-----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, Bys3r+5d6OIfQ69Dbb5fZveg99xznpxUdtq455MQihCV7a8FXTyc9xToeCkai385 7YQh8vBnIT+XxFYn0sS43w== 0000891618-97-003402.txt : 19970814 0000891618-97-003402.hdr.sgml : 19970814 ACCESSION NUMBER: 0000891618-97-003402 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: 3DFX INTERACTIVE INC CENTRAL INDEX KEY: 0001010026 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770390421 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22651 FILM NUMBER: 97658299 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 10-Q 1 FORM 10-Q FOR PERIOD ENDING JUNE 30, 1997 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q ---------------- (Mark One) [ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended June 30, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-22651 3DFX INTERACTIVE, INC. (Exact name of registrant as specified in its charter) CALIFORNIA 77-0390421 (State or other (I.R.S. Employer jurisdiction of Identification incorporation or Number) organization) 4435 FORTRAN DRIVE SAN JOSE, CALIFORNIA 95134 (Address of principal executive offices) TELEPHONE NUMBER (408) 935-4400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No X --- --- As of July 31, 1997 there were 12,116,802 shares of the Registrant's Common Stock outstanding. ================================================================================ 1 2 3DFX INTERACTIVE, INC. FORM 10-Q INDEX
Page No. -------- Cover Page.......................................................................1 Index............................................................................2 PART I - Financial Information Item 1 - Financial statements Condensed Balance Sheets - June 30, 1997 and December 31, 1996..........3 Condensed Statements of Operations -Three Months and Six Months Ended June 30, 1997 and June 30, 1996.............................4 Condensed Statements of Cash Flows -Six Months Ended June 30, 1997 and June 30, 1996.......................5 Notes to Condensed Financial Statements.................................6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations..............................8 PART II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders............20 Item 6 - Exhibits.......................................................22 Signatures.......................................................................23
2 3 ITEM 1. FINANCIAL STATEMENTS 3DFX INTERACTIVE, INC. CONDENSED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
JUNE 30, DECEMBER 31, 1997 1996 -------- -------- Assets: Cash and cash equivalents ........................ $ 32,764 $ 5,291 Accounts receivable, net ......................... 5,114 1,393 Inventory ........................................ 2,083 4,960 Other current assets ............................. 1,618 321 -------- -------- Total current assets ..................... 41,579 11,965 Property and equipment, net ...................... 4,092 3,482 Other assets ..................................... 63 134 -------- -------- $ 45,734 $ 15,581 ======== ======== Liabilities and Shareholders' Equity: Line of credit ................................... $ 1,358 $ 1,076 Accounts payable ................................. 3,590 2,236 Accrued liabilities .............................. 1,866 1,415 Current portion of capitalized lease obligations ................................... 616 601 -------- -------- Total current liabilities ................ 7,430 5,328 Capitalized lease obligations, less current portion .......................................... 343 632 -------- -------- Shareholders' equity: Preferred Stock .................................. -- 28,701 Common Stock ..................................... 62,068 1,626 Warrants ......................................... 24 353 Notes receivable ................................. (2) (19) Deferred compensation ............................ (1,423) (1,250) Accumulated deficit .............................. (22,706) (19,790) -------- -------- Total shareholders' equity ............... 37,961 9,621 -------- -------- $ 45,734 $ 15,581 ======== ========
See accompanying notes to condensed financial statements 3 4 3DFX INTERACTIVE, INC. CONDENSED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- -------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Revenues: Product ............................... $ 5,440 $ -- 9,937 $ -- Development contract .................. 1,067 -- 1,817 -- -------- -------- -------- -------- Total revenues ................ 6,507 -- 11,754 -- Cost of product revenues ................ 3,278 -- 5,860 -- -------- -------- -------- -------- Gross profit .................. 3,229 -- 5,894 -- -------- -------- -------- -------- Operating expenses: Research and development .............. 2,397 2,864 4,351 4,523 Selling, general and administrative ... 2,521 1,529 4,368 2,557 -------- -------- -------- -------- Total operating expenses ...... 4,918 4,393 8,719 7,080 -------- -------- -------- -------- Loss from operations .................... (1,689) (4,393) (2,825) (7,080) Interest and other income (expense), net (64) 3 (91) 38 -------- -------- -------- -------- Net loss ................................ $ (1,753) $ (4,390) $ (2,916) $ (7,042) ======== ======== ======== ======== Net loss per share ...................... $ (0.17) $ (0.43) $ (0.27) $ (0.73) -------- -------- -------- -------- Shares used in computing net loss per share ................................... 10,206 10,153 10,861 9,675
See accompanying notes to condensed financial statements 4 5 3DFX INTERACTIVE, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1997 1996 -------- -------- Cash flows from operating activities: Net loss ........................................... $ (2,916) $ (7,042) Adjustments: Depreciation .................................. 856 381 Warrant valuation ............................. -- 138 Stock compensation ............................ 242 28 Increase in allowance for doubtful accounts ... 50 -- Changes in assets and liabilities: Accounts receivable ........................ (3,771) (180) Inventory .................................. 2,877 (617) Other assets ............................... (1,226) (63) Accounts payable ........................... 1,354 1,625 Accrued liabilities ........................ 451 (279) -------- -------- Net cash used in operating activities ................ (2,083) (6,009) -------- -------- Cash flows from investing activities for the purchase of property and equipment ................. (1,466) (1,085) -------- -------- Cash flows from financing activities: Proceeds from issuance of Convertible Preferred Stock, net ............................ 521 11,634 Proceeds from issuance of Common Stock, net ...................................... 30,436 29 Proceeds from exercise of warrants, net ............. 57 -- Proceeds from drawdown on line of credit, net ....... 282 -- Principal payments of capitalized lease obligations ..................................... (274) (360) -------- -------- Net cash provided by financing activities ............ 31,022 11,303 -------- -------- Net increase (decrease) in cash and cash equivalents ................................... 27,473 4,209 Cash and cash equivalents at beginning of period .......................................... 5,291 865 -------- -------- Cash and cash equivalents at end of period .......................................... $ 32,764 $ 5,074 ======== ======== SUPPLEMENTAL INFORMATION: Cash paid during the period for interest ........... $ 127 $ 51
See accompanying notes to condensed financial statements 5 6 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. The unaudited condensed financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in financial statements prepared in accordance with the generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjuction with the audited financial statements and accompanying notes included in the Company's Prospectus dated June 25, 1997 filed as part of a Registration Statement on Form S-1 (Reg. No. 333-25365), as amended. The results of operations for the quarter ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. Four customers represented 38%, 16%, 14% and 13% and four customers represented 47%, 10%, 10% and 10% of the Company's revenue during the second quarter and first half of 1997, respectively. NOTE 3 -- INITIAL PUBLIC OFFERING: In June 1997, the Company completed its initial public offering and issued 3,000,000 shares of its common stock to the public at a price of $11.00 per share. The Company received cash of approximately $30.4 million, net of underwriting discounts and commissions. Upon the closing of initial public offering, all outstanding shares of the Company's then outstanding Convertible Preferred Stock were automatically converted into shares of common stock. On July 25, 1997, the Company's underwriters exercised an option to purchase an additional 450,000 shares of common stock at a price of $11.00 per share to cover over-allotments. The Company received cash of approximately $4.6 million, net of underwriting discounts and commissions. 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 based upon a cumulative volume of units sold by Sega which included the Company's product. In July 1997, the Company learned from Sega that Sega will not use the Company's product in Sega's next generation home game console (See Note 8). Development contract revenues of $1,067,000 were recognized under the percentage of completion method of accounting based on costs incurred relative to total contract costs and $750,000 was recognized for the delivery of certain engineering designs ($1,067,000 and $1,817,000 of development contract revenue was recognized in the three and six months ended June 30, 1997, respectively). The revenue recognized is non-refundable and the Company has no further obligations to Sega with regard to these amounts. The Company has an unbilled development contract receivable of $267,000 as of June 30, 1997. The Company incurred $650,000 and $725,000 of costs relating to this contract in the three and six months ended June 30, 1997, respectively, which are included in research and development. The Company did not earn any royalty revenue in the three and six months ended June 30, 1997. No further revenues are expected under the Sega Agreement. 