otherwise becomes aware of same) and shall devote available business hours of not less than one Project Personnel full time during normal business hours to correct such bug or error or provide a work-around as soon as possible. "Severity 3" means bugs or errors which impair the operation of a minor feature or cause inconvenience or annoyance. 3Dfx shall correct same or provide a work-around within fourteen (14) calendar days following receipt from Sega of such bugs or errors. 3Dfx shall give Sega prompt notice of any bugs, errors or defects of which 3Dfx becomes aware. 51 SCHEDULE 6.2 3DFX [*] SUPPORT PROFILE [TO BE NEGOTIATED AND ATTACHED] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. 52 SCHEDULE 6.3 [*] = CONFIDENTIAL TREATMENT REQUESTED [*] *CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.10 11 MASTER EQUIPMENT LEASE AGREEMENT W/ MMC/GATX 1 EXHIBIT 10.10 MASTER EQUIPMENT LEASE AGREEMENT Agreement No. _______ Dated: January 1, 1996 LESSOR: MMC/GATX PARTNERSHIP NO. I, a California general partnership ("Lessor"), c/o GATX Capital Corporation, as Agent, Four Embarcadero Center, Suite 2200, San Francisco, California 94111 LESSEE: 3D/FX INTERACTIVE, INC., a California corporation ("Lessee") ADDRESS: 415 Clyde Avenue, Suite 105, Mountain View, California 94043 IN CONSIDERATION of the mutual covenants contained herein, the parties agree as follows: 1. LEASE. Lessor leases to Lessee and Lessee leases from Lessor the personal property described in each Equipment Schedule executed pursuant hereto, subject to the terms and conditions of this Master Equipment Lease Agreement ("Master Lease") and the applicable Lease Line Schedule (defined below). The "Equipment" (as defined in the Lease Line Schedules) is being leased for commercial or business purposes only, and not for personal, home, or family purposes. The parties agree that each Lease is a "finance lease" under the Uniform Commercial Code (as in effect in the State of California during the term of the Lease and referred to hereafter as the "UCC"). 2. LEASE LINE SCHEDULE. "Lease Line Schedule" means a Lease Line Schedule in the form of EXHIBIT A-L or EXHIBIT A-2 signed by Lessor and Lessee and incorporating by reference the terms and provisions of this Master Lease. 3. EQUIPMENT SCHEDULES. "Equipment Schedule" means an Equipment Schedule in the form of EXHIBIT B-1 or EXHIBIT B-2 signed by Lessor and Lessee and incorporating, by reference, the terms and provisions of this Master Lease and the applicable Lease Line Schedule. Each Equipment Schedule shall constitute a separate and independent lease (a "Lease"); the original of such Lease shall consist of the signed Equipment Schedule and a copy of the Master Lease and applicable Lease Line Schedule. Capitalized terms used, but not defined, in this Master Lease have the meanings given to such terms in the applicable Lease Line Schedule or Equipment Schedule, as the case may be. 4. TERM AND RENTALS. (a) ACCEPTANCE. The Lease shall commence with respect to Equipment described on an Equipment Schedule upon the Acceptance Date. The "Acceptance Date" shall be the date upon which Lessee executes a Delivery and Acceptance Certificate in the form of EXHIBIT C. (b) TERM AND PAYMENT OF RENT. The lease term for the Equipment shall be the "Lease Term" set forth in the applicable Equipment Schedule which shall commence on the "Commencement Date" (as defined in the applicable Lease Line Schedule). Lessee agrees to pay to Lessor the "Rental Payments" for the Lease Term, in the amounts and at the times set forth in the applicable Equipment Schedule. (c) INTERIM PERIOD. If an Acceptance Date does not fall on a Commencement Date, then Lessee agrees to pay to Lessor "Interim Rent" for the period commencing on the Acceptance Date through and including the day preceding the Commencement Date (the "Interim Period"). The Interim Rent payment for the Interim Period shall accrue at the "Interim Rate" (as defined in the applicable Lease Line Schedule) and shall be due and payable in full on the Commencement Date. (d) LEASE TERMINATION. Lessee may terminate the Lease at the expiration of the Lease Term or any renewal term (the "Lease Termination") by submitting to Lessor a Notice of Election in the form of EXHIBIT D. If a 1 2 Notice of Election is not submitted by Lessee to Lessor during the "Advance Notice Period" (as defined in the Lease Line Schedule), then the Lease Term or any renewal Term will be automatically extended for an additional period equal to the "Automatic Extension Period" (as defined in the Lease Line Schedule). The Lease will continue to automatically extend until Lessee submits to Lessor a Notice of Election. The Lease may only be terminated as expressly provided in this Section, in the applicable Lease Line Schedule or in the applicable Equipment Schedule. Lessee agrees to continue paying rent for the Equipment in the amount of the Rental Payment set forth in the applicable Equipment Schedule until the later of (i) the expiration of the Lease Term, any renewal term and any Automatic Extension Period and (ii) either (A) the purchase option price is paid pursuant to SECTION 6(A), or (B) a mutually agreed renewal of the Lease takes effect pursuant to SECTION 6(B), or (C) the Equipment is returned in the manner and condition prescribed in SECTION 6(C), in each case after delivery of a Notice of Election. (e) NET LEASE. Each Equipment Schedule shall be a net lease, and Lessee's obligation to pay all rent and other sums thereunder shall be absolute and unconditional, and shall not be subject to any abatement, reduction, setoff, defense, counterclaims, interruption, deferment or recoupment, for any reason whatsoever. 5. LATE FEE. Lessee shall pay a late charge on any rent payments or other sums due hereunder which are past due, in the amount specified in the applicable Lease Line Schedule, payable on demand. In addition, interest shall accrue daily at the "Default Rate" (as defined in the Lease Line Schedule), or if such rate exceeds the maximum rate allowed by law, then at such maximum rate, and shall be payable on demand. 6. LEASE TERMINATION OPTIONS. Upon Lease Termination, Lessee will have the option to purchase the Equipment or renew the term of the Lease as set forth below. Lessee shall specify its election of a Lease Termination Option in the Notice of Election. (a) PURCHASE OPTION. If Lessee exercises the option to purchase, then, provided no Event of Default has occurred and is then continuing, Lessee shall at the expiration of the Lease Term, renewal term or extension, as the case may be, purchase the Equipment. The purchase price shall be the Equipment's then fair market value ("FMV") or as may be otherwise provided in a particular Lease Line Schedule. FMV, as applied to a purchase option, shall be determined by Lessor based on the price a willing buyer would pay and a willing seller would accept (neither buyer nor seller being under compulsion to act) for the Equipment as installed and in use, giving due consideration to its condition, utility, revenue-producing capability, and replacement costs. If Lessee fails to agree with Lessor's good faith determination of the FMV, Lessee shall nevertheless pay Lessor's invoice and provide Lessor with a written request for a determination of the FMV with or prior to such payment. Within ten (10) days after such request Lessor and Lessee shall agree on an appraiser to determine the FMV or, lacking such agreement, shall each tender the name of an appraiser. The appraiser(s) shall, within thirty (30) days, either agree on the FMV or select a third appraiser, to form a committee to determine the FMV. Determination by the appraiser(s) shall be final and binding on both parties. Within fifteen (15) days after such determination, Lessor shall refund any excess received over the FMV, and/or Lessee shall pay any additional amount of the FMV above the amount previously paid. Each party shall bear the fees and expenses of any appraiser which it names and share equally the fees and expenses of any appraiser(s) jointly selected. If the appraised FMV is within 5% of the amount invoiced by Lessor, then Lessee shall pay all appraiser fees and expenses. The purchase option price shall be paid not later than the last day of the Lease Term. (b) RENEWAL. If Lessee exercises the option to renew this Lease, such renewal shall be upon the terms and conditions of this Master Lease and the applicable Lease Line Schedule, for a rental period and rental amount to be agreed upon by Lessee and Lessor. 7. USE; MAINTENANCE. (a) Lessee, at its expense, shall make all necessary site preparations and cause the Equipment to be operated in accordance with any applicable operating manuals and manufacturer's instructions. Notwithstanding any 2 3 transfer or assignment by Lessor and provided Lessee is not in default hereunder, Lessee shall have the right to quietly possess and use the Equipment as provided herein without interference by Lessor, its assigns or any other third party claiming through or under Lessor. (b) Lessee shall effect and bear the expense of all necessary repair, maintenance, operation and replacements required to be made to maintain the Equipment in good condition, reasonable wear and tear excepted, and to comply with all domestic and international laws to which the use and operation of the Equipment may be or become subject. All replacement Equipment and parts furnished in connection with such maintenance or repair shall immediately become the property of Lessor and part of the Equipment for all purposes hereof. All such maintenance, repair and replacement sen ices shall be immediately paid for and discharged by Lessee with the result that no lien under any applicable laws, will attach to the Equipment as a result of the performance of such services or the provision of any such material, except mechanic's liens not based on delinquent payments which the Lessee may contest in good faith. 8. INSURANCE. Lessee shall obtain and maintain for the Lease Term (and any renewal term or extension), at its own expense, (a) "all risk" insurance against loss or damage to the Equipment, (b) commercial general liability insurance (including contractual liability, products liability and completed operations coverage) reasonably satisfactory to Lessor, and (c) such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to or reasonably required by Lessor (as to carriers, amounts and otherwise). The amount of the "all risk" insurance shall be greater than or equal to the Stipulated Loss Value (as defined in Section 9 below) of all Equipment outstanding under the Lease Line Schedules and must otherwise be reasonably satisfactory to Lessor as of each anniversary date of this Lease. Any increase in the amount of such insurance coverage reasonably requested by Lessor shall be put into effect on the next succeeding renewal date of such insurance. Each "all risk" policy shall: (i) name Lessor as sole loss payee with respect lo the Equipment, (ii) provide for each insurer's waiver of its right of subrogation against Lessor and Lessee, and (iii) shall waive set-off, counterclaim or offset against Lessor. Each liability policy shall name Lessor as an additional insured and provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Lessee's insurance). All insurance policies shall provide that Lessee's insurance shall be primary without a right of contribution of Lessor's insurance, if any, or any obligation on the part of Lessor to pay premiums of Lessee! and shall contain a clause requiring the insurer to give Lessor at least 30 days' prior written notice of its cancellation (other than cancellation for non-payment for which 10 days' notice shall be sufficient. Lessee shall on or prior to the date of the first effective Equipment Schedule and prior to each policy renewal, furnish to Lessor certificates of insurance or other evidence satisfactory to Lessor that such insurance coverage is in effect. Lessee further agrees to give Lessor prompt notice of any damage to, or loss of, the Equipment, or any part thereof. 9. LOSS OR DAMAGE. If any items of Equipment shall become lost, stolen, destroyed, or damaged beyond repair for any reason, or in the event of condemnation, confiscation, seizure or requisition of title to or use of such items (collectively, an "Event of Loss"), Lessee shall promptly pay to Lessor the applicable Stipulated Loss Value of the Equipment subject to the Event of Loss. Upon payment by Lessee of the Stipulated Loss Value, Lessor will transfer to Lessee, "AS IS, WHERE IS, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all of Lessor's right, title and interest, if any, in such items of Equipment. The "Stipulated Loss Value" payable by Lessee under this Lease shall be an amount equal to the product of (a) Lessor's Cost of the affected Equipment and (b) the percentage set forth in the table attached to the applicable Lease Line Schedule as Annex A opposite the Rental Payment number next following the Event of Loss. Stipulated Loss Values and Rental Payments shall not be prorated. 3 4 10. TITLE, INSPECTION AND LOCATION. (a) TITLE. Lessor and Lessee confirm their intent that title (if an ) to the Equipment shall remain in Lessor (or its successors and assigns) exclusively. If requested by Lessor, Lessee will affix plates or markings on the Equipment and on any operating manuals and manufacturer's instructions indicating the interests of Lessor and its assigns therein, and Lessee will not allow any other indicia of ownership or other interest in the Equipment to be placed on the Equipment. Lessee shall not sell, assign, grant a security interest in, sublet, pledge, hypothecate or otherwise encumber or suffer a lien upon or against this Lease or the Equipment. (b) INSPECTION. Lessor (through any of its officers, employees or agents) shall have the right to inspect the Equipment during regular business hours, with reasonable notice, and in compliance with Lessee's reasonable security procedures; provided, that such inspections will be conducted no more often than every six (6) months unless an Event of Default, or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. (c) LOCATION. In the case of Equipment other than mobile Equipment, Lessee may move such Equipment from the installation address shown on the Equipment Schedule (or any other location for which Lessee has complied with this provision) only if (i) the new location is within the continental United States, and (ii) Lessee gives prior written notice of the relocation and provides UCC-I financing statements, landlord waivers or such other documentation as Lessor reasonably requests to protect its interest in the Equipment. In the case of mobile equipment (including, without limitation, lap-top computers), Lessee agrees to obtain from the person using such mobile Equipment and deliver to Lessor, an Acknowledgment in the form of EXHIBIT F. (d) Lessee shall keep copies of all operating manuals and manufacturer's instructions with respect to the Equipment in good condition at the locations specified in Section 10(c). 