6 7 NOTE 5 -- SHAREHOLDERS' EQUITY: Warrants In June 1997, TSMC exercised their warrant to purchase 87,510 shares of the Company's Series C Convertible Preferred Stock at an exercise price of $4.40 per share. The aggregate proceeds to the Company were approximately $385,000. Upon the closing of the initial public offering (See Note 3), all of the outstanding shares of the Company's Series C Convertible Preferred Stock, including the shares issued to TSMC upon exercise of the warrant, was converted into shares of common stock. NOTE 6 -- NET INCOME (LOSS) PER SHARE: Net income (loss) per share is computed using the weighted average of common and common equivalent shares outstanding during the periods. Common equivalent shares consist of Convertible Preferred Stock and warrants (using the "if converted" method) and stock options (using the "treasury stock" method). Common equivalent shares are excluded from the computation if their effect is anti-dilutive, except that, pursuant to a Securities and Exchange Commission Staff Accounting Bulletin, Convertible Preferred Stock and warrants (using the "if converted" method) and stock options (using the "treasury stock" method at the initial public offering price) issued subsequent to April 1996 have been included in the computation as if they were outstanding for all periods presented. NOTE 7 -- NEW ACCOUNTING PRONOUNCEMENTS: Recent Accounting Pronouncements (unaudited) In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share". Under SFAS 128, the Company will be required to disclose basic earnings per share and diluted per share for all periods for which an income statement is presented, which will replace the disclosure currently presented for primary earnings per share and fully-diluted earnings per share. SFAS 128 requires adoption for fiscal periods ending after December 15, 1997. Pro forma disclosure of basic (loss) per share and diluted (loss) per share for the current reporting and comparable period in the prior year is as follows:
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 --------------------- ------------------- ---------------- ---------------- Basic loss per share . $ (0.19) $ (2.29) $ (0.33) $ (3.74) Diluted loss per share $ (0.17) $ (0.43) $ (0.27) $ (0.73)
NOTE 8 -- SUBSEQUENT EVENT: In July 1997, the Company was notified by Sega that Sega was terminating the Sega Agreement (See Note 4). The Company believes that the decision by Sega may constitute a breach of the Sega Agreement and is evaluating its options, including legal recourse. Although the ultimate outcome of this matter is not presently determinable, the Company believes that the resolution of this matter will not have material adverse impact on the Company's financial position or results of operations. 7 8 3DFX INTERACTIVE, INC. ITEM 2. 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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include the sentence in the first paragraph under "Overview" regarding anticipated net losses; the sentences in the second paragraph under "Overview" and the third paragraph under "Results of Operations" regarding future sales of the Obsidian product; the last sentence in the second paragraph under "Overview" regarding expected customer concentration; the sentence in the third paragraph under "Overview" and the third paragraph under "Results of Operations" regarding revenue under the Sega Agreement; the sentences in the fourth and eleventh paragraphs under "Results of Operations" regarding factors affecting gross margin; the sentences in the fifth, sixth, twelfth and thirteenth paragraphs under "Results of Operations regarding future research and development and selling, general and administrative costs, respectively; the sentence in the third paragraph under "Liquidity and Capital Resources" regarding capital expenditures; the statements in the sixth paragraph under "Liquidity and Capital Resources" regarding future liquidity and capital requirements and the statements below under "Factors Affecting Future Operating Results". These forward-looking statements are based on current expectations and entail various risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties are set forth below under "Factors Affecting Future Operating Results". OVERVIEW The Company was founded in August 1994 to design, develop, market and support 3D media processors, subsystems and API software for the interactive electronic entertainment market. The Company had no operations during the period from inception (August 24, 1994) through December 31, 1994. The Company was considered a development stage enterprise and was primarily engaged in product development and product testing until its first commercial product shipments in the third quarter of 1996. The Company has incurred losses since inception and as of June 30, 1997 had an accumulated deficit of $22.7 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 8 9 The Company derives revenue from the sale of 3D media processors and subsystems 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 began commercial shipments in April 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. Four customers represented 38%, 16%, 14% and 13% and four customers represented 47%, 10%, 10% and 10% of the Company's revenue during the second quarter and first half of 1997, respectively. The Company expects that a small number of customers will continue to account for a substantial portion of its total revenues for the foreseeable future. In March 1997, the Company and Sega Enterprises, Ltd. ("Sega") entered into a Technology Development and License Agreement (the "Sega Agreement") pursuant to which the Company began developing a 3D media processor chipset for Sega's next generation home game console. During the six months ended June 30, 1997, the Company recognized development contract revenues of $1.8 million under the Sega Agreement representing 15% of total revenues during that period. In July 1997, the Company learned from Sega that Sega will not use the Company's chipset for the next generation Sega home game console. The Company believes that the decision by Sega may constitute a breach of the Sega Agreement and is evaluating its options, including legal recourse. No future revenues are expected under 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. Once production yield for a particular product stabilizes, the Company pays an agreed price for wafers meeting certain acceptance criteria pursuant to a "good die" only pricing structure for that particular product. Until production yield for a particular product stabilizes, however, the Company must pay an agreed price for wafers regardless of yield. Such wafer and die purchases constitute a substantial portion of cost of products revenues once products are sold. TSMC is responsible for procurement of raw materials used in the production of the Company's products. The Company believes that raw materials required are readily available. 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 $121,000 (of which $48,000 and $73,000 were recorded in research and development expenses and selling, general and administrative expenses, respectively) and $242,000 (of which $96,000 and $146,000 were recorded in research and development expenses and selling, general and administrative expenses, respectively) in the three and six months ended June 30, 1997, respectively, and will result in charges over the next 14 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). 9 10 RESULTS OF OPERATIONS Three Months Ended June 30, 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 $6.5 million in the three months ended June 30, 1997. No revenues were generated in the three months ended June 30, 1996. Product revenues were $5.4 million in the three months ended June 30, 1997. Product revenues in the three months ended June 30, 1997 were principally attributable to sales of the Company's Voodoo Graphics and Voodoo Rush chipsets. Development contract revenues of approximately $1.1 million were recognized in the three months ended June 30, 1997 under the percentage of completion method of accounting based on costs incurred relative to total contract costs. The revenue represents certain design work performed under the Sega Agreement. The Company does not expect any further revenues under the Sega Agreement. See "Overview". 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 $3.2 million in the three months ended June 30, 1997. Cost of product revenues was $3.3 million in the three months ended June 30, 1997. Gross profit as a percentage of total revenues was 50% in the three months ended June 30, 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, 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 decreased 16% from $2.9 million in the three months ended June 30, 1996 to $2.4 million in the three months ended June 30, 1997. Research and development expenses in the three months ended June 30, 1997 include costs associated with development contract revenues of approximately $650,000. The decrease reflects a decrease in non-recurring engineering costs resulting from the commencement of manufacturing of the Voodoo Rush chipset, which is based upon existing technology. 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 65 % from $1.5 million in the three months ended June 30, 1996 to $2.5 million in the three months ended June 30, 1997. The increase resulted from the addition of personnel in sales, marketing, finance and administration as the Company expanded operations, increased commission expenses associated with the commencement of commercial sales and increased involvement in tradeshow and advertising activities. The Company expects that selling, general 10 11 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 $3,000 in the three months ended June 30, 1996 to net interest and other expense of $64,000 in the three months ended June 30, 1997. The decrease is related to higher interest expense as a result of higher outstanding equipment line of credit and capital lease balances, partially offset by interest income earned on average cash balances. Provision For Income Taxes. The Company recorded no provision for income taxes in the three months ended June 30, 1996 and 1997 as it incurred losses during such periods. Six Months Ended June 30, 1997 and 1996 Revenues. The Company's total revenues were $11.7 million in the six months ended June 30, 1997. In 1996, the Company was still in the development stage and did not generate any revenues. Product revenues were $9.9 million in the six months ended June 30, 1997. Substantially all of the product revenues in the period were derived from sale of the Company's Voodoo Graphics and Voodoo Rush chipsets and, to a lesser extent, sale of Obsidian graphics subsystems. Development contract revenues of $1.8 million were recognized in the six months ended June 30, 1997. The development contract revenue recognized in the period represents $1.1 million recognized under the percentage of completion method of accounting based on costs incurred relative to total contract costs and $750,000 representing a non-refundable amount due for the delivery of certain engineering designs to Sega. There were no development contract revenues in 1996. Gross Profit. Gross profit and cost of product revenues were $5.9 million and $5.9 million, respectively, in the six months ended June 30, 1997. Gross profit as a percentage of total revenues was 50% in the six months ended June 30, 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, 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 decreased 4% from $4.5 million in the six months ended June 30, 1996 to $4.4 million in the six months ended June 30, 1997. The decrease reflects a decrease in non-recurring engineering costs resulting from the commencement of manufacturing of the Voodoo Rush chipset, which is based upon existing technology. Research and development expenses in the six months ended June 30, 1997 include costs associated with development contract revenues of approximately $725,000. 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. 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 increased 71% from $2.6 million in the six months ended June 30, 1996 to $4.4 million in 1997. The increase primarily relates to increased finance and administration staffing and related costs necessary to support higher levels of operations, established sales and marketing operations to support the commencement of commercial product shipments, incurred commission expenses associated with product sales and increased participation in tradeshow and advertising activities. The Company expects that selling, general and administrative expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate. 11 12 Interest and Other Income (Expense), Net. Interest and other income (expense), net decreased from $38,000 in the six months ended June 30, 1996 to net interest and other expense of $91,000 in the six months ended June 30, 1997. The decrease is related to higher levels of interest expense as a result of higher outstanding capital lease balances partially offset by interest income earned on average cash balances. Provision for Income Taxes. The Company recorded no provision for income taxes in the six months ended June 30, 1996 and 1997 as it incurred losses during such periods. LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has financed its operations primarily through private placements of equity securities yielding approximately $29.4 million and most recently through an initial public offering in June 1997 yielding approximately $33 million, gross of underwriting fees and expenses. As of June 30, 1997, the Company had approximately $958,000 of equipment line financing in place. As of June 30, 1997, the Company had approximately $32.7 million in cash and cash equivalents. Net cash used in operating activities was approximately $6.0 million and $2.1 million in the six months ended June 30, 1996 and June 30, 1997, respectively. For the six months ended June 30, 1996, net cash used in operating activities was due primarily to the net loss of $7.0 million and a decrease in inventory of approximately $617,000, partially offset by increases in accounts payable of $1.6 million. Net cash used in operating activities in the six months ended June 30, 1997 was due primarily to the net loss of $2.9 million, a $3.8 million and $1.2 million increase in accounts receivable and other assets, respectively, which was partially offset by a $2.9 million and $1.8 million increase in inventory and accounts payable and accrued liabilities, respectively. Net cash used in investing activities was approximately $1.1 million and $1.5 million in the six months ended June 30, 1996 and June 30, 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 June 30, 1997, the Company had capital equipment of $6.2 million less accumulated depreciation of $2.1 million to support its research and development and administrative activities. The Company has financed approximately $1.9 million from capital lease obligations through June 30, 1997. The Company has an equipment line of credit, which provided initially for the purchase of up to $2.0 million of property and equipment, of which approximately $1.7 million had been utilized as of June 30, 1997. No remaining borrowing capacity is available under this equipment line of credit. 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 (8.5% as of June 30, 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 June 30, 1997. The lease line of credit expires in August 1998. 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 $11.3 million and $31.0 million in the six months ended June 30, 1996 and 1997, respectively, due primarily to proceeds from the issuance of Preferred Stock in the six months ended June 30, 1997 and the initial public offering in the six months ended June 30, 1997. The Company has a line of credit agreement with Silicon Valley Bank, which provides for maximum borrowings in an amount up to the lesser of 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 12 13 in compliance with its covenants as of June 30, 1997. The line of credit expires in August 1997. At June 30, 1996 and June 30, 1997, there were no borrowings outstanding under this line of credit, respectively. The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities, the extent to which the Company's existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, and available borrowings under line of credit arrangements and other factors. The Company believes that the 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. FACTORS AFFECTING FUTURE OPERATING RESULTS Limited Operating History; Anticipation of Continued Losses. The Company has 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 a development stage company until its first commercial product shipments in the third quarter of 1996. The Company's limited operating history makes the assessment of future operating results difficult. The Company incurred net losses of approximately $5.0 million, $14.8 million and $2.9 million in 1995, 1996 and for the six months ended June 30, 1997, respectively, and had an accumulated deficit of $22.7 million at June 30, 1997. These net losses were attributable to the lack of substantial revenue and continuing significant costs incurred in the research, development and testing of the Company's products. 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. If significant revenues or profitability are ever be achieved, they may not be sustained or increased on a quarterly or annual basis in the future. Potential Fluctuations in Quarterly Results. The Company believes that 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 the relative volume of sales of the Company's various products; changes in the relative volume of sales to the Company's various direct and indirect customers; unanticipated delays or problems in the introduction or performance of the Company's next generation of products; unanticipated delays or problems experienced by the Company's product development partners; market acceptance of the products of the Company's customers; 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; expenditures in connection with enforcing contractual and other rights; 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 13 14 associated with the tendency of PC sales to increase in the second half of each calendar year; the level of expenditures for research and development and sales, general and administrative functions of the Company; costs associated with protecting the Company's intellectual property; and foreign exchange rate fluctuations. Any one or more of these factors could result in the Company failing to achieve its expectations as to future revenues. Because most operating expenses are relatively fixed in the short term, the Company may be unable to adjust spending sufficiently in a timely manner to compensate for any unexpected sales shortfall, which could materially adversely affect quarterly results of operations. Accordingly, the Company believes that period-to-period comparisons of its results of operations should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. Finally, the Company's results of operations in any given quarter may be below the expectations of public market analysts or investors, in which case the market price of the Common Stock could be materially adversely affected. Competition. The Company's strategy of targeting the interactive electronic entertainment market across multiple platforms requires the Company to compete in several market segments, all of which are intensely competitive. 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. Regardless of the quality 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. Many of the Company's current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources, greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than the Company. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, certain of the Company's principal competitors offer a single vendor solution, since they maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. The Company's ability to compete successfully in the rapidly evolving market for 3D interactive electronic entertainment will depend upon certain factors, many of which are beyond the Company's control, including, but not limited to, success in designing and subcontracting the manufacture of new products; implementing new technologies; access to adequate sources of raw materials and foundry capacity; the price, quality and timing of new product introductions by the Company and its competitors; the emergence of new multimedia and PC standards; the 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. In addition to competition from companies in the entertainment segments of the PC market, the Company faces potential competition from companies that have focused on the high-end of the 3D market for PCs and the production of 3D systems targeted for the professional engineering market. These companies are developing lower cost versions of their 3D technology to bring workstation-like 3D graphics to mainstream applications and may enter the interactive electronics entertainment market. 