11. LESSEE'S REPRESENTATIONS, WARRANTIES AND WAIVERS. Upon execution of the Master Lease and each Equipment Schedule, Lessee warrants and represents the following: (a) Lessee is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Lessee has full power and authority and all necessary licenses and permits to carry on its business as presently conducted, to own or hold under lease its properties and to enter into this Master Lease, each Lease Line Schedule and each Equipment Schedule and to perform its obligations thereunder; and Lessee is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of its properties or the nature of its business or the performance of its obligations under this Master Lease, the Lease Line Schedules and any Equipment Schedules requires such qualification, except for such jurisdictions in which failure to qualify would not have a material adverse effect on Lessee. (b) The execution and delivery by Lessee of this Master Lease, the Lease Line Schedules and each Equipment Schedule and the performance by Lessee of its obligations thereunder have been duly authorized by all necessary corporate action on the part of Lessee; and do not and will not contravene the provisions of or constitute a default (either with or without notice or lapse of time, or both) under, or result in the creation of any lien upon, the Equipment or any property of Lessee under any indenture, mortgage, contract or other instrument to which Lessee is a party or by which Lessee or its properties is bound. (c) No consent or approval of, giving of notice to, registration with, or taking of any other action by, any state, federal, foreign or other governmental commission, agency or regulatory authority or any other person or entity is required for the consummation or performance by Lessee of the transactions contemplated under this Master Lease, the Lease Line Schedules and each Equipment Schedule. 4 5 (d) This Master Lease, the Lease Line Schedules and each Equipment Schedule, when executed by Lessee, constitute legal, valid and binding agreements of Lessee enforceable against Lessee in accordance with their terms, except as limited by any bankruptcy, insolvency, reorganization, or other similar laws of general application affecting the enforcement of creditor or Lessor rights. (e) There are no actions, suits or proceedings pending or threatened against or affecting Lessee or any property of Lessee in any court, before any arbitrator of any kind or before or by any federal state, municipal or other government department, commission, board, bureau, agency or instrumentality (collectively "Governmental Body"), which, if adversely determined, would materially adversely affect the business, financial condition, assets, or operations of Lessee, or adversely affect the ability of Lessee to perform its obligations under this Master Lease, the Lease Line Schedules and each Equipment Schedule; and Lessee is not in default with respect to any order of any court, arbitrator or Governmental Body or with respect to any material loan agreement, debt instrument or contract with a supplier or customer of Lessee, except as disclosed in writing to Lessor. (f) To the extent permitted by applicable law, Lessee waives any and all rights and remedies to: (i) cancel this Lease; (ii) repudiate this Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover damages from Lessor for any breaches of warranty or for any other reason other than breach by Lessor of the covenant of quiet enjoyment as set forth in Section 7(a) hereof; (vi) claim a security interest in the Equipment in Lessee's possession or control for any reason; (vii) deduct from Rental Payments all or any part of any claimed damages resulting from Lessor's default, if any, under this Lease; (viii) accept partial delivery of the Equipment; (ix) "cover" by making any purchase or lease of or contract to purchase or lease equipment in substitution for Equipment designated in the Lease; (x) recover any direct, general, special, incidental, indirect, exemplary or consequential damages, for any reason whatsoever; and (xi) obtain specific performance, replevin, detinue, sequestration, claim and delivery or the like for any Equipment identified to this Lease. To the extent permitted by applicable law, Lessee also waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's damages or which may otherwise limit or modify any of Lessor's rights or remedies. 12. ASSIGNMENT BY LESSOR. LESSEE ACKNOWLEDGES THAT LESSOR MAY SELL, ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT NOTICE TO OR CONSENT OF LESSEE. Upon Lessor's written notice to Lessee that this Lease, or the right to the Rental Payments hereunder, have been assigned, Lessee shall, if requested, pay directly to Lessor's assignee without abatement, deduction or set-off amounts which become due hereunder. Lessee waives and agrees it will not assert against Lessor's assignee any counterclaim or set-off in any action for rent under the Lease. Upon the assignment of this Lease, Lessor's assignee shall have and be entitled to exercise any and all rights and remedies (but none of the obligations) of lessor hereunder, and all references herein to Lessor shall include Lessor's assignee. Lessee acknowledges that any assignment or transfer by Lessor does not materially change Lessee's duties or obligations under this Lease nor materially increase the burdens or risks imposed on Lessee. 13. ASSIGNMENT BY LESSEE. LESSEE MAY NOT, WITHOUT LESSOR IS PRIOR WRITTEN CONSENT, (;) ASSIGN THIS LEASE, WHETHER BY OPERATION OF LAW OR OTHERWISE, OR SUBLEASE THE EQUIPMENT OR ANY PART THEREOF OR (;;) ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN AND TO THIS LEASE OR THE EQUIPMENT. In the event Lessee makes an assignment, sublease or other transfer (to which Lessor has consented), Lessee shall not thereby be relieved of its duties and obligations hereunder, for which it shall remain fully responsible and liable (independent of its assignee). 5 6 14. TAXES. (a) Lessee shall comply with all applicable federal, state, local, foreign and international laws, regulations and orders relating to this Lease. Lessee assumes liability for, and shall pay when due, and on a net after-tax basis shall indemnify and defend Lessor against, all federal, state, local, foreign and international fees, taxes and government charges (including, without limitation, interest and penalties) of any nature imposed upon or in any way relating to Lessor, Lessee, any item of Equipment or this Lease, except federal, state and local taxes on or measured by Lessor's net income (other than any such tax which is in substitution for or relieves Lessee from the payment of taxes it would otherwise be obligated to pay to or reimburse Lessor for as herein provided). Lessee shall at its expense file when due with the appropriate authorities any and all tax and similar returns and reports required to be filed with respect thereto or, if requested by Lessor, notify Lessor of all such requirements and furnish Lessor with all information required for Lessor to effect such filings, which filings shall also be at Lessee's expense. Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make such payments shall at Lessor's option become immediately due from Lessee to Lessor. (b) This Lease has been entered into on the assumption that Lessor shall be entitled to all deductions, credits, and other tax benefits as are provided in the Internal Revenue Code of 1986, including amendments as may occur (the "Code"), to an owner of property including, without limitation, depreciation deductions and interest deductions with respect to any debts incurred to finance the purchase of the Equipment. If, as a result of any acts, omissions or misrepresentations by Lessee, Lessor's projected after-tax economic return resulting from ownership and lease of the Equipment is reduced, then Lessee's Rental Payments shall be increased in an amount (based on Lessor's reasonable calculations) sufficient to provide the same net after-tax economic return as if such acts or omissions had not occurred. Appropriate increases shall also be made in the applicable Stipulated Loss Values for this Lease. In the event the Equipment is sold by Lessor to another party, the net after-tax economic returns considered shall be those of such other party. 15. EQUIPMENT WARRANTIES. Lessee acknowledges that (i) Lessee has selected the supplier of the Equipment, (ii) Lessor acquired the goods or the right to possession and use of the goods in connection with the Lease, and (iii) Lessee received a copy of the contract by which Lessor acquired the Equipment or the right to possession and use of the Equipment before signing the a particular Lease. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE EQUIPMENT AND DISCLAIMS THE SAME. Lessor shall have no liability for any damages, whether direct, indirect, general, special, incidental, exemplary or consequential, incurred b, Lessee as a result of an), defect or malfunction of the Equipment. Lessee shall look solely to the Equipment supplier for any and all claims related to the Equipment. Lessor assigns to Lessee, for and during the Lease Term, any warranty on the Equipment provided by the supplier. Lessor and Lessee agree that all limitations on remedies and liability contained in this Lease represent a reasonable allocation of risks that is part of the fundamental bargain between the parties. 16. EVENTS OF DEFAULT. An Event of Default shall occur if Lessee (i) fails to pay any Rental Payment or other payment required under the Lease when due and such failure continues for a period of five (5) days after written notice from Lessor; or (ii) fails to perform or observe any other covenant, condition or agreement to be performed or observed by it or breaches any provision contained in the Lease or in any other document furnished to Lessor in connection herewith, and such failure or breach continues for a period of thirty (30) days after written notice from Lessor; or (iii) without Lessor's consent, attempts to assign this Lease or sell, transfer, encumber, part with possession, or sublet any item of Equipment; or (iv) makes any representation or warranty herein or in any document furnished by Lessor in connection herewith, which shall have been materially false or inaccurate when made or at the time to which such representation or warranty relates; or (v) shall commit an act of bankruptcy or become insolvent or bankrupt or make an assignment for the benefit of creditors or consent to the appointment of a Trustee or Receiver or either shall be appointed for Lessee or for a substantial part of its property without its consent, or bankruptcy reorganization, or insolvency proceedings shall be instituted by or against Lessee, 6 7 and, if instituted against Lessee, shall not be vacated or dismissed within sixty (60) days. Any Event of Default shall be deemed material and a substantial impairment of Lessor's interests for the purposes of this Lease, the UCC, and any other applicable law. 17. REMEDIES. Upon the occurrences of any Events of Default and at any time thereafter. provided such Event of Default is then continuing, Lessor may, in its discretion, do any one or more of the following: (a) cancel any or all Leases which reference this Master Lease or the Lease Line Schedule, upon notice to Lessee; (b) recover any accrued and unpaid Rental Payments and other amounts which are due and owing under the Leases so canceled on the Rental Payment Date immediately preceding the date on which Lessor obtains possession of the Equipment (or such earlier date as judgment is entered in favor of Lessor) (the "Determination Date"), plus interest at the Default Rate; (c) with or without canceling this Lease, recover (i) such Stipulated Loss Value as of the Rental Payment Date immediately preceding the Determination Date, and (ii) the amount of any loss or reduction of tax benefits which Lessor anticipated it would receive if the Lease continued for its full Lease Term; (d) recover any amounts due under any indemnity then determinable, plus interest at the Default Rate; (e) require that Lessee provide the return and certification of the Equipment in accordance with Section 6(c) hereof; (f) enter the premises where such Equipment is located and take immediate possession of and remove the same, all without liability to Lessor or its agents for such entry, except for costs incurred for any physical damage to the premises caused by Lessor or its agents for such entry; (g) sell any or all of the Equipment at public or private sale, with or without notice to Lessee or advertisement, or otherwise dispose of, hold, use, operate, lease to others or keep idle such Equipment, all free and clear of any rights of Lessee and without any duty to account to Lessee for such action or inaction or for any proceeds with respect thereto; and (h) exercise any other right or remedy , which may be available to it under the UCC or other applicable law including the right to recover damages for the breach hereof. In addition, Lessee shall be liable for, and reimburse Lessor for, all reasonable legal fees and all commercially reasonable costs and expenses incurred by Lessor as a result of the foregoing defaults or the exercise of Lessor's remedies, including without limitation recovering possession of the Equipment, selling or leasing the Equipment (including broker's and sales representative's fees and commissions), and placing any Equipment in the condition and obtaining the certificate required by Section 6(c) hereof. No remedy referred to in this Section is intended to be exclusive. but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at la\v or in equity. No express or implied waiver by Lessor of any default shall constitute a waiver of any other default by Lessor, or a waiver of any of Lessor's rights. 