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. 14 15 Dependence on the PC Market. For 1996 and the six months ended June 30, 1997, the Company derived 82% and 79%, 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. 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. Any reduction in the demand for PCs generally, or for a particular product that incorporates the Company's 3D media processors, could have a material adverse effect on the Company's business, financial condition and results of operations. The Company's ability to compete in the future will depend on its ability to identify and ensure compliance with evolving industry standards. Failure to predict changes in industry standards, may require the Company 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 for design wins. In July 1997, the Company learned from Sega that Sega will not use the Company's chipset for the next generation Sega home game console. As a result, the Company currently has no arrangements for developing, marketing and selling a product for the home game console market. There can be no assurance that the Company will be able to find a strategic partner that will to produce a home game console incorporating a chipset developed by the Company. The failure to access the home game console market may limit the Company's ability to diversify its product offerings and may have the effect of increasing the Company's dependency on the PC market. 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 developed a 3D/2D chipset branded as Voodoo Rush that began commercial shipement in April 1997. Voodoo Rush may not offer significant price/performance benefits or meet the technical or other requirements of buyers to realize market acceptance. 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/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. Any competitive, 16 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. Dependence on Third Party Developers and Publishers. The Company depends on third party software developers and publishers to create, produce and market a sufficient number of high quality, commercially successful 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 and competition for these resources is intense. Consequently, the Company may not be able to attract the number and quality of software developers and publishers necessary to develop and publish a sufficient number of high quality, commercially successful software titles compatible with the Company's 3D media processor products. Further, the development and marketing of game titles that do not fully demonstrate the technical capabilities of the Company's products could create the impression that the Company's technology offers only marginal, if any, performance improvements over competing 3D media processors. 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 success of new product introductions is dependent on several factors, including proper new product definition, timely completion and introduction of new product designs, the ability of the Company's 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. 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. 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. 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, 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. Customer Concentration. Because of the Company's limited operating history and early stage of development, it has a limited number of customers and the Company's sales are highly concentrated. Revenues derived from sales to Orchid, Diamond and Williams accounted for 44%, 33% and 11%, respectively, of product revenues for 1996. All such sales were made pursuant to purchase orders. Revenues derived from sales to Orchid, Diamond and Williams accounted for 10%, 47% and 10%, respectively, of product revenues for the six months ended June 30, 1997. Development contract revenues recognized under the Sega Agreement represented 15% of total revenues during the six months ended June 30, 1997; no further revenues are expected under the Sega Agreement. The Company expects that a small number of customers will continue to account for a substantial portion of its revenues for the foreseeable future. As a result, the Company's business, financial condition and results of operations could be materially adversely affected by the decision of a single customer to cease using the Company's products or by a decline in the number of PCs or coin-op arcade systems sold by a single customer or by a small number of customers. 16 17 Adoption of Glide. The Company's success will be substantially affected by the adoption by software developers of Glide, its proprietary, low-level 3D application programming interface ("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. 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 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. All of the Company's products require wafers manufactured with state-of-the-art fabrication equipment and techniques. The Company currently obtains all of its manufacturing services from TSMC in Taiwan 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 or the reallocation of capacity by TSMC to other uses could adversely affect the Company's business, financial condition and results of operations. Although the Company's products are designed using TSMC's process design rules, TSMC may not 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. 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's products are assembled and tested on a purchase order basis by a third party subcontractor, Advanced Semiconductor Engineering Group ("ASE"). 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. 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, until production yield for a 17 18 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 profit and results of operations. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until well into the production process. 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. 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. 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. 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. Dependence on Key Personnel. The Company's performance will be substantially dependent on the performance of its executive officers and key employees. 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 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. 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. 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. There can be no assurance that 18 19 pending 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 protect its intellectual property could have a material adverse effect on the Company's business, financial condition and results of operations. The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. There 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 Company's control. The Company is also subject to general political risks in connection with its international trade relationships. 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. 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. Fluctuations in currency exchange rates may 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. 19 20 ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS On April 11, 1997, the Company held an Annual Meeting of Shareholders for which it solicited votes by proxy. The following is a brief description of the matters voted upon at the meeting and a statement of the number of votes case for and against and the number of abstentions. There were no broker non-votes with respect to any matter. 1. To elect directors to serve for the following year and until their successors are elected.
Director Votes For Votes Withheld - -------- --------- -------------- L. Gregory Ballard 3,651,358 0 Scott D. Sellers 3,651,358 0 James Whims 3,651,358 0 Gordon A. Campbell 4,921,745 0 Philip M. Young 4,921,745 0 Anthony Sun 3,710,238 0 George J. Still, Jr. 3,138,718 0
2. To ratify the appointment of Price Waterhouse LLP as independent public accountants of the Company for the year ending December 31, 1997. FOR: 15,299,768 AGAINST: 0 ABSTAIN: 32,291 3. To (a) approve an amendment to the Company's Amended and Restated Articles of Incorporation to (i) increase the authorized number of shares of Common Stock from 25,033,333 shares to 50,000,000 shares and (ii) increase the number of shares to be issued under the Company's option plans which are excluded from the anti-dilution provisions from 3,500,000 shares to 5,600,000 shares, and (b) ratify and approve a restatement of the Company's Articles of Incorporation, to be effective upon the conversions of the currently outstanding Preferred Stock, to provide that the Company will have authorized 5,000 shares of Preferred Stock. FOR: 15,135,157 AGAINST: 25,000 ABSTAIN: 171,902 4. To approve and ratify a form of Indemnification Agreement to be entered into between the Company and its directors, officers and agents. FOR: 13,928,725 AGAINST: 0 ABSTAIN: 1,403,334 5. To approve amendments to the Company's 1995 Employee Stock Plan to (i) increase the number of shares of Common Stock reserved for issuance thereunder by 1,850,000 shares, (ii) cause the 1995 Employee Stock Plan to comply with the provisions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended, (iii) delete the provisions with respect to stock purchase rights, (iv) limit the maximum number of shares which can be granted to any employee during any fiscal year, (v) allow the grant of nonstatutory stock options at any such exercise price as may be determined by the Board of Directors on the date of grant, and (vi) require the assumption of outstanding options or, in the absence of such assumption, the acceleration of vesting of outstanding options, in the event of a merger or sale of all or substantially all of the assets of the Company. FOR: 15,219,092 AGAINST: 0 ABSTAIN: 112,967 20 21 6. To approve the adoption of the 1997 Employee Stock Purchase Plan pursuant to which 1,100,000 shares of Common Stock are reserved for issuance. FOR: 15,289,092 AGAINST: 0 ABSTAIN: 42,967 7. To approve the adoption of the 1997 Director Option Plan pursuant to which 300,000 shares of Common Stock are reserved for issuance. FOR: 15,289,092 AGAINST: 0 ABSTAIN: 42,967 8. To approve amendments to the Company's By-laws to (i) provide for indemnification of the Company's officers, directors and agents to the fullest extent under California law and (ii) permit the Company to make loans to officers solely on the approval of the Board of Directors. FOR: 15,265,342 AGAINST: 11,250 ABSTAIN: 55,467 In addition, holders of a majority of the outstanding shares of Series A, Series B, and Series C Preferred stock, each voting as a separate class, and the holders of a majority of the outstanding shares of Common Stock approved by written consent, effective as of May 19, 1997, an amendment to the Company's Restated Articles of Incorporation to provide for a one-for-two reverse stock split. 21 22 ITEM 6: EXHIBITS (a) Exhibits 10.14 Software License and Co-marketing Agreement made as of June, 1997 by and between Electronic Arts, Inc. and the Registrant 10.15 Master Equipment Lease dated July 1, 1997 by and between the Registrant and Pentech Financial Services, Inc. 11.1 Statement regarding computation of net income (loss) per share 27.1 Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 1997. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: August 13, 1997 3DFX INTERACTIVE, INC. (Registrant) /s/ L. GREGORY BALLARD ---------------------------------------- L. Gregory Ballard Chief Executive Officer (Principal Executive Officer) /s/ GARY P. MARTIN ---------------------------------------- Gary P. Martin Vice President, Administration and Chief Financial Officer (Principal Financial and Accounting Officer) 23 24 INDEX TO EXHIBITS EXHIBITS 10.14 Software License and Co-marketing Agreement dated as of June, 1997 by and between Electronic Arts, Inc. and the Registrant 10.15 Master Equipment Lease dated as of July 1, 1997 by and between the Registrant and Pentech Financial Services, Inc. 11.1 Statement regarding computation of net income (loss) per share 27.1 Financial Data Schedule 24 EX-10.14 2 SOFTWARE LICENSE AND CO-MARKETING AGREEMENT 1 EXHIBIT 10.14 [ELECTRONIC ARTS LETTERHEAD] SOFTWARE LICENSE AND CO-MARKETING AGREEMENT This Agreement is made as of June__, 1997 (the "Effective Date") by and between ELECTRONIC ARTS INC., a Delaware corporation with offices at 1450 Fashion Island Boulevard, San Mateo, California 94404 ("EA") and 3DFX INTERACTIVE, INC., a California corporation with offices at 415 Clyde Avenue, Suite 105, Mountain View, CA 94043 ("3DFX"). RECITALS A. EA designs, develops, publishes and distributes interactive software entertainment products. B. 3DFX develops, manufactures and distributes 3D graphics accelerator technology (the "3DFX Technology"), and develops and distributes software for incorporation in entertainment software products which is designed to facilitate compatibility between such software products and the 3DFX Technology. C. 3DFX desires to have EA incorporate its software into EA's software products in order to increase the base of software products compatible with the 3DFX Technology and thereby facilitate 3DFX's efforts to market such 3DFX Technology. D. EA desires to incorporate software of 3DFX in EA's software products, in order to establish compatibility between such products and the 3DFX Technology. NOW, THEREFORE, the parties agree as follows: 1. DEFINITIONS 1.1 "Software" means the software product distributed by 3DFX under the current title "Glide" as part of the 3DFX Interactive, Inc. Software Development Kit, including any updates, enhancements, revised versions, corrections and fixes thereto, in both source and object code forms. 1.2 "EA Product" means any software product developed or distributed by EA and/or under any trademark or logo of EA [*] [*] 1.4 "Intellectual Property Rights" means any and all rights existing from time to time in any jurisdiction under patent law, copyright law, moral rights law, trade secret law, trademark law, unfair competition law or other similar rights existing anywhere in the world. * CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 1 2 1.5 "Trademarks" means the trademarks of 3DFX as set forth on Exhibit A hereto. 1.6 "Advertising Materials" shall have the meaning set forth in Exhibit B hereto. 2. LICENSE 2.1 General. 3DFX hereby grants to EA a perpetual fully paid, royalty free, world-wide, non-exclusive, transferable, irrevocable, license, with right to sublicense, to do any and all of the following: use, modify, localize, prepare derivative works of, copy and reproduce, make and have made, perform and display (publicly or otherwise) distribute and sell the Software as part of any EA Product in any manner and embodied in any medium currently existing or hereafter conceived. 2.2 Moral Rights. For purposes of this subsection, "Moral Rights" means any rights of paternity or integrity, any right to claim authorship of the Software, to object to any distortion, mutilation or other modification of, or other derogatory action in relation to, any Software, whether or not such would be prejudicial to 3DFX honor or reputation, and any similar rights existing under judicial or statutory law of any country in the world, or under any treaty, regardless whether or not such right is denominated or generally referred to as a "moral" right. 3DFX hereby agrees not to assert against EA or any EA licensee or customer any and all Moral Rights that 3DFX may have in the Software. 2.3 Execution of Documents. 3DFX will cooperate with EA, at EA's expense, in obtaining patent, copyright, trademark or other statutory protection for any EA Product which incorporates the Software, in each country in which EA Products incorporating the Software are sold, distributed or licensed and in taking any enforcement action, including any public or private prosecution, to protect EA's intellectual property rights in or to all EA Products which incorporate the Software; provided, however, that any invention in the Software and any resulting patent application shall belong exclusively to 3DFX, and that any copyright registration by EA in any EA Product incorporating the Software shall reflect 3DFX as owner of the Software and any trademark right or other intellectual property right in the Software shall belong exclusively to 3DFX. Each party agrees to cooperate with the other in executing and filing applicable registrations and recordations by the other party to protect such other party's rights and, to the extent needed, to assist in bringing enforcement actions initiated by the other party to protect such other party's rights. 2.4 Trademark License. 3DFX grants EA a non-exclusive, royalty-free, sublicensable, irrevocable right and license, with right to sublicense, to use and reproduce the Trademarks on and in the EA Products and in any reasonable manner in connection with the advertising, promotion and marketing thereof; provided that EA's use thereof complies with the restrictions set forth in the 3DFX Style Guide as such style guide may be reasonably amended from time to time by 3DFX. 2.5 Ownership. As between EA and 3DFX, EA is the sole and exclusive owner of any and all EA Products and all Intellectual Property Rights contained therein. As between EA and 3DFX, 3DFX is the sole and exclusive owner of the Software, the Trademarks and all Intellectual Property Rights contained therein. To the extent that EA creates any modifications to the Software, which modifications are not particular to all or any of the EA Products, EA shall grant 3DFX a non-exclusive, perpetual worldwide license to use, reproduce, make, sell and distribute such modifications. Page 2 3 2.6 Restrictions. Notwithstanding anything to the contrary in this Agreement, EA have no right to sell, market or distribute the source code to the Software. 3. OBLIGATIONS OF EA [**] (a) EA shall exercise commercially reasonable efforts to incorporate the Glide 2.3 version of the Software (or such other version of the Software as EA deems appropriate in its sole discretion) into [*]. Although EA will exercise reasonable efforts to activate the Software features appropriate [*], EA makes no representation or warranty as to the specific features which will be activated [*]. EA makes no representation or warranty that EA will successfully incorporate the Software into any of the EA products, or that the EA products, with incorporated 3DFX software, will be compatible with the 3DFX Technology. (b) The parties acknowledge that, where it is not commercially practicable for EA to complete incorporation of the Software [*], EA may issue a "patch" or a "silent revision" following commercial release, [*]. Prior to commercial release [*], EA will exercise reasonable efforts to arrange a meeting between representatives of 3DFX and the development teams [*]. During such meetings, 3DFX shall advise the development teams on optimum use of the Software and the features of the Software which 3DFX recommends activating in the context of a particular product. 3.2 Additional Products. EA may, in its sole discretion, incorporate the Software into additional EA Products. In addition, EA may, in its sole discretion, issue "patches" or "silent revisions" for additional EA Products following the commercial release of such additional Products. If practicable, as determined by EA in its sole discretion, EA will exercise reasonable efforts to arrange a meeting between representatives of 3DFX and the development teams creating each of such additional EA Products. During such meetings, 3DFX shall advise the development teams on optimum use of the Software and the features of the Software which 3DFX recommends activating in the context of a particular product. 3.3 Marketing Services. EA shall perform the marketing services as specified on Exhibit B under the heading "EA Marketing Services", at the times and in the manner specified therein. 