18. INDEMNIFICATION. Lessee assumes liability for, and shall pay when due, and shall indemnify, reimburse and hold each Indemnified Person (defined below) harmless from and against all Claims (defined below), directly or indirectly relating to or arising out of the acquisition, use. manufacture, purchase, shipment, transportation, delivery, installation, lease or sublease, ownership, operation. possession, control, storage, return or condition of any item of Equipment (regardless of whether such item of Equipment is at the time in the possession 7 8 of Lessee), the falsity of any non-tax representation or warranty of Lessee or Lessee's failure to comply with the terms of the Lease during the Lease Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of Equipment, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, or (iii) any Claim for negligence or strict or absolute liability in tort; provided, however, that Lessee shall not indemnify Lessor for any liability incurred by Lessor as a direct and sole result of Lessor's gross negligence or willful misconduct. "Claim" means all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including, without limitation, claims relating to environmental discharge, cleanup or compliance), and all costs and expenses whatsoever to the extent they may be incurred or suffered by an Indemnified Person in connection therewith (including, without limitation, reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Equipment, damage to or loss of use of property (including, without limitation, consequential or special damages to third parties or damages to Lessee's property), or bodily injury to or death of any person (including, without limitation, any agent or employee of Lessee). "Indemnified Person" means Lessor (including without limitation, each of its partners) and each of their respective successors, assigns, agents, officers, directors, shareholders, partners, servants, agents and employees. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Lease. Upon Lessor's written demand, Lessee shall assume and diligently conduct, at its sole cost and expense, the entire defense of any Indemnified Person against any indemnified Claim described in this Section 18. Lessee shall not settle or compromise any Claim against or involving Lessor without first obtaining Lessor's written consent thereto, which consent shall not be unreasonably withheld. Lessee shall give Lessor prompt notice of any occurrence, event or condition in connection with which Lessor may be entitled to indemnification hereunder. The provisions of this Section 18 are in addition to, and not in limitation of, the provisions of Section 14(b). 19. NOTICES. Any notices or demands required or permitted hereunder shall be given to the parties in writing and by personal delivery, regular or certified mail. facsimile or telegram at the address set forth in the Lease Line Schedule or to such other address as the parties may hereafter substitute by written notice given in the manner prescribed in this Section. Such notices or demands shall be deemed given upon receipt in the case of personal delivery and upon mailing or transmission in the case of mail, facsimile or telegram. Lessee agrees to provide Lessor with thirty (30) days' prior written notice of (a) any merger or consolidation with or into any other business organization, (b) any sale, lease or other disposition of assets not in the ordinary course of business, and (c) any other material change in Lessee's financial structure or ownership. 20. FURTHER ASSURANCES. Lessee will promptly execute and deliver to Lessor such further reasonable documents and take such further reasonable action as Lessor may request in order to more effectively carry out the intent and purpose of this Lease or an assignment of Lessor's interest herein. 21. MISCELLANEOUS. This Lease shall be binding upon and inure to the benefit of the parties hereto, their permitted successors and assigns. Any provision of the Lease which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof; and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; provided, however, that to the extent that the provisions of any such applicable law can be waived, they are waived by Lessee. Time is of the essence with respect to the Lease. Lessee expressly assumes liability for and agrees to indemnify and defend and hold Lessor harmless from and against any breach by Lessee of any representation, warranty or covenant made by Lessee herein and in connection therewith to pay and reimburse Lessor for the payment of any and all expenses, including reasonable attorney fees incurred by Lessor in connection with or as the result of any such breach. The captions set forth herein are for convenience only and shall not define or limit any of the terms hereof. THIS LEASE SHALL 8 9 IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES. LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM THIS LEASE. THIS LEASE SHALL BECOME EFFECTIVE AND BINDING ON THE PARTIES, THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, AND SHALL BE DEEMED EXECUTED AND PERFORMED IN THE STATE OF CALIFORNIA, WHEN THE RELATED EQUIPMENT SCHEDULES ARE ACCEPTED BY LESSOR LESSEE CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE COURTS OF CALIFORNIA FOR THE RESOLUTION OF ANY DISPUTES HEREUNDER 22. AMENDMENTS, MODIFICATIONS, WAIVERS. NONE OF THE PROVISIONS OF THIS LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY LESSOR AND LESSEE. INITIALS _________ (LESSEE) INITIALS _________ (LESSEE) LESSEE: LESSOR: 3D/FX INTERACTIVE, INC. By:MMC/GATX PARTNERSHIP NO. I By GATX Capital Corporation, as Agent By:________________________________ By:_____________________________________ Name:______________________________ Name:___________________________________ Title:_____________________________ Title:__________________________________ 9 10 LEASE LINE SCHEDULE NO. 01, dated January 1, 1996 ("Lease Line Schedule"), to MASTER EQUIPMENT LEASE AGREEMENT NO.___, dated January 1, 1996 ("Master Lease"), by and between MMC/GATX PARTNERSHIP NO. I, a California general partnership("Lessor") and 3D/FX INTERACTIVE, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) IN CONSIDERATION of the mutual covenants contained herein, the parties agree as follows: LEASE LINE. The total Lessor's Cost of all units of Equipment under all Equipment Schedules pursuant to Lease Line Schedule No. 01 and 02, both dated March 31, 1995, to Master Equipment Lease Agreement No. ___, dated January 1, 1996, shall not exceed $l,000,000.00 (the "Commitment"). "Lessor's Cost" means, with respect to a unit of Equipment, the total cost to Lessor of purchasing such unit, as indicated on the applicable Equipment Schedule. Lessor's obligation to fund Equipment Schedules under the Commitment shall terminate on December 31, 1996 (the "Commitment Termination Date"). The minimum Lessor's Cost for each Delivery & Acceptance Certificate shall be $10,000.00. There shall be no more than one Equipment Schedule in any month. RENTAL FACTOR. The Rental Factor for each Equipment Schedule will be based upon an implicit interest rate equal to the prime lending rate as quoted in The Wall Street Journal ten business days prior to the Commencement Date for such Equipment Schedule (the "Prime Rate") plus 200 basis points. If on such date the Prime Rate is other than 8.5%, then the Rental Factor for that Equipment Schedule will be adjusted upward or downward basis point for basis point to maintain an implicit interest rate equal to the Prime Rate plus 200 basis points. Once the Lease Term commences for any Equipment Schedule, there will be no further adjustments to the Rental Factor for such Equipment Schedule. The Rental Payment under a particular Equipment Schedule shall be an amount equal to the product of (a) the Rental Factor and (b) the aggregate Lessor's Cost of Equipment subject to such Equipment Schedule. INTERIM RATE. The Interim Rate used to calculate the daily Interim Rent shall be equal to the Rental Factor for each Equipment Schedule divided by thirty (30). The Interim Period as defined in the Master Lease shall be modified to start on the date the Equipment is delivered to and accepted by the Lessee and the Lessor's Cost of Equipment is advanced by Lessor. ADVANCE RENT. Upon execution of each Summary Equipment Schedule under this Lease Line Schedule, Lessee shall pay to Lessor advance rent equal to the product of the Lessor's Cost and the Rental Factor ("Advance Rent"), to be applied toward the last Rental Payment due from Lessee to Lessor under each Equipment Schedule. EXPENSES. Lessee agrees to reimburse Lessor for a total of up to Fifteen Hundred Dollars ($1,500.00) of expenses incurred in connection with the negotiation and documentation of this transaction, promptly upon receipt of an invoice together with appropriate back-up. ELIGIBLE EQUIPMENT. All equipment financed under an Equipment Schedule shall be Eligible Equipment. "Eligible Equipment" means the following types of equipment to the extent acceptable to Lessor: Various new and used computers, peripherals, analytical and test equipment, laboratory equipment and furniture, office furniture and equipment and other equipment as mutually agreed between Lessee and Lessor, together with all replacements, parts, cables. repairs, additions and accessories incorporated therein or affixed thereto and all operating manuals and manufacturer's instructions (collectively hereinafter called the "Equipment"). Such replacements, parts, cables, repairs, additions and accessories shall (whether or not purchased by Lessor) be 1 11 considered part of the Equipment for all purposes and, when installed in or attached to the Equipment (unless otherwise agreed), be or become the property of the Lessor except such external, stand-alone accessories acquired by Lessee which may be removed without damage to the equipment which shall be the property of the Lessee. Except as otherwise specifically provided or the context so requires, the term "Equipment" includes operating system or other bundled software which is delivered on or with the Equipment or is included on the Equipment Schedules. COMMENCEMENT DATE. The "Commencement Date" for each Equipment Schedule shall be the first day of the calendar month following the Acceptance Date for the items of Equipment subject to such Equipment Schedule. If the Acceptance Date is the first day of a calendar month, then the Commencement Date shall be the Acceptance Date. LEASE TERMINATION OPTIONS. Notwithstanding anything to the contrary in Section 6 of the Master Lease, upon Lease Termination (as defined in the Master Lease), Lessee will have, with respect to all but not less than all of the Equipment governed by this Lease Line Schedule, the option to (a) purchase the Equipment from Lessor for the lesser of its Fair Market Value or fifteen percent (15% ) of the Lessor's Cost or (b) renew the Lease. ADVANCE NOTICE PERIOD. The "Advance Notice Period" shall be at least ninety (90) days, but not more than 180 days, prior to Lease Termination (as defined in the Master Lease) of Equipment Schedule No. 1 to this Lease Line Schedule. AUTOMATIC EXTENSION PERIOD. The "Automatic Extension Period" shall equal three (3) months and affects each Equipment Schedule under this Lease Line Schedule. INSURANCE. The amount of commercial general liability insurance (other than products liability coverage and completed operations insurance) required under the Master Lease shall be at least $1,000,000 per occurrence. The amount of the products liability and completed operations insurance under the Master Lease shall be at least $1,000,000 per occurrence; provided however, that Lessee shall not be required to obtain products liability and completed operations insurance until the occurrence of the first shipment of a product to a customer. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as available, but in any event within twenty (20) days after the end of each month, a company prepared balance sheet, income statement and cash flow statement covering Lessee's operations during such period, certified by an officer of Lessee reasonably acceptable to Lessor; (b) as soon as practicable after the end of each fiscal year, and in any event within one hundred twenty (120) days Lessee will provide Lessor with consolidated balance sheets of Lessee and its subsidiaries, if any, as at the end of each fiscal year, and consolidated statements of operations and consolidate statements of cash flows of the Lessee and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles, all in reasonable detail certified by independent public auditors of recognized national standing selected by Lessee; provided, however, that until the Lessee shall have revenues in excess of $10,000,000, such financial statements may be reviewed but not audited; (c) promptly upon becoming available, copies of all statements, reports, budgets, sales projections, operating plans and notices sent or made available generally by Lessee to its security holders; (d) immediately upon receipt of notice thereof, a report of any material legal actions pending or threatened against Lessee; and (e) such other financial information as Lessor may reasonably request from time to time. MAINTENANCE SERVICE CONTRACTS. Lessee shall obtain and keep in effect at all times during the Lease Term (and any renewal or extension thereof), maintenance service contracts covering the Equipment with the Equipment supplier or with suppliers of maintenance services approved by Lessor, such approval not to be unreasonably withheld. 2 12 INSTALLATION, HANDLING AND DELIVERY CHARGES. Any handling and delivery charge to cover all Equipment transportation, rigging, drayage, packing, installation and handling to and from vendor's plant and upon return to Lessor's designated location shall be paid by Lessee. MISCELLANEOUS TAXES. Without limitation of the provisions of the Master Lease, Lessee agrees to pay and to indemnify Lessor for any sales or use tax and any property tax in connection with the sale, lease or use of the Equipment. LATE FEE. Lessee shall pay a late charge on any rent payments or other sums due hereunder which are past due, in an amount equal to 2 % of the past due amount, payable on demand. DEFAULT RATE. The Default Rate of interest on late payments shall be fifteen percent (15%) per annum. NOTICES. All notices shall be addressed as follows: If to Lessor: MMC/GATX Partnership No. I c/o GATX Capital Corporation, Agent Four Embarcadero Center, Suite 2200 San Francisco, CA 94111 Attn: Contract Administration phone: (415) 955-3200 Fax: (415) 955-3444 With a copy of required financial information to: MEIER MITCHELL & COMPANY 4 Orinda Wy, Suite 200-B Orinda, California 94563 Attn: Contract Administration Phone: (510) 254-9520 Fax (415)254-9528 If to Lessee: 3D/fx Interactive, Inc. 415 Clyde Avenue, Suite. 105 Mountain View, CA 94043 Attn: Gary Martin Phone: (415) 934-2400 Fax (415) 934-2424 CONDITIONS TO THE FIRST EQUIPMENT SCHEDULE. On or prior to the date of execution of the first Equipment Schedule under this Lease Line Schedule, Lessor shall have received in form and substance satisfactory to Lessor, each of the following: A Warrant substantially in the form of EXHIBIT H to the Master Lease. A legal opinion of Lessee's legal counsel in form and substance reasonably satisfactory to Lessor, covering the matters set forth in EXHIBIT G to the Master Lease. 3 13 Copies, certified by the Secretary or Assistant Secretary or Chief Financial Officer of Lessee, of: (i) the Articles of Incorporation and By-Laws of Lessee (as amended to the date of the Lease) and (ii) the resolutions adopted by l~e's board of directors authorizing the execution and delivery of this Lease, the Lease Line Schedule, the Equipment Schedules, the Warrant and the other documents referred in this Lease Line Schedule and the performance by Lessee of its obligations in such documents. Evidence of the insurance coverage required by SECTION 8 of the Master Lease. All necessary consents of shareholders and other third parties with respect to the subject matter of the Master Lease, the Lease Line Schedule, the Equipment Schedules and the Warrant. Payment of the Advance Rent. CONDITIONS TO ALL FUNDINGS UNDER ALL EQUIPMENT SCHEDULES. On or prior to each funding under each Equipment Schedule under this Lease Line Schedule, each of the following conditions shall have been satisfied: No Event of Default or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. Lessor shall have received all necessary or desirable estoppel certificates and UCC filings, releases or terminations. Lessor shall have received a landlord waiver and consent in substantially the form of EXHIBIT E to the Master Lease with respect to each equipment location. Until such landlord waiver has been provided Lessor will not finance any Equipment that in its sole opinion may or may not be a fixture. There shall not have occurred (i) any material adverse change to the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Lessee, whether or not arising from transactions in the ordinary course of business, or (ii) any material adverse deviation by Lessee from the business plan of Lessee presented to and not disapproved by Lessor, since the date of the Master Lease. Lessee shall have delivered to Lessor an Equipment Schedule covering the appropriate funding period. The aggregate of Lessor's Cost of all Units subject to each Equipment Schedule and all Equipment Schedules previously made subject to the Master Lease which consist of computer software and/or equipment manufactured specially for Lessee shall not exceed 25% of the total Lessor's Cost of Equipment funded. Lessee shall have delivered to Lessor (i) in the case of a sale-leaseback, copies of invoices, canceled checks or other proof of payment, a Bill of Sale, a Delivery and Acceptance Certificate, and any UCC filings or other notices deemed necessary or desirable in connection with the sale-leaseback or (ii) at Lessor's request, in the case of a purchase of new equipment in excess of $2S,000 from an equipment vendor, a Purchase Order and Invoice Assignment and a Delivery and Acceptance Certificate. 4 14 All terms and conditions in the Equipment Schedule shall have been satisfied by the Acceptance Date for the Equipment under such Equipment Schedule. All other documents as Lessor shall have reasonably requested. LESSEE: LESSOR: 3D/FX INTERACTIVE, INC. By:MMC/GATX PARTNERSHIP NO. I By GATX Capital Corporation, as Agent By:________________________________ By:__________________________________ Name:______________________________ Name:________________________________ Title:_____________________________ Title:_______________________________ ANNEX A - Stipulated Loss Value Table 5 EX-10.11 12 MASTER EQUIPMENT LEASE AGREEMENT W/LIGHTHOUSE CAP 1 EXHIBIT 10.11 MASTER EQUIPMENT LEASE AGREEMENT Agreement No. 101 Dated: March 31, 1995 LESSOR: LIGHTHOUSE CAPITAL PARTNERS, L.P., a Delaware limited partnership ("Lessor") 100 Drakes Landing Road, Suite 260, Greenbrae, California 94904 LESSEE: 3D/FX INTERACTIVE, INC., a California corporation ("Lessee") ADDRESS: 415 Clyde Avenue, Suite 105, Mountain View, California 94043 IN CONSIDERATION of the mutual covenants contained herein, the parties agree as follows: 1. LEASE. Lessor leases to Lessee and Lessee leases from Lessor the personal property described in each Equipment Schedule executed pursuant hereto, subject to the terms and conditions of this Master Equipment Lease Agreement ("Master Lease") and the applicable Lease Line Schedule (defined below). The "Equipment" (as defined in the Lease Line Schedules) is being leased for commercial or business purposes only, and not for personal, home, or family purposes. The parties agree that each Lease is a "finance lease" under the Uniform Commercial Code (as in effect in the State of California during the term of the Lease and referred to hereafter as the "UCC"). 2. LEASE LINE SCHEDULE. "Lease Line Schedule" means a Lease Line Schedule in the form of EXHIBIT A-L or EXHIBIT A-2 signed by Lessor and Lessee and incorporating by reference the terms and provisions of this Master Lease. 3. EQUIPMENT SCHEDULES. "Equipment Schedule" means an Equipment Schedule in the form of EXHIBIT B-1 or EXHIBIT B-2 signed by Lessor and Lessee and incorporating, by reference, the terms and provisions of this Master Lease and the applicable Lease Line Schedule. Each Equipment Schedule shall constitute a separate and independent lease (a "Lease"); the original of such Lease shall consist of the signed Equipment Schedule and a copy of the Master Lease and applicable Lease Line Schedule. Capitalized terms used, but not defined, in this Master Lease have the meanings given to such terms in the applicable Lease Line Schedule or Equipment Schedule, as the case may be. 4. TERM AND RENTALS. (a) ACCEPTANCE. The Lease shall commence with respect to Equipment described on an Equipment Schedule upon the Acceptance Date. The "Acceptance Date" shall be the date upon which Lessee executes a Delivery and Acceptance Certificate in the form of EXHIBIT C. (b) TERM AND PAYMENT OF RENT. The lease term for the Equipment shall be the "Lease Term" set forth in the applicable Equipment Schedule which shall commence on the "Commencement Date" (as defined in the applicable Lease Line Schedule). Lessee agrees to pay to Lessor the "Rental Payments" for the Lease Term, in the amounts and at the times set forth in the applicable Equipment Schedule. (c) INTERIM PERIOD. If an Acceptance Date does not fall on a Commencement Date, then Lessee agrees to pay to Lessor "Interim Rent" for the period commencing on the Acceptance Date through and including the day preceding the Commencement Date (the "Interim Period"). The Interim Rent payment for the Interim Period shall accrue at the "Interim Rate" (as defined in the applicable Lease Line Schedule) and shall be due and payable in full on the Commencement Date. (d) LEASE TERMINATION. Lessee may terminate the Lease at the expiration of the Lease Term or any renewal term (the "Lease Termination") by submitting to Lessor a Notice of Election in the form of EXHIBIT D. If a 1 2 Notice of Election is not submitted by Lessee to Lessor during the "Advance Notice Period" (as defined in the Lease Line Schedule), then the Lease Term or any renewal Term will be automatically extended for an additional period equal to the "Automatic Extension Period" (as defined in the Lease Line Schedule). The Lease will continue to automatically extend until Lessee submits to Lessor a Notice of Election. The Lease may only be terminated as expressly provided in this Section, in the applicable Lease Line Schedule or in the applicable Equipment Schedule. Lessee agrees to continue paying rent for the Equipment in the amount of the Rental Payment set forth in the applicable Equipment Schedule until the later of (i) the expiration of the Lease Term, any renewal term and any Automatic Extension Period and (ii) either (A) the purchase option price is paid pursuant to SECTION 6(a), or (B) a mutually agreed renewal of the Lease takes effect pursuant to SECTION 6(b), or (C) the Equipment is returned in the manner and condition prescribed in SECTION 6(c), in each case after delivery of a Notice of Election. (e) NET LEASE. Each Equipment Schedule shall be a net lease, and Lessee's obligation to pay all rent and other sums thereunder shall be absolute and unconditional, and shall not be subject to any abatement, reduction, setoff, defense, counterclaims, interruption, deferment or recoupment, for any reason whatsoever. 5. LATE FEE. Lessee shall pay a late charge on any rent payments or other sums due hereunder which are past due, in the amount specified in the applicable Lease Line Schedule, payable on demand. In addition, interest shall accrue daily at the "Default Rate" (as defined in the Lease Line Schedule), or if such rate exceeds the maximum rate allowed by law, then at such maximum rate, and shall be payable on demand. 6. LEASE TERMINATION OPTIONS. Upon Lease Termination, Lessee will have the option to purchase the Equipment or renew the term of the Lease as set forth below. Lessee shall specify its election of a Lease Termination Option in the Notice of Election. (a) PURCHASE OPTION. If Lessee exercises the option to purchase, then, provided no Event of Default has occurred and is then continuing, Lessee shall at the expiration of the Lease Term, renewal term or extension, as the case may be, purchase the Equipment. The purchase price shall be the Equipment's then fair market value ("FMV") or as may be otherwise provided in a particular Lease Line Schedule. FMV, as applied to a purchase option, shall be determined by Lessor based on the price a willing buyer would pay and a willing seller would accept (neither buyer nor seller being under compulsion to act) for the Equipment as installed and in use, giving due consideration to its condition, utility, revenue-producing capability, and replacement costs. If Lessee fails to agree with Lessor's good faith determination of the FMV, Lessee shall nevertheless pay Lessor's invoice and provide Lessor with a written request for a determination of the FMV with or prior to such payment. Within ten (10) days after such request Lessor and Lessee shall agree on an appraiser to determine the FMV or, lacking such agreement, shall each tender the name of an appraiser. The appraiser(s) shall, within thirty (30) days, either agree on the FMV or select a third appraiser, to form a committee to determine the FMV. Determination by the appraiser(s) shall be final and binding on both parties. Within fifteen (15) days after such determination, Lessor shall refund any excess received over the FMV, and/or Lessee shall pay any additional amount of the FMV above the amount previously paid. Each party shall bear the fees and expenses of any appraiser which it names and share equally the fees and expenses of any appraiser(s) jointly selected. If the appraised FMV is within 5% of the amount invoiced by Lessor, then Lessee shall pay all appraiser fees and expenses. The purchase option price shall be paid not later than the last day of the Lease Term. (b) RENEWAL. If Lessee exercises the option to renew this Lease, such renewal shall be upon the terms and conditions of this Master Lease and the applicable Lease Line Schedule, for a rental period and rental amount to be agreed upon by Lessee and Lessor. 7. USE; MAINTENANCE. (a) Lessee, at its expense, shall make all necessary site preparations and cause the Equipment to be operated in accordance with any applicable operating manuals and manufacturer's instructions. Notwithstanding any 2 3 transfer or assignment by Lessor and provided Lessee is not in default hereunder, Lessee shall have the right to quietly possess and use the Equipment as provided herein without interference by Lessor, its assigns or any other third party claiming through or under Lessor. (b) Lessee shall effect and bear the expense of all necessary repair, maintenance, operation and replacements required to be made to maintain the Equipment in good condition, reasonable wear and tear excepted, and to comply with all domestic and international laws to which the use and operation of the Equipment may be or become subject. All replacement Equipment and parts furnished in connection with such maintenance or repair shall immediately become the property of Lessor and part of the Equipment for all purposes hereof. All such maintenance, repair and replacement services shall be immediately paid for and discharged by Lessee with the result that no lien under any applicable laws, will attach to the Equipment as a result of the performance of such services or the provision of any such material, except mechanic's liens not based on delinquent payments which the Lessee may contest in good faith. 