3.4 Disclaimer of Warranties. EA MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE PERFORMANCE [*] (OR ANY OTHER EA PRODUCT), INCLUDING, WITHOUT LIMITATION, AS TO THE COMPATIBILITY OF SUCH PRODUCTS WITH THE TECHNOLOGY. EA EXPRESSLY DISCLAIMS ALL EXPRESS AND IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE. - ------ *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 3 4 3.5 Restrictions. EA agrees that it will not prior to March 31, 1998 enter into a co-marketing arrangement with a third party developer of graphics accelerator chips on terms and conditions similar to those contained in this Agreements, and including marketing obligations of a scope similar to those contained herein. Notwithstanding the foregoing, nothing in this Agreement shall preclude EA from including software in all or any of its Products which is designed to facilitate compatibility with graphics accelerator chips of any third parties, or engaging in any marketing services on behalf of such third party which are similar to the services set forth in Exhibit A (including, without limitation, including the trademark of such third party on the packaging of a Product), so long as the aggregate scope of such services does not rise to the level of the aggregate scope of services set forth herein. 4. OBLIGATIONS OF 3DFX [*] 4.2 Cooperation. 3DFX agrees to use good faith and diligent efforts to consult with and aid EA in connection with EA's fulfillment of its obligations pursuant to Section 3. 4.3 Marketing Services. 3DFX shall perform the marketing services as specified on Exhibit B under the heading "3DFX Marketing Services", at the times and in the manner specified therein. 4.4 New Software; New Technology. (a) All improvements, modifications and enhancements to the Software that are developed by 3DFX for a period of two years following execution of this Agreement shall be provided to EA at no cost. (b) 3DFX shall provide notice to EA as far as reasonably possible in advance prior to the marketing and distribution of new 3DFX Technology. Such notice will include information on the revised features of such technology, and the impact on the EA Products which have incorporated existing versions of the Software. Until EA has fulfilled its obligations under Section 3 of this Agreement, future versions of the 3DFX Technology, will be generally backward compatible with software designed for previous versions of 3DFX Technology. Thereafter, 3DFX will exercise reasonable efforts to ensure that future versions of the 3DFX Technology continues to be generally backward compatible with software designed for previous versions of 3DFX Technology; provided that 3DFX makes no representation or warranty that such future versions of the 3DFX Technology (distributed after EA has fulfilled its obligations under Section 3 of this Agreement) will be backward compatible with such previous versions of the Software. (c) 3DFX will communicate and provide EA with reasonable assistance, with respect to the incorporation of future versions of the Software into EA Products for the purpose of optimizing compatibility between the EA Products and future 3DFX Technology. 5. CONFIDENTIALITY 5.1 Definitions. - ---------- *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 4 5 (a) "Confidential Information" means the terms and conditions (but not the existence) of this Agreement, the Confidential Information of 3DFX and the Confidential Information of EA, except to the extent any of the following may be included therein: (i) information that becomes known to the general public without breach of the nondisclosure obligations of this Agreement; (ii) information that is obtained from a third party or independently developed without breach of a nondisclosure obligation and without restriction on disclosure; and (iii) information that is required to be disclosed in connection with any suit, action or other dispute related to this Agreement, provided that the receiving party shall notify the disclosing party prior to making such disclosure and shall take all reasonable measures to obtain confidential treatment. (b) "Confidential Information of 3DFX" means: (i) the concepts and source code of the Software; (ii) any information regarding existing or future products of 3DFX; and (iii) any other information of 3DFX designated in writing as "confidential" or "proprietary" by 3DFX. (c) "Confidential Information of EA" means: (i) any information concerning the EA Products or EA's use of the Software in the EA Products, (ii) any information concerning existing or future products of hardware manufacturers other than Licensee; and (iii) any additional information designated orally or in writing as confidential or proprietary by EA or its Affiliates. 5.2 Protection of Confidential Information. Each party agrees to hold in confidence, and not to use except as expressly authorized in this Agreement, all Confidential Information of the other party and to use at least the same degree of care that it uses to protect its own Confidential Information of like importance, but in no event less than reasonable care, to prevent the unauthorized disclosure or use of the other party's Confidential Information, both during and for two (2) years after the term of this Agreement. Each party agrees it will not make any public statement or comment on the existence or provisions of this Agreement, without the written consent of the other, except as may be required by the reasonable opinion of its legal counsel. 5.3 Use, Development and Marketing of Similar Programs. Nothing in this Agreement will impair the right of either party to use, develop or market ideas or programs similar to the Software so long as such use, development or marketing does not infringe on the copyright, trademark, patent, license or other rights of the other party. 6. REPRESENTATIONS AND WARRANTIES 6.1 3DFX Representations. 3DFX represents and warrants to and agrees with EA that: (a) The Software is the original work of 3DFX and the Software and the use, modification, reproduction and distribution thereof by EA pursuant to this Agreement, do not and will not infringe upon any Intellectual Property Rights of third parties; (b) 3DFX is the sole and exclusive owner or valid licensee of all Intellectual Property Rights in the Software, the Trademarks, the 3DFX Technology and the Advertising Materials; (c) 3DFX has not granted and will not grant any rights in the Software, the 3DFX Technology, the Trademarks or the Advertising Materials to any third party which are inconsistent with the rights assigned to EA herein; Page 5 6 (d) 3DFX has full power to enter into this Agreement, to carry out its obligations hereunder and to grant the rights herein granted to EA; and (e) The Software and the 3DFX Technology (i) are and will comply materially with the description of the Software and the 3DFX Technology included in any documentation distributed by 3DFX in connection with the Software or the advertising or marketing thereof, (ii) are and will be free of defect in material and workmanship, and (iii) are and will be of high quality in all respects. 6.2 EA's Representations. EA represents and warrants to and agrees with 3DFX that: EA has full power to enter into this Agreement and to carry out its obligations hereunder. 7. INDEMNIFICATION Each party will indemnify the other party and its customers and sublicensees for, and hold them harmless from, any loss, expense (including reasonable fees of attorneys and other professionals), damage or liability arising out of any claim, demand or suit resulting from an alleged breach of any of the warranties of the indemnifying party in Section 6 hereof. In addition, EA will indemnify 3DFX and its customers and sublicensees for, and hold them harmless from, any loss, expense (including reasonable fees of attorneys and other professionals), damage or liability arising out of any claim, demand or suit resulting from an allegation by a third party [*] infringe the Intellectual Property rights of such third party. As a condition to indemnification, the indemnified party will promptly inform the indemnifying party in writing of any such claim, demand or suit and the indemnified party will fully cooperate in the defense thereof. As a condition to indemnification, the indemnified party will not agree to the settlement of any such claim, demand or suit prior to a final judgment thereon without the consent of the indemnifying party, which consent will not be unreasonably withheld. 8. TECHNICAL SUPPORT 8.1 EA Support of Customers. Except as limited elsewhere in this Agreement, EA will be responsible for providing product support to end users solely with respect to gameplay [*]. EA will provide such support in accordance with its standard user support policies which include an EA toll telephone number for customers to call during EA's normal business hours with technical questions about the EA Products. EA will not provide support for any component to the 3DFX Technology or the Software. 8.2 3DFX Support of Customers. 3DFX will provide warranty and post warranty service for the 3DFX Technology and the software at least in accordance with generally accepted industry standards. 3DFX shall in all events be solely responsible to its customers for support, warranty and post-warranty service for the 3DFX Technology and the Software and will hold EA harmless from all claims made under such warranties. 9. GENERAL TERMS 9.1 Amendment. No amendment or modification of this Agreement will be made except by an instrument in writing signed by both parties. 9.2 Independent Contractors. 3DFX is an independent contractor, and nothing in this Agreement will be deemed to place the parties in the relationship of employer-employee, principal-agent, partners or joint venturers. - ---------- *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 6 7 9.3 Limitation of Damages. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY KIND OR THE LOSS OF ANTICIPATED PROFITS ARISING FROM ANY BREACH OF THIS AGREEMENT EVEN IF THE OTHER PARTY IS NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES AND REGARDLESS OF WHETHER ANY REMEDY SET FORTH HEREIN FAILS OF ITS ESSENTIAL PURPOSE. 