8. INSURANCE. Lessee shall obtain and maintain for the Lease Term (and any renewal term or extension), at its own expense, (a) "all risk" insurance against loss or damage to the Equipment, (b) commercial general liability insurance (including contractual liability, products liability and completed operations coverage) reasonably satisfactory to Lessor, and (c) such other insurance against such other risks of loss and with such terms, as shall in each case be reasonably satisfactory to or reasonably required by Lessor (as to carriers, amounts and otherwise). The amount of the "all risk" insurance shall be greater than or equal to the Stipulated Loss Value (as defined in Section 9 below) of all Equipment outstanding under the Lease Line Schedules and must otherwise be reasonably satisfactory to Lessor as of each anniversary date of this Lease. Any increase in the amount of such insurance coverage reasonably requested by Lessor shall be put into effect on the next succeeding renewal date of such insurance. Each "all risk" policy shall: (i) name Lessor as sole loss payee with respect lo the Equipment, (ii) provide for each insurer's waiver of its right of subrogation against Lessor and Lessee, and (iii) shall waive set-off, counterclaim or offset against Lessor. Each liability policy shall name Lessor as an additional insured and provide that such insurance shall have cross-liability and severability of interest endorsements (which shall not increase the aggregate policy limits of Lessee's insurance). All insurance policies shall provide that Lessee's insurance shall be primary without a right of contribution of Lessor's insurance, if any, or any obligation on the part of Lessor to pay premiums of Lessee! and shall contain a clause requiring the insurer to give Lessor at least 30 days' prior written notice of its cancellation (other than cancellation for non-payment for which 10 days' notice shall be sufficient. Lessee shall on or prior to the date of the first effective Equipment Schedule and prior to each policy renewal, furnish to Lessor certificates of insurance or other evidence satisfactory to Lessor that such insurance coverage is in effect. Lessee further agrees to give Lessor prompt notice of any damage to, or loss of, the Equipment, or any part thereof. 9. LOSS OR DAMAGE. If any items of Equipment shall become lost, stolen, destroyed, or damaged beyond repair for any reason, or in the event of condemnation, confiscation, seizure or requisition of title to or use of such items (collectively, an "Event of Loss"), Lessee shall promptly pay to Lessor the applicable Stipulated Loss Value of the Equipment subject to the Event of Loss. Upon payment by Lessee of the Stipulated Loss Value, Lessor will transfer to Lessee, "AS IS, WHERE IS, WITHOUT RECOURSE, REPRESENTATION OR WARRANTY," all of Lessor's right, title and interest, if any, in such items of Equipment. The "Stipulated Loss Value" payable by Lessee under this Lease shall be an amount equal to the product of (a) Lessor's Cost of the affected Equipment and (b) the percentage set forth in the table attached to the applicable Lease Line Schedule as Annex A opposite the Rental Payment number next following the Event of Loss. Stipulated Loss Values and Rental Payments shall not be prorated. 3 4 10. TITLE, INSPECTION AND LOCATION. (a) TITLE. Lessor and Lessee confirm their intent that title (if an ) to the Equipment shall remain in Lessor (or its successors and assigns) exclusively. If requested by Lessor, Lessee will affix plates or markings on the Equipment and on any operating manuals and manufacturer's instructions indicating the interests of Lessor and its assigns therein, and Lessee will not allow any other indicia of ownership or other interest in the Equipment to be placed on the Equipment. Lessee shall not sell, assign, grant a security interest in, sublet, pledge, hypothecate or otherwise encumber or suffer a lien upon or against this Lease or the Equipment. (b) INSPECTION. Lessor (through any of its officers, employees or agents) shall have the right to inspect the Equipment during regular business hours, with reasonable notice, and in compliance with Lessee's reasonable security procedures; provided, that such inspections will be conducted no more often than every six (6) months unless an Event of Default, or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. (c) LOCATION. In the case of Equipment other than mobile Equipment, Lessee may move such Equipment from the installation address shown on the Equipment Schedule (or any other location for which Lessee has complied with this provision) only if (i) the new location is within the continental United States, and (ii) Lessee gives prior written notice of the relocation and provides UCC-I financing statements, landlord waivers or such other documentation as Lessor reasonably requests to protect its interest in the Equipment. In the case of mobile equipment (including, without limitation, lap-top computers), Lessee agrees to obtain from the person using such mobile Equipment and deliver to Lessor, an Acknowledgment in the form of EXHIBIT F. (d) Lessee shall keep copies of all operating manuals and manufacturer's instructions with respect to the Equipment in good condition at the locations specified in Section 10(c). 11. LESSEE'S REPRESENTATIONS, WARRANTIES AND WAIVERS. Upon execution of the Master Lease and each Equipment Schedule, Lessee warrants and represents the following: (a) Lessee is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation. Lessee has full power and authority and all necessary licenses and permits to carry on its business as presently conducted, to own or hold under lease its properties and to enter into this Master Lease, each Lease Line Schedule and each Equipment Schedule and to perform its obligations thereunder; and Lessee is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the character of its properties or the nature of its business or the performance of its obligations under this Master Lease, the Lease Line Schedules and any Equipment Schedules requires such qualification, except for such jurisdictions in which failure to qualify would not have a material adverse effect on Lessee. (b) The execution and delivery by Lessee of this Master Lease, the Lease Line Schedules and each Equipment Schedule and the performance by Lessee of its obligations thereunder have been duly authorized by all necessary corporate action on the part of Lessee; and do not and will not contravene the provisions of or constitute a default (either with or without notice or lapse of time, or both) under, or result in the creation of any lien upon, the Equipment or any property of Lessee under any indenture, mortgage, contract or other instrument to which Lessee is a party or by which Lessee or its properties is bound. (c) No consent or approval of, giving of notice to, registration with, or taking of any other action by, any state, federal, foreign or other governmental commission, agency or regulatory authority or any other person or entity is required for the consummation or performance by Lessee of the transactions contemplated under this Master Lease, the Lease Line Schedules and each Equipment Schedule. 4 5 (d) This Master Lease, the Lease Line Schedules and each Equipment Schedule, when executed by Lessee, constitute legal, valid and binding agreements of Lessee enforceable against Lessee in accordance with their terms, except as limited by any bankruptcy, insolvency, reorganization, or other similar laws of general application affecting the enforcement of creditor or Lessor rights. (e) There are no actions, suits or proceedings pending or threatened against or affecting Lessee or any property of Lessee in any court, before any arbitrator of any kind or before or by any federal state, municipal or other government department, commission, board, bureau, agency or instrumentality (collectively "Governmental Body"), which, if adversely determined, would materially adversely affect the business, financial condition, assets, or operations of Lessee, or adversely affect the ability of Lessee to perform its obligations under this Master Lease, the Lease Line Schedules and each Equipment Schedule; and Lessee is not in default with respect to any order of any court, arbitrator or Governmental Body or with respect to any material loan agreement, debt instrument or contract with a supplier or customer of Lessee, except as disclosed in writing to Lessor. (f) To the extent permitted by applicable law, Lessee waives any and all rights and remedies to: (i) cancel this Lease; (ii) repudiate this Lease; (iii) reject the Equipment; (iv) revoke acceptance of the Equipment; (v) recover damages from Lessor for any breaches of warranty or for any other reason other than breach by Lessor of the covenant of quiet enjoyment as set forth in Section 7(a) hereof; (vi) claim a security interest in the Equipment in Lessee's possession or control for any reason; (vii) deduct from Rental Payments all or any part of any claimed damages resulting from Lessor's default, if any, under this Lease; (viii) accept partial delivery of the Equipment; (ix) "cover" by making any purchase or lease of or contract to purchase or lease equipment in substitution for Equipment designated in the Lease; (x) recover any direct, general, special, incidental, indirect, exemplary or consequential damages, for any reason whatsoever; and (xi) obtain specific performance, replevin, detinue, sequestration, claim and delivery or the like for any Equipment identified to this Lease. To the extent permitted by applicable law, Lessee also waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Equipment in mitigation of Lessor's damages or which may otherwise limit or modify any of Lessor's rights or remedies. 12. ASSIGNMENT BY LESSOR. LESSEE ACKNOWLEDGES THAT LESSOR MAY SELL, ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN THIS LEASE AND THE EQUIPMENT WITHOUT NOTICE TO OR CONSENT OF LESSEE. Upon Lessor's written notice to Lessee that this Lease, or the right to the Rental Payments hereunder, have been assigned, Lessee shall, if requested, pay directly to Lessor's assignee without abatement, deduction or set-off amounts which become due hereunder. Lessee waives and agrees it will not assert against Lessor's assignee any counterclaim or set-off in any action for rent under the Lease. Upon the assignment of this Lease, Lessor's assignee shall have and be entitled to exercise any and all rights and remedies (but none of the obligations) of lessor hereunder, and all references herein to Lessor shall include Lessor's assignee. Lessee acknowledges that any assignment or transfer by Lessor does not materially change Lessee's duties or obligations under this Lease nor materially increase the burdens or risks imposed on Lessee. 13. ASSIGNMENT BY LESSEE. LESSEE MAY NOT, WITHOUT LESSOR IS PRIOR WRITTEN CONSENT, (;) ASSIGN THIS LEASE, WHETHER BY OPERATION OF LAW OR OTHERWISE, OR SUBLEASE THE EQUIPMENT OR ANY PART THEREOF OR (;;) ASSIGN, GRANT A SECURITY INTEREST IN, OR OTHERWISE TRANSFER ALL OR ANY PART OF ITS RIGHTS, TITLE AND INTEREST IN AND TO THIS LEASE OR THE EQUIPMENT. In the event Lessee makes an assignment, sublease or other transfer (to which Lessor has consented), Lessee shall not thereby be relieved of its duties and obligations hereunder, for which it shall remain fully responsible and liable (independent of its assignee). 5 6 14. TAXES. (a) Lessee shall comply with all applicable federal, state, local, foreign and international laws, regulations and orders relating to this Lease. Lessee assumes liability for, and shall pay when due, and on a net after-tax basis shall indemnify and defend Lessor against, all federal, state, local, foreign and international fees, taxes and government charges (including, without limitation, interest and penalties) of any nature imposed upon or in any way relating to Lessor, Lessee, any item of Equipment or this Lease, except federal, state and local taxes on or measured by Lessor's net income (other than any such tax which is in substitution for or relieves Lessee from the payment of taxes it would otherwise be obligated to pay to or reimburse Lessor for as herein provided). Lessee shall at its expense file when due with the appropriate authorities any and all tax and similar returns and reports required to be filed with respect thereto or, if requested by Lessor, notify Lessor of all such requirements and furnish Lessor with all information required for Lessor to effect such filings, which filings shall also be at Lessee's expense. Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make such payments shall at Lessor's option become immediately due from Lessee to Lessor. (b) This Lease has been entered into on the assumption that Lessor shall be entitled to all deductions, credits, and other tax benefits as are provided in the Internal Revenue Code of 1986, including amendments as may occur (the "Code"), to an owner of property including, without limitation, depreciation deductions and interest deductions with respect to any debts incurred to finance the purchase of the Equipment. If, as a result of any acts, omissions or misrepresentations by Lessee, Lessor's projected after-tax economic return resulting from ownership and lease of the Equipment is reduced, then Lessee's Rental Payments shall be increased in an amount (based on Lessor's reasonable calculations) sufficient to provide the same net after-tax economic return as if such acts or omissions had not occurred. Appropriate increases shall also be made in the applicable Stipulated Loss Values for this Lease. In the event the Equipment is sold by Lessor to another party, the net after-tax economic returns considered shall be those of such other party. 