9.4 Force Majeure. Neither party will be deemed in default of this Agreement to the extent that performance of its obligations or attempts to cure any breach are delayed or prevented by reason of any act of God, fire, natural disaster, accident, act of government, shortages of material or supplies or any other cause reasonably beyond the control of such party ("Force Majeure"), provided that such party gives the other party written notice thereof promptly and, in any event, within fifteen (15) days of discovery thereof, and uses its diligent, good faith efforts to cure the breach. In the event of such a Force Majeure, the time for performance or cure will be extended for a period equal to the duration of the Force Majeure but not in excess of six (6) months. 9.5 Governing Law; Forum. This Agreement will be deemed entered into in San Mateo County, California and will be governed by and interpreted in accordance with the substantive laws of the State of California. The parties agree that any dispute arising under this Agreement will be resolved in the state or federal courts within the Northern District of California and 3DFX expressly consents to jurisdiction therein. 9.6 Severability. Should any provision of this Agreement be held to be void, invalid or inoperative, such provision will be enforced to the extent permissible and the remaining provisions of this Agreement will not be affected. 9.7 Notices. Any notice required or permitted to be sent hereunder will be given by hand delivery, by registered, express or certified mail, return receipt requested, postage prepaid, or by nationally-recognized private express courier or by facsimile to either party at the address listed above, or to such other addresses of which either party may so notify the other. Notices will be deemed given when hand delivered if by hand delivery, or when sent if by any other authorized method. 9.8 Complete Agreement. This Agreement constitutes the entire agreement between the parties and supersedes all prior negotiations, understandings, correspondence and agreements with respect to the same subject matter between the parties, including without limitation any License Agreement included with the packaging of the Software. ELECTRONIC ARTS INC. 3DFX By: /s/ Nancy L. Smith By: /s/ Andy Keane ------------------------- -------------------- Name: Nancy L. Smith Name: Andy Keane ------------------------- -------------------- Date: 6/6/97 Date: 6/18/97 ------------------------- -------------------- Page 7 8 EXHIBIT A TRADEMARKS 3Dfx Interactive Voodoo Graphics Voodoo Rush Voodoo Glide NOTICES (C)1997 3Dfx Interactive, Inc. The 3Dfx Interactive logo and Voodoo Graphics are a trademark of 3Dfx Interactive, Inc. [*] - ------ *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 8 9 [*] - ------ *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 9 10 [*] - ------ *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 10 11 EXHIBIT B MARKETING SERVICES EA Marketing Services [*] Trade Show Support At trade shows attended by EA (including E3), EA will demonstrate [*], and will represent to attendees that such [*] have been enhanced for 3DFX. At such tradeshows, EA will reasonably display the 3DFX logos. Web Site Coverage/Hypertext Links EA will place hypertext links on the sites of [*]. Where reasonably appropriate, EA will upload patches for enhancements or updates to the Software, and, where appropriate, EA will include the posting of upgrade patches and technology information. In addition, on such sites, EA will represent the fact that such [*] have been enhanced for the 3DFX Technology. Press Releases In press releases [*], EA will announce that such products have been enhanced for the 3DFX Software. [*] [*] - ------ *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 11 12 Print Advertisements. Subject to the approval of any League or other EA licensor with trademark approval, EA shall, as EA deems appropriate in its sole discretion, include the Trademarks on print advertising, sell sheets, catalogues, and other similar materials concerning [*] and which is fully compatible with the 3DFX technology. Retail Promotions Retail Marketing. Subject to the approval of any League or other EA licensor with trademark approval, EA shall, as EA deems appropriate in its sole discretion, exercise reasonable efforts to include [*], in co-marketing programs at retail, including but not limited to encaps, retail advertising and other special offers. 3DFX Marketing Services [*] Trade Show Support At tradeshows attended by 3Dfx, 3Dfx will demonstrate (as appropriate to release and timing and whether EA can provide an appropriate demo) EA Products, in which EA has successfully incorporated the Software and which is fully compatible with the 3DFX technology. At such tradeshows, 3Dfx will display the EA logos with reasonable prominence in connection with the EA Products. WEB Site 3Dfx will place hypertext links to the EA web site. 3Dfx will offer the opportunity to EA as appropriate for other promotional activities and representations on the 3Dfx web site to represent EA Products, in which EA has successfully incorporated the Software and which is fully compatible with the 3Dfx technology. Press Releases 3Dfx will include EA in press releases as appropriate for EA Products, in which EA has successfully incorporated the Software and which is fully compatible with the 3Dfx technology. *CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 12 EX-10.15 3 MASTER EQUIPMENT LEASE DATED JULY 1, 1997 1 EXHIBIT 10.15 PENTECH FINANCIAL SERVICES, INC. Lease No. 300198 ------------------ MASTER EQUIPMENT LEASE This is a Master Equipment Lease between PENTECH FINANCIAL SERVICES, INC., whose principal office is located at 310 West Hamilton Avenue, Suite 202, Campbell, California 95008 ("Lessor") and 3Dfx Interactive, Inc., whose principal office address is 4435 Fortran Dr., City of San Jose, State of California ("Lessee"). 1. LEASE. Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor, subject to the terms and conditions of this Master Equipment Lease ("Lease"), the personal property ("Equipment") described in each Acceptance Supplement ("Supplement") executed and delivered by Lessor and Lessee pursuant to the terms of this Lease. Each Supplement shall be in the form prescribed by Lessor and, upon execution and delivery, shall constitute a part of this Lease to the same extent as if the provisions thereof were set forth in full in this Lease document; the terms "Agreement," "hereof," "herein," and "thereunder," when used in this Lease shall mean this Lease, each Supplement and each Schedule as hereinafter defined. The Agreement constitutes an agreement to lease. Ownership of the Equipment remains with Lessor and nothing herein contained shall be construed as conveying to Lessee any right, title or interest in the equipment except as Lessee only. 2. SELECTION OF EQUIPMENT. Lessee acknowledges that it has selected the type, quantity and supplier of the Equipment referred to herein and that it has requested Lessor to purchase the same for leasing to Lessee. Lessee agrees that the Equipment and each part or unit thereof is of a design, size, quality and capacity required by Lessee and is suitable for its purposes. Lessee acknowledges that Lessor has informed or advised Lessee, in writing either previously or by this Lease, of the following: (i) the identity of the supplier; (ii) that the Lessee may have rights under the Supply Contract; and (iii) that the Lessee may contact the supplier for a description of any such rights Lessee may have under the Supply Contract. Lessor hereby assigns to Lessee all rights which Lessor has or may acquire against any manufacturer, supplier, or contractor with respect to any warranty or representation relating to the Equipment leased thereunder. 3. EQUIPMENT TO REMAIN PERSONAL PROPERTY; LOCATION, IDENTIFICATION; INSPECTION. Lessee represents that the Equipment shall be and at all times remain separately identifiable personal property. Lessee shall, at its own expense, take such action as may be necessary to prevent any third party from acquiring any right to or interest in the Equipment by virtue of the Equipment being deemed to be real property or a part of other personal property, and shall indemnify Lessor against any loss which it may sustain by reason of Lessee's failure to do so. The Equipment may not be removed from the location specified in the Supplement pertaining thereto without Lessor's prior written consent. If requested by Lessor, Lessee shall attach to and maintain on each item of Equipment a conspicuous plate or marking disclosing Lessor's ownership thereof. Lessor or its representatives may, at all reasonable times, and without advance notice, inspect the Equipment. Lessee shall promptly advise Lessor of any circumstances which may in any manner affect any item of Equipment or in any manner affect Lessor's title thereto. 4. EXECUTION OF FURTHER DOCUMENTATION. Lessee will, at its own expense, promptly execute and deliver to Lessor such further documentation and assurances and take such further action as Lessor may from time to time require in order to more effectively carry out the intent and purpose of the Agreement so as to establish and protect the rights, interests and remedies intended to be created in favor of Lessor thereunder, including, without limitation, the execution and filing of financing statements and continuation statements with respect to the Equipment and Agreement. Lessee authorizes Lessor to effect any such filing (including the filing of any financing statements without the signature of Lessee). Any expense incurred by Lessor in connection with any filings under this paragraph shall be payable by Lessor on demand. 5. DISCLAIMER OF IMPLIED WARRANTIES. THE PROPERTY WILL BE LEASED "AS IS" AND "WHERE IS." THE LESSOR HAS NOT MADE, MAY NOT BE CONSIDERED TO HAVE MADE, AND SPECIFICALLY DISCLAIMS: (1) ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO THE PROPERTY, REGARDING TITLE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM CLAIMS OF INFRINGEMENT OR THE LIKE, FITNESS FOR USE FOR A PARTICULAR PURPOSE, QUALITY OF MATERIALS OR WORKMANSHIP, ABSENCE OF DISCOVERABLE OR NONDISCOVERABLE DEFECTS, OR THAT THE EQUIPMENT IS IN COMPLIANCE WITH ANY APPLICABLE GOVERNMENT REQUIREMENTS OR REGULATIONS; AND (2) ANY OTHER EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO THE PROPERTY (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE, COURSE OF DEALING, OR USAGE OF TRADE); AND (3) ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY REGARDING THE CHARACTERIZATION OF THIS LEASE FOR TAX, ACCOUNTING, OR OTHER PURPOSES. THE LESSEE WAIVES, RELEASES, RENOUNCES, AND DISCLAIMS EXPECTATION OF OR RELIANCE ON ANY SUCH WARRANTY OR WARRANTIES. THE LESSOR WILL NOT HAVE ANY RESPONSIBILITY OR LIABILITY TO THE LESSEE OR ANY OTHER PERSON, WHETHER ARISING IN CONTRACT OR TORT, OUT OF ANY NEGLIGENCE OR STRICT LIABILITY OF THE LESSOR OR OTHERWISE, FOR: (1) ANY LIABILITY, LOSS, OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE PROPERTY; BY ANY INADEQUACY, DEFICIENCY OR DEFECT OF THE PROPERTY; OR BY ANY OTHER CIRCUMSTANCES IN CONNECTION WITH THIS LEASE; (2) THE USE, OPERATION, OR PERFORMANCE OF THE PROPERTY OR ANY RISKS RELATING TO IT; (3) ANY CONSEQUENTIAL DAMAGES, INCLUDING THOSE FOR INTERRUPTION OF SERVICE, LOSS OF BUSINESS, OR ANTICIPATED PROFITS; OR (4) THE DELIVERY, OPERATION, MAINTENANCE, REPAIR, IMPROVEMENT, OR REPLACEMENT OF THE PROPERTY. 