15. EQUIPMENT WARRANTIES. Lessee acknowledges that (i) Lessee has selected the supplier of the Equipment, (ii) Lessor acquired the goods or the right to possession and use of the goods in connection with the Lease, and (iii) Lessee received a copy of the contract by which Lessor acquired the Equipment or the right to possession and use of the Equipment before signing the a particular Lease. LESSOR MAKES NO EXPRESS OR IMPLIED WARRANTIES INCLUDING THOSE OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE WITH RESPECT TO THE EQUIPMENT AND DISCLAIMS THE SAME. Lessor shall have no liability for any damages, whether direct, indirect, general, special, incidental, exemplary or consequential, incurred b, Lessee as a result of an), defect or malfunction of the Equipment. Lessee shall look solely to the Equipment supplier for any and all claims related to the Equipment. Lessor assigns to Lessee, for and during the Lease Term, any warranty on the Equipment provided by the supplier. Lessor and Lessee agree that all limitations on remedies and liability contained in this Lease represent a reasonable allocation of risks that is part of the fundamental bargain between the parties. 16. EVENTS OF DEFAULT. An Event of Default shall occur if Lessee (i) fails to pay any Rental Payment or other payment required under the Lease when due and such failure continues for a period of five (5) days after written notice from Lessor; or (ii) fails to perform or observe any other covenant, condition or agreement to be performed or observed by it or breaches any provision contained in the Lease or in any other document furnished to Lessor in connection herewith, and such failure or breach continues for a period of thirty (30) days after written notice from Lessor; or (iii) without Lessor's consent, attempts to assign this Lease or sell, transfer, encumber, part with possession, or sublet any item of Equipment; or (iv) makes any representation or warranty herein or in any document furnished by Lessor in connection herewith, which shall have been materially false or inaccurate when made or at the time to which such representation or warranty relates; or (v) shall commit an act of bankruptcy or become insolvent or bankrupt or make an assignment for the benefit of creditors or consent to the appointment of a Trustee or Receiver or either shall be appointed for Lessee or for a substantial part of its property without its consent, or bankruptcy reorganization, or insolvency proceedings shall be instituted by or against Lessee, 6 7 and, if instituted against Lessee, shall not be vacated or dismissed within sixty (60) days. Any Event of Default shall be deemed material and a substantial impairment of Lessor's interests for the purposes of this Lease, the UCC, and any other applicable law. 17. REMEDIES. Upon the occurrences of any Events of Default and at any time thereafter. provided such Event of Default is then continuing, Lessor may, in its discretion, do any one or more of the following: (a) cancel any or all Leases which reference this Master Lease or the Lease Line Schedule, upon notice to Lessee; (b) recover any accrued and unpaid Rental Payments and other amounts which are due and owing under the Leases so canceled on the Rental Payment Date immediately preceding the date on which Lessor obtains possession of the Equipment (or such earlier date as judgment is entered in favor of Lessor) (the "Determination Date"), plus interest at the Default Rate; (c) with or without canceling this Lease, recover (i) such Stipulated Loss Value as of the Rental Payment Date immediately preceding the Determination Date, and (ii) the amount of any loss or reduction of tax benefits which Lessor anticipated it would receive if the Lease continued for its full Lease Term; (d) recover any amounts due under any indemnity then determinable, plus interest at the Default Rate; (e) require that Lessee provide the return and certification of the Equipment in accordance with Section 6(c) hereof; (f) enter the premises where such Equipment is located and take immediate possession of and remove the same, all without liability to Lessor or its agents for such entry, except for costs incurred for any physical damage to the premises caused by Lessor or its agents for such entry; (g) sell any or all of the Equipment at public or private sale, with or without notice to Lessee or advertisement, or otherwise dispose of, hold, use, operate, lease to others or keep idle such Equipment, all free and clear of any rights of Lessee and without any duty to account to Lessee for such action or inaction or for any proceeds with respect thereto; and (h) exercise any other right or remedy , which may be available to it under the UCC or other applicable law including the right to recover damages for the breach hereof. In addition, Lessee shall be liable for, and reimburse Lessor for, all reasonable legal fees and all commercially reasonable costs and expenses incurred by Lessor as a result of the foregoing defaults or the exercise of Lessor's remedies, including without limitation recovering possession of the Equipment, selling or leasing the Equipment (including broker's and sales representative's fees and commissions), and placing any Equipment in the condition and obtaining the certificate required by Section 6(c) hereof. No remedy referred to in this Section is intended to be exclusive. but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at la\v or in equity. No express or implied waiver by Lessor of any default shall constitute a waiver of any other default by Lessor, or a waiver of any of Lessor's rights. 18. INDEMNIFICATION. Lessee assumes liability for, and shall pay when due, and shall indemnify, reimburse and hold each Indemnified Person (defined below) harmless from and against all Claims (defined below), directly or indirectly relating to or arising out of the acquisition, use. manufacture, purchase, shipment, transportation, delivery, installation, lease or sublease, ownership, operation. possession, control, storage, return or condition of any item of Equipment (regardless of whether such item of Equipment is at the time in the possession 7 8 of Lessee), the falsity of any non-tax representation or warranty of Lessee or Lessee's failure to comply with the terms of the Lease during the Lease Term. The foregoing indemnity shall cover, without limitation, (i) any Claim in connection with a design or other defect (latent or patent) in any item of Equipment, (ii) any Claim for infringement of any patent, copyright, trademark or other intellectual property right, or (iii) any Claim for negligence or strict or absolute liability in tort; provided, however, that Lessee shall not indemnify Lessor for any liability incurred by Lessor as a direct and sole result of Lessor's gross negligence or willful misconduct. "Claim" means all liabilities, losses, damages, actions, suits, demands, claims of any kind and nature (including, without limitation, claims relating to environmental discharge, cleanup or compliance), and all costs and expenses whatsoever to the extent they may be incurred or suffered by an Indemnified Person in connection therewith (including, without limitation, reasonable attorneys' fees and expenses), fines, penalties (and other charges of applicable governmental authorities), licensing fees relating to any item of Equipment, damage to or loss of use of property (including, without limitation, consequential or special damages to third parties or damages to Lessee's property), or bodily injury to or death of any person (including, without limitation, any agent or employee of Lessee). "Indemnified Person" means Lessor (including without limitation, each of its partners) and each of their respective successors, assigns, agents, officers, directors, shareholders, partners, servants, agents and employees. Such indemnities shall continue in full force and effect, notwithstanding the expiration or termination of this Lease. Upon Lessor's written demand, Lessee shall assume and diligently conduct, at its sole cost and expense, the entire defense of any Indemnified Person against any indemnified Claim described in this Section 18. Lessee shall not settle or compromise any Claim against or involving Lessor without first obtaining Lessor's written consent thereto, which consent shall not be unreasonably withheld. Lessee shall give Lessor prompt notice of any occurrence, event or condition in connection with which Lessor may be entitled to indemnification hereunder. The provisions of this Section 18 are in addition to, and not in limitation of, the provisions of Section 14(b). 19. NOTICES. Any notices or demands required or permitted hereunder shall be given to the parties in writing and by personal delivery, regular or certified mail. facsimile or telegram at the address set forth in the Lease Line Schedule or to such other address as the parties may hereafter substitute by written notice given in the manner prescribed in this Section. Such notices or demands shall be deemed given upon receipt in the case of personal delivery and upon mailing or transmission in the case of mail, facsimile or telegram. Lessee agrees to provide Lessor with thirty (30) days' prior written notice of (a) any merger or consolidation with or into any other business organization, (b) any sale, lease or other disposition of assets not in the ordinary course of business, and (c) any other material change in Lessee's financial structure or ownership. 20. FURTHER ASSURANCES. Lessee will promptly execute and deliver to Lessor such further reasonable documents and take such further reasonable action as Lessor may request in order to more effectively carry out the intent and purpose of this Lease or an assignment of Lessor's interest herein. 21. MISCELLANEOUS. This Lease shall be binding upon and inure to the benefit of the parties hereto, their permitted successors and assigns. Any provision of the Lease which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof; and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction; provided, however, that to the extent that the provisions of any such applicable law can be waived, they are waived by Lessee Time is of the essence with respect to the Lease. Lessee expressly assumes liability for and agrees to indemnify and defend and hold Lessor harmless from and against any breach by Lessee of any representation, warranty or covenant made by Lessee herein and in connection therewith to pay and reimburse Lessor for the payment of any and all expenses, including reasonable attorney fees incurred by Lessor in connection with or as the result of any such breach. The captions set forth herein are for convenience only and shall not define or limit any of the terms hereof. THIS LEASE SHALL IN ALL 8 9 RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO CONFLICT OF LAWS PRINCIPLES. LESSOR AND LESSEE WAIVE ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING FROM THIS LEASE. THIS LEASE SHALL BECOME EFFECTIVE AND BINDING ON THE PARTIES, THEIR RESPECTIVE SUCCESSORS AND PERMITTED ASSIGNS, AND SHALL BE DEEMED EXECUTED AND PERFORMED IN THE STATE OF CALIFORNIA, WHEN THE RELATED EQUIPMENT SCHEDULES ARE ACCEPTED BY LESSOR LESSEE CONSENTS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE COURTS OF CALIFORNIA FOR THE RESOLUTION OF ANY DISPUTES HEREUNDER 22. AMENDMENTS, MODIFICATIONS, WAIVERS. NONE OF THE PROVISIONS OF THIS LEASE MAY BE AMENDED, MODIFIED OR WAIVED EXCEPT IN A WRITING SIGNED BY LESSOR AND LESSEE. INITIALS _________ (LESSEE) INITIALS _________ (LESSEE) LESSEE: LESSOR: 3D/FX INTERACTIVE, INC. By: LIGHTHOUSE CAPITAL PARTNERS, L.P., its general partner By: __________________________ By: LIGHTHOUSE CAPITAL PARTNERS, L.P., its general partner Name: ________________________ By: ___________________________ Title: _______________________ Name: _________________________ Date: ________________________ Title: ________________________ 9 10 EXHIBIT A-1 LEASE LINE SCHEDULE NO. 01, dated March 31, 1995 ("Lease Line Schedule"), to MASTER EQUIPMENT LEASE AGREEMENT NO. 101, dated March 31, 1995 ("Master Lease"), by and between LIGHTHOUSE CAPITAL PARTNERS, LP., a Delaware limited partnership ("Lessor") and 3D/FX INTERACTIVE, INC., a California corporation ("Lessee"). (All capitalized terms not otherwise defined herein shall have the meanings given to such terms in the Master Lease.) IN CONSIDERATION of the mutual covenants contained herein, the parties agree as follows: LEASE LINE. The total Lessor's Cost of all units of Equipment under all Equipment Schedules pursuant to Lease Line Schedule No. 01 and 02, both dated March 31, 1995, to Master Equipment Lease Agreement No. 101, dated March 31, 1995, shall not exceed $l,000,000.00 (the "Commitment"). "Lessor's Cost" means, with respect to a unit of Equipment, the total cost to Lessor of purchasing such unit, as indicated on the applicable Equipment Schedule. Lessor's obligation to fund Equipment Schedules under the Commitment shall terminate on June 30, 1996 (the "Commitment Termination Date"). The minimum Lessor's Cost for each Delivery & Acceptance Certificate shall be $10,000.00. RENTAL FACTOR. The Rental Factor for each Equipment Schedule will be based upon an implicit interest rate equal to the prime lending rate as quoted in The Wall Street Journal ten business days prior to the Commencement Date for such Equipment Schedule (the "Prime Rate") plus 300 basis points. If on such date the Prime Rate is other than 9 %, then the Rental Factor for that Equipment Schedule will be adjusted upward or downward basis point for basis point to maintain an implicit interest rate equal to the Prime Rate plus 300 basis points. Once the Lease Term commences for any Equipment Schedule, there will be no further adjustments to the Rental Factor for such Equipment Schedule. The Rental Payment under a particular Equipment Schedule shall be an amount equal to the product of (a) the Rental Factor and (b) the aggregate Lessor's Cost of Equipment subject to such Equipment Schedule. INTERIM RATE. The Interim Rate used to calculate the daily Interim Rent shall be equal to the Rental Factor for each Equipment Schedule divided by thirty (30). The Interim Period as defined in the Master Lease shall be modified to start on the date the Equipment is delivered to and accepted by the Lessee and the Lessor's Cost of Equipment is advanced by Lessor. ADVANCE RENT. Upon execution of each Summary Equipment Schedule under this Lease Line Schedule, Lessee shall pay to Lessor advance rent equal to the product of the Lessor's Cost and the Rental Factor ("Advance Rent"), to be applied toward the last Rental Payment due from Lessee to Lessor under each Equipment Schedule. EXPENSES. Lessee agrees to reimburse Lessor for a total of up to Fifteen Hundred Dollars ($ 1,500.00) of expenses incurred in connection with the negotiation and documentation of this transaction, promptly upon receipt of an invoice together with appropriate back-up. ELIGIBLE EQUIPMENT. All equipment financed under an Equipment Schedule shall be Eligible Equipment. "Eligible Equipment" means the following types of equipment to the extent acceptable to Lessor: Various new and used computers, peripherals, analytical and test equipment, laboratory equipment and furniture, office furniture and equipment and other equipment as mutually agreed between Lessee and Lessor. 1 11 ...together with all replacements, parts, cables. repairs, additions and accessories incorporated therein or affixed thereto and all operating manuals and manufacturer's instructions (collectively hereinafter called the "Equipment"). Such replacements, parts, cables, repairs, additions and accessories shall (whether or not purchased by Lessor) be considered part of the Equipment for all purposes and, when installed in or attached to the Equipment (unless otherwise agreed), be or become the property of the Lessor except such external, stand-alone accessories acquired by Lessee which may be removed without damage to the equipment which shall be the property of the Lessee. Except as otherwise specifically provided or the context so requires, the term "Equipment" includes operating system or other bundled software which is delivered on or with the Equipment or is included on the Equipment Schedules. COMMENCEMENT DATE. The "Commencement Date" for each Equipment Schedule shall be the first day of the calendar month following the Acceptance Date for the items of Equipment subject to such Equipment Schedule. If the Acceptance Date is the first day of a calendar month, then the Commencement Date shall be the Acceptance Date. LEASE TERMINATION OPTIONS. Notwithstanding anything to the contrary in Section 6 of the Master Lease, upon Lease Termination (as defined in the Master Lease), Lessee will have, with respect to all but not less than all of the Equipment governed by this Lease Line Schedule, the option to (a) purchase the Equipment from Lessor for the lesser of its Fair Market Value or fifteen percent (15% ) of the Lessor's Cost or (b) renew the Lease. ADVANCE NOTICE PERIOD. The "Advance Notice Period" shall be at least ninety (90) days, but not more than 180 days, prior to Lease Termination (as defined in the Master Lease) of Equipment Schedule No. 1 to this Lease Line Schedule. AUTOMATIC EXTENSION PERIOD. The "Automatic Extension Period" shall equal three (3) months and affects each Equipment Schedule under this Lease Line Schedule. INSURANCE. The amount of commercial general liability insurance (other than products liability coverage and completed operations insurance) required under the Master Lease shall be at least $1,000,000 per occurrence. The amount of the products liability and completed operations insurance under the Master Lease shall be at least $1,000,000 per occurrence; provided however, that Lessee shall not be required to obtain products liability and completed operations insurance until the occurrence of the first shipment of a product to a customer. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a) as soon as available, but in any event within twenty (20) days after the end of each month, a company prepared balance sheet, income statement and cash flow statement covering Lessee's operations during such period, certified by an officer of Lessee reasonably acceptable to Lessor; (b) as soon as practicable after the end of each fiscal year, and in any event within one hundred twenty (120) days Lessee will provide Lessor with consolidated balance sheets of Lessee and its subsidiaries, if any, as at the end of each fiscal year, and consolidated statements of operations and consolidate statements of cash flows of the Lessee and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles, all in reasonable detail certified by independent public auditors of recognized national standing selected by Lessee; provided, however, that until the Lessee shall have revenues in excess of $10,000,000, such financial statements may be reviewed but not audited; (c) promptly upon becoming available, copies of all statements, reports, budgets, sales projections, operating plans and notices sent or made available generally by Lessee to its security holders; (d) immediately upon receipt of notice thereof, a report of any material legal actions pending or threatened against Lessee; and (e) such other financial information as Lessor may reasonably request from time to time. MAINTENANCE SERVICE CONTRACTS. Lessee shall obtain and keep in effect at all times during the Lease Term (and any renewal or extension thereof), maintenance service contracts covering the Equipment with the Equipment 2 12 supplier or with suppliers of maintenance services approved by Lessor, such approval not to be unreasonably withheld. INSTALLATION, HANDLING AND DELIVERY CHARGES. Any handling and delivery charge to cover all Equipment transportation, rigging, drayage, packing, installation and handling to and from vendor's plant and upon return to Lessor's designated location shall be paid by Lessee. MISCELLANEOUS TAXES. Without limitation of the provisions of the Master Lease, Lessee agrees to pay and to indemnify Lessor for any sales or use tax and any property tax in connection with the sale, lease or use of the Equipment. LATE FEE. Lessee shall pay a late charge on any rent payments or other sums due hereunder which are past due, in an amount equal to 2 % of the past due amount, payable on demand. DEFAULT RATE. The Default Rate of interest on late payments shall be fifteen percent (15%) per annum. NOTICES. All notices shall be addressed as follows: If to Lessor: Lighthouse Capital Partners, L.P. 100 Drake's Landing, Suite 260 Greenbrae, CA 94904 Attn: Contract Administration Phone: (415) 925-3370 Fax: (415) 925-3387 If to Lessee: 3D/fx Interactive, Inc. 415 Clyde Avenue, Suite 105 Mountain View, CA 94043 Attn: Ross Q. Smith Phone: (415) 934-2400 Fax: (415) 934-2424 CONDITIONS TO THE FIRST EQUIPMENT SCHEDULE. On or prior to the date of execution of the first Equipment Schedule under this Lease Line Schedule, Lessor shall have received in form and substance satisfactory to Lessor, each of the following: A Warrant substantially in the form of EXHIBIT H to the Master Lease. A legal opinion of Lessee's legal counsel in form and substance reasonably satisfactory to Lessor, covering the matters set forth in EXHIBIT C to the Master Lease. Copies, certified by the Secretary or Assistant Secretary or Chief Financial Officer of Lessee, of: (i) the Articles of Incorporation and By-Laws of Lessee (as amended to the date of the Lease) and (ii) the resolutions adopted by Lessee's board of directors authorizing the execution and delivery of this Lease, the Lease Line Schedule, the Equipment Schedules, the Warrant and the other documents referred in this Lease Line Schedule and the performance by Lessee of its obligations in such documents. Evidence of the insurance coverage required by SECTION 8 of the Master Lease. 3 13 All necessary consents of shareholders and other third parties with respect to the subject matter of the Master Lease, the Lease Line Schedule, the Equipment Schedules and the Warrant. Payment of the Advance Rent. Conditions to all findings under all Equipment Schedules. On or prior to each funding under each Equipment Schedule under this Lease Line Schedule, each of the following conditions shall have been satisfied: No Event of Default or event which, with notice or lapse of time or both, would become an Event of Default, has occurred and is continuing. Lessor shall have received all necessary or desirable estoppel certificates and UCC filings, releases or terminations. Lessor shall have received a landlord waiver and consent in substantially the form of EXHIBIT E to the Master Lease with respect to each equipment location, provided that Lessee shall have until the earlier of (i) the execution of a lease for its corporate headquarters or (ii) June 30, 1995, to provide such landlord waiver. Until such landlord waiver has been provided Lessor will not finance any Equipment that in its sole opinion may or may not be a fixture. There shall not have occurred (i) any material adverse change to the general affairs, management, results of operations, condition (financial or otherwise) or prospects of Lessee, whether or not arising from transactions in the ordinary course of business, or (ii) any material adverse deviation by Lessee from the business plan of Lessee presented to and not disapproved by Lessor, since the date of the Master Lease. Lessee shall have delivered to Lessor an Equipment Schedule covering the appropriate funding period. Lessee shall have delivered to Lessor (i) in the case of a sale-leaseback, copies of invoices, canceled checks or other proof of payment, a Bill of Sale, a Deliver,' and Acceptance Certificate, and any UCC filings or other notices deemed necessary or desirable in connection with the sale leaseback or (ii) at Lessor's request, in the case of a purchase of new equipment in excess of $25,000 from an equipment vendor, a Purchase Order and Invoice Assignment and a Delivery and Acceptance Certificate. 4 14 All terms and conditions in the Equipment Schedule shall have been satisfied by the Acceptance Date for the Equipment under such Equipment Schedule. All other documents as Lessor shall have reasonably requested. LESSEE: LESSOR: 3D/FX INTERACTIVE, INC. By: LIGHTHOUSE CAPITAL PARTNERS, L.P., its general partner By: ___________________________ By: LIGHTHOUSE CAPITAL PARTNERS, L.P., its general partner Name: _________________________ By: _________________________________ Title: ________________________ Name: _______________________________ Date: _________________________ Title: ______________________________ 1 EX-10.12 13 LOAN COMMITMENT AGREEMENT W/ SILICON VALLEY BANK 1 EXHIBIT 10.12 July 1, 1996 Gary Martin Chief Financial Officer 3D/fx Interactive, Inc. 415 Clyde Ave., Suite 105 Mountain View, CA 94043 Dear Gary: Silicon Valley Bank ("Bank") is pleased to commit the following loans ("Loans") to 3D/fx Interactive, Inc. ("Borrower") under the terms and conditions in this letter. This letter is not meant to be, nor shall it be construed as, an attempt to define all of the terms and conditions of the loans. The following is a summary of the basic points of our proposal: CREDIT FACILITY: A. $4,000,000 Revolving Accounts Receivable Line of Credit, with the full amount of the facility available for the issuance of letters of credit. B. $2,000,000 Term Loan. MATURITY: A. 12 months from execution of loan documents. B. Draw-Down Period: 6 months from execution of loan documents. Repayment Period: 18 months following Draw-Down Period. COLLATERAL: First priority security interest in all corporate assets. Facilities will be cross defaulted and cross-collateralized. INTEREST RATE: A. Prime Rate plus 0.50%, floating. B. OPTION 1: Prime Rate plus 1.50%, floating. This option carries no prepayment penalty. OPTION 2: Draw period - Prime Rate plus 1.50%, floating. Repayment - Fixed rate of 400 basis points above the current yield given on US Treasury securities of equal maturity. The rate will be set at the conclusion of the draw period. This option carries a prepayment penalty. LOAN FEE: A. $20,000 (0.5%), due upon acceptance of commitment. B. $10,000 (0.5%), due upon acceptance of commitment. WARRANTS: A. None. B. None. 2 3D/fx Interactive, Inc. Commitment Letter Page -2- BORROWING FORMULA: A. Lesser of Facility amount or 75% of standard eligible* accounts receivable Borrower may increase borrowing base availability by pledging cash & equivalents in the amount of 100% of any request exceeding eligible A/R base. *Standard ineligibles will be modified to allow up to a 35% concentration for any one A/R debtor in any one month during the term of the Facility. B. 100% of the invoice cost of equipment, software and leaseholds. Expenses related to sales tax, installation and/or delivery will be excluded. WARRANTIES & COVENANTS: Borrower shall make customary representations, warranties, and covenants, together with such other representations, warranties, and covenants as the Bank or its counsel may deem reasonably necessary or desirable, including the following: FINANCIAL COVENANTS: Borrower will agree to maintain the following financial covenants monthly when there is an outstanding balance under Facility A or B (quarterly otherwise): 1. Minimum Quick Ratio of 1.50 to 1; 2. Minimum Tangible Net Worth of $3,750,000; 3. Maximum Debt to Tangible Net Worth of 2.00 to 1; 4. Quarterly profitability required starting Q496. Q296 and Q396 losses not to exceed ($4,250,000) and ($1,700,000), respectively; annual profitability required beginning FY97; 5. *MINIMUM LIQUIDITY coverage of 2x Facility B commitment required until expiration of drawdown; 2x loan outstanding under Facility B required thereafter. *MINIMUM LIQUIDITY applies to Facility B only and is defined as unrestricted cash (and equivalents) plus 50% of net accounts receivable or net available under A/R line of credit. REPORTING REQUIREMENTS: 1. Within 90 days of fiscal year-end, CPA-audited annual financial statements; 2. Monthly company-prepared financial statements, prepared in accordance with GMP, and Covenant Compliance Certificate received within fifteen (15) days of month end when there is an outstanding balance* under Facility A or B; quarterly, within 30 days otherwise; 3. Monthly Borrowing Base Certificate, accounts receivable agings and accounts payable agings received within fifteen days (15) of month end immediately prior to and while there is an outstanding balance* under Facility A; 3 3D/fx Interactive, Inc. Commitment Letter Page -3- 4. Collateral audit required prior to initial cash advance under Facility A and within 30 days following a non-cash secured L/C issuance; audits performed semi-annually thereafter so long as there is an outstanding balance* under Facility A. Cost of the examinations are at Borrower's expense. *Bank will permit letters of credit to be issued in an amount not to exceed 25% of gross A/R without considering such issuances as outstandings under Facility A. Borrower will be required to submit a Borrowing Base Certificate and A/R aging prior to initial letter of credit issuance secured by A/R. OTHER REQUIREMENTS: 1. Primary banking relationship to be maintained with Bank. 2. Copies of invoices prior to each advance on the Term Loan. 4. Proof of insurance on all corporate assets with Lenders' Loss Payable F Clause naming Bank Loss Payee. EXPENSES: Borrower shall pay all of the Bank's fees and charges in connection with the Loans, including all reasonable fees of Bank's counsel. Such costs payable by Borrower are in addition to the Loan Fees described above. In the event the Loan does not close, the Loan Fees to Borrower shall be reduced by the aggregate of all expenses and charges. CONDITIONS OF CLOSING: The following shall be satisfied prior to closing and shall be conditions precedent to the Bank's obligation to fund the Loans: 1. Compliance with all warranties and covenants, including financial and reporting requirements. 2. After due-diligence inquiry conducted by the Bank there shall be no discovery of any facts or circumstances which would negatively affect, in the Bank's sole discretion, collectability of the Loans against Borrower. If these basic terms and conditions are acceptable, please so indicate by signing the enclosed copy of this letter and returning it with the Loan Fees to the attention of the undersigned by Wednesday, July 10, 1996 or such later date agreed upon by Bank in writing. The proposal will constitute your instruction to the Bank to commence, at your expense, documentation which shall supersede this letter. This letter is intended to set forth the proposed terms of the Loans currently under discussion between us. Except for your obligation to pay the Bank's expenses and charges described above, this letter and our other communications and negotiations regarding the proposed Loans do not constitute an agreement or an offer and do not create any legal rights benefiting, or obligations binding on, either of us. It is intended that all legal rights and obligations of the Bank and Borrower will be set forth in definitive loan documents. 4 3D/fx Interactive, Inc. Commitment Letter Page -4- Gary, we are pleased to provide you with this commitment. We hope these loans provide the foundation for a long and mutually beneficial relationship. Sincerely, SILICON VALLEY BANK ________________________________ Michael J. Rose, Vice President ________________________________ Sean Lynden, Vice President & Group Manager AGREED TO AND ACCEPTED THIS _________ DAY OF ________, 1996 3DFX INTERACTIVE, INC. By: ________________________________ Vice President, Administration & CFO Its: _______________________________ EX-10.13.1 14 CHANGE OFCONTROL LETTER W/ L. GREGORY BALLARD 1 EXHIBIT 10.13.1 January 10, 1997 L. Gregory Ballard Dear Greg: On behalf of the Board of Directors, I would like to express our gratitude for your hard work and efforts in building a strong 3Dfx Interactive Inc. In appreciation of your efforts, the Board of Directors has approved a special vesting provision with respect to your stock option grant in the event of a change of control of the Company. For the purposes of this letter, the term "change of control" shall mean (i) a sale of all or substantially all of the Company's assets, or (ii) a consolidation or merger of the Company with or into any other corporation or corporations (other than wholly-owned subsidiaries of the Company), or engagement in a transaction or series of related transactions, in which more than 50% of the voting power of the Company is disposed. In the event your employment is terminated for other than cause within one year following the effective date of a change of control, in addition to options already vested, the vesting of 25% of your options will be accelerated and become fully vested or, in the event that less than 25% of your options remain unvested, the vesting of all of your remaining options will be accelerated and become fully vested. For the purposes of this letter, termination other than for cause shall include "constructive" termination under the following circumstances: (i) your base salary or rate of compensation is reduced; (ii) your job authority and responsibility are significantly reduced; and (iii) you are required to change the location of your job so that you will be based at a location more than 50 miles from the then current location of your job. 2 L. Gregory Ballard January 10, 1997 Page 2 If the foregoing confirms our agreement regarding these arrangements, please confirm your acceptance by signing a copy of this letter in the space indicated below. Sincerely, /s/ GORDON CAMPBELL - --------------------------- Gordon Campbell Chairman of the Board The foregoing is agreed and accepted: Signature: /s/ L. GREGORY BALLARD ------------------------ Print Name: L. Gregory Ballard ------------------------- Date: 1/14/97 ----------------------------- EX-10.13.2 15 CHANGE OF CONTROL LETTER AGREEMENT W/ KARL CHICCA 1 EXHIBIT 10.13.2 August 26, 1996 Karl Chicca Dear Karl: On behalf of the Board of Directors, I would like to express our gratitude for your hard work and efforts in building a strong 3Dfx Interactive, Inc. In appreciation of your efforts, the Board of Directors has approved a special vesting provision with respect to your stock option grant in the event of a change of control of the Company. For the purposes of this letter, the term "change of control" shall mean (i) a sale of all or substantially all of its assets, or (ii) a consolidation or merger with or into any other corporation or corporations (other than wholly-owned subsidiaries of the Company), or engagement in a transaction or series of related transactions, in which more than 50% of the voting power of the Company is diagnosed. In the event your employment is terminated for other than cause within one year following the effective date of a change of control, the vesting of 25% some of your options will be accelerated and become fully vested or, in the event that less than 25% of your options remain unvested, the vesting of all of your remaining options will be accelerated and become fully vested. For the purposes of this letter, termination other than for cause shall include "constructive" termination under the following circumstances: (i) your base salary or rate of compensation is reduced; (ii) your job authority and responsibility are significantly reduced; and (iii) you are required to change the location of your job so that you will be based at a location more than 50 miles from the then current location of your job. 2 Karl Chicca August 26, 1996 Page 2 If the foregoing confirms our agreement regarding these arrangements, please confirm your acceptance by signing a copy of this letter in the space indicated below. Sincerely, /s/ GORDON CAMPBELL - --------------------------- Gordon Campbell Chairman of the Board and President The foregoing is agreed and accepted: Signature: /s/ KARL CHICCA ------------------------ Print Name: KARL CHICCA ------------------------- Date: 8-26-96 ----------------------------- EX-10.13.3 16 CHANGE OF CONTROL LETTER AGREEMENT W/SCOTT SELLERS 1 EXHIBIT 10.13.3 August 26, 1996 Scott Sellers Dear Scott: On behalf of the Board of Directors, I would like to express our gratitude for your hard work and efforts in building a strong 3Dfx Interactive Inc. In appreciation of your efforts, the Board of Directors has approved a special vesting provision with respect to your restricted stock in the event of a change of control of the Company. For the purposes of this letter, the term "change of control" shall mean (i) a sale of all or substantially all of the Company's assets, or (ii) a consolidation or merger of the Company with or into any other corporation or corporations (other than wholly-owned subsidiaries of the Company), or engagement in a transaction or series of related transactions, in which more than 50% of the voting power of the Company is diagnosed. In the event your employment is terminated for other than cause within one year following the effective date of a change of control, in addition to stock already released from the Company's repurchase option, 25% of your stock will be released from the Company's repurchase option set forth in Section 3 of your Restricted Stock Purchase Agreement or, in the event that less than 25% of your stock remains subject to the Company's repurchase option, all of your remaining stock will be released from the Company's repurchase option. For the purposes of this letter, termination other than for cause shall include "constructive" termination under the following circumstances: (i) your base salary or rate of compensation is reduced; (ii) your job authority and responsibility are significantly reduced; and (iii) you are required to change the location of your job so that you will be based at a location more than 50 miles from the then current location of your job. 2 Scott Sellers August 26, 1996 Page 2 If the foregoing confirms our agreement regarding these arrangements, please confirm your acceptance by signing a copy of this letter in the space indicated below. Sincerely, /s/ GORDON CAMPBELL - --------------------------- Gordon Campbell Chairman of the Board The foregoing is agreed and accepted: Signature: /s/ SCOTT SELLERS ------------------------ Print Name: Scott Sellers ------------------------- Date: 8/30/96 ----------------------------- EX-10.13.4 17 CHANGE OF CONTROL LETTER AGREEMENT W/GARY TAROLLI 1 EXHIBIT 10.13.4 August 26, 1997 Gary Tarolli Dear Gary: On behalf of the Board of Directors, I would like to express our gratitude for your hard work and efforts in building a strong 3Dfx Interactive, Inc. In appreciation of your efforts, the Board of Directors has approved a special vesting provision with respect to your restricted stock in the event of a change of control of the Company. For the purposes of this letter, the term "change of control" shall mean (i) a sale of all or substantially all of the Company's assets, or (ii) a consolidation or merger of the Company with or into any other corporation or corporations (other than wholly-owned subsidiaries of the Company), or engagement in a transaction or series of related transactions, in which more than 50% of the voting power of the Company is diagnosed. In the event your employment is terminated for other than cause within one year following the effective date of a change of control, in addition to stock already released from the Company's repurchase option, 25% of your stock will be released from the Company's repurchase option set forth in Section 3 of your Restricted Stock Purchase Agreement or, in the event that less than 25% of your stock remains subject to the Company's repurchase option, all of your remaining stock will be released from the Company's repurchase option. For the purposes of this letter, termination other than for cause shall include "constructive" termination under the following circumstances: (i) your base salary or rate of compensation is reduced; (ii) your job authority and responsibility are significantly reduced; and (iii) you are required to change the location of your job so that you will be based at a location more than 50 miles from the then current location of your job. 2 Gary Tarolli August 26, 1997 Page 2 If the foregoing confirms our agreement regarding these arrangements, please confirm your acceptance by signing a copy of this letter in the space indicated below. Sincerely, /s/ GORDON CAMPBELL - --------------------------- Gordon Campbell Chairman of the Board The foregoing is agreed and accepted: Signature: /s/ GARY TAROLLI ------------------------ Print Name: Gary Tarolli ------------------------- Date: 8-28-96 ----------------------------- EX-11.1 18 CALCULATION OF PRO FORMA NET LOSS PER SHARE 1 Exhibit 11.1 3Dfx Interactive, Inc. Calculation of Pro Forma Net Loss Per Share (in thousands, except per share data)
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, 1996 1997 ------------ ------------------ Net loss $(14,751) $(1,161) -------- ------- Weighted average common shares outstanding 3,774 3,851 Weighted average common equivalent shares related to convertible preferred stock (using the if-converted method) 13,161 14,044 Common equivalent shares relating to stock options and warrants issued (using the treasury stock method) subsequent to April 15, 1996 2,726 2,726 -------- ------- Shares used in pro forma net loss per share calculation 19,661 20,621 Net loss per share $ (0.75) $ (0.06)
EX-23.1 19 CONSENT OF PRICE WATERHOUSE LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated April 11, 1997, relating to the financial statements of 3Dfx Interactive, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP has not prepared or certified such "Selected Financial Data." PRICE WATERHOUSE LLP San Jose, California April 16, 1997 EX-27.1 20 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS YEAR YEAR 3-MOS DEC-31-1995 DEC-31-1996 DEC-31-1997 JAN-01-1995 JAN-01-1996 JAN-01-1997 DEC-31-1995 DEC-31-1996 MAR-31-1997 1 1 1 865 5,291 4,141 0 0 0 0 1,471 4,113 0 78 128 37 4,960 2,999 135 321 896 1,596 4,726 5,060 227 1,244 1,629 2,440 15,581 15,586 1,344 5,328 5,972 0 0 0 0 0 0 5,474 28,701 29,222 310 1,626 2,078 (5,039) (19,790) (20,951) 2,440 15,581 15,586 0 6,390 4,497 0 6,390 5,247 0 5,123 2,582 0 5,123 2,582 5,106 16,077 3,799 0 0 0 45 141 63 (5,039) (14,751) (1,161) 0 0 0 (5,106) (14,810) (1,134) 0 0 0 0 0 0 0 0 0 (5,039) (14,751) (1,161) 0 (.75) (.06) 0 (1.56) (.12)
-----END PRIVACY-ENHANCED MESSAGE-----