6. TERM; ACCEPTANCE; RENT; RETURN. The term of lease of each item of Equipment shall commence on the Commencement Date specified in the Supplement pertaining to such Equipment and, unless earlier terminated pursuant to the provisions hereof, shall continue for the term specified in such Supplement. Lessee's execution and delivery of each Supplement shall constitute Lessee's irrevocable acceptance of the equipment covered thereby for all purposes of this Agreement. Lessee shall pay to Lessor, at the addresses specified above or at such other address as may be provided by Lessor from time to time, rent as specified in each Supplement. Each date on which an installment of rent is payable is designated herein as "Rent Payment Date." As to each Supplement, the first Rent Payment Date shall be the Rent Payment Date set forth therein, with the succeeding Rent Payment Date on the corresponding day of each month thereafter. In addition, if applicable, Lessee shall pay interim rent for the period between the actual commencement of the rent under each Supplement and the date designated as the Rent Payment Date, based on a 30 day month and the number of days between the actual commencement date and the first Rent Payment Date. Should any payment not be made by Lessee on or before the applicable Rent Payment Date, Lessor shall be entitled to a late payment charge in addition to the actual rent due of 5% of the late rent and any other amount due but unpaid under this Agreement. Upon the expiration or earlier termination of the term of lease of each item of Equipment leased thereunder, Lessee 2 shall at its own expense return such item to Lessor at such location as Lessor may designate, in the condition required to be maintained by Paragraph 9 hereof. 7. LESSEE'S OBLIGATIONS IRREVOCABLE. The Lessee's obligation to pay all rent will be absolute and unconditional and will not be affected or reduced by any circumstance, including: (1) Any setoff, counterclaim, recoupment, defense, or other right that the Lessee may have for any reason against the Lessor, the manufacturer, any seller of the property, or any person providing services with respect to the property; (2) Any defect in the title, condition, design, operation, or fitness for use of the property; any damage to, or loss or destruction of, the property; or any interruption or cessation in its use or possession by the Lessee for any reason, whether arising out of or related to an act or omission of the Lessor or any other person; (3) Any liens with respect to the property; (4) The invalidity or unenforceability of this Agreement or any absence of right, power or authority of the Lessor or Lessee to enter into this Lease; (5) Any insolvency, bankruptcy, reorganization, or similar proceedings by or against the Lessor or Lessee; or (6) Any other circumstance or occurrence of any nature, whether or not similar to any of the foregoing. It is the express intention of the Lessor and Lessee that all rent payable under this Agreement will be payable in all events, unless the obligation to pay is terminated under the express provisions of this Agreement. The Lessee hereby waives, to the extent permitted by law, all rights that it may now have or later acquire, by order or otherwise, to terminate this Agreement or any obligation imposed on the Lessee in relation to this Agreement. Nothing in this Agreement may be construed as a waiver of the Lessee's right to seek a separate recovery of any payment of rent that is not due and payable under this Agreement. The Lessee retains any right it may have to seek damages, specific performance, or any other remedy at law or in equity, separately or in combination, against the Lessor or any other person, on account of the Lessor's or other person's failure to perform its obligations under this Agreement. 8. RESTRICTIONS ON TRANSFER. THE LESSEE MAY NOT SUBLET OR TRANSFER POSSESSION OF THE PROPERTY WITHOUT THE PRIOR WRITTEN CONSENT OF THE LESSOR WHICH MAY BE WITHHELD IN THE SOLE AND ABSOLUTE DISCRETION OF THE LESSOR. THE LESSEE MAY NOT ASSIGN, PLEDGE, OR OTHERWISE ENCUMBER THIS LEASE. With respect to any sublease or transfer of possession of the property, the rights of the sublessee or transferee will be subject and subordinate to all the terms of this Agreement, including the Lessor's right of repossession on the occurrence of an event of default. The Lessee will remain primarily liable for the performance of all the terms of this Agreement to the same extent as if the sublease or transfer of possession had not occurred. The Lessor will have the right, at its sole expense, to assign, sell, or encumber any part of its interest in the property or in this Agreement and any proceeds of the disposition of that interest, subject to the Lessee's rights under this lease. To effect or facilitate such assignment, sale or encumbrance, the Lessee agrees to provide all agreements, consents, conveyances or documents that may be reasonably requested by the Lessor, including an unrestricted release of the Lessor from its obligations under this Agreement. That release will not release the Lessor from any liability that arose before the assignment or sale. Any person who succeeds to the rights and interests of the Lessor under this clause will agree to be bound by the terms of this Agreement without alteration. The Lessee acknowledges that an assignment, sale, or encumbrance of the Lessor's interest would not materially change the Lessee's duties under the Agreement or materially increase its burdens or risks. Even if such a transfer could be deemed to have that effect, the Lessee agrees that the assignment, sale or encumbrance will nevertheless be permitted. Without prejudice to any rights that the Lessee may have against the Lessor, the Lessee agrees that it will not assert against an assignee any claim or defense that it may have against the Lessor. The agreements, covenants, obligations and liabilities contained in this clause, including but not limited to, all obligations to pay rent and to indemnify each indemnitee, are made for the benefit of the indemnitees and their respective successors and assigns. 9. MAINTENANCE COVENANT. The Lessee will: (1) Furnish all labor and parts required for maintaining, repairing, and replacing component parts of the property to keep it in good operating condition and appearance; (2) Use, operate, maintain, and store the property in a careful and proper manner; (3) Protect the property from deterioration; (4) Comply with the manufacturer's operating procedures and warranty restrictions and all laws, ordinances, and regulations applicable to the property or its use and in compliance with the insurance policies required to be maintained thereunder; (5) Put the property only to the use contemplated by the manufacturer; and (6) Maintain accurate and complete records of all repairs and maintenance of the property and allow the Lessor to inspect those records at any time. (7) Comply with the maintenance requirements of any maintenance schedule attached as a part of this agreement. The Lessee will not make any alterations, additions, or improvements to the property without the Lessor's prior written consent. All repairs, replacement parts, additions, alterations, and improvements made to the property by the Lessee will be considered to be the Lessor's property and subject to the terms of this Agreement. 10. RISK OF LOSS COVENANT. The Lessee will bear the entire risk of destruction, loss, theft, requisition of title, or use, confiscation, taking, or damage (collectively, casualty loss) of the property from any cause during the period commencing when the property is placed in transit to the Lessee and ending when the property is returned to the Lessor or its designee following termination as provided herein. If during that period the property suffers any casualty loss, the Lessee will notify the Lessor in writing within five days following the casualty loss. On demand by the Lessor, the Lessee will: (1) If the damage constituting the casualty loss is repairable, repair the property to the condition in which the property is required to be maintained under this Agreement; (2) If the damaged property is not repairable, replace the property at the Lessee's sole expense with like property approved by the Lessor and take all actions and make all payments that may be required to vest in the Lessor title to the replacement property, free and clear of all liens, encumbrances, or security interests; or (3) Pay to the Lessor the casualty value (as defined below) and all other amounts then due under this Agreement. "Casualty value" is, at any given date, the stipulated loss value as shown on the applicable Schedule to each Supplement, and is computed to be the sum of: (1) The discounted value at that time, of the aggregate unpaid monthly rent payments to be paid through the then remaining term of this Agreement, discounting that amount at an annual discount rate of 8 percent; and (2) The Lessor's reasonable estimate, at that time, of the fair market value of the property at the end of the term of this Agreement, discounted at an annual discount rate of 8 percent. 11. INSURANCE. Lessee shall maintain at all times on the equipment, at Lessee's expense, property damages, direct damage, and liability insurance in such amounts, against such risks, and in such form and with such insurers as shall be satisfactory to Lessee. The required insurance shall be as specified in the applicable Supplement, provided, however, that the amount of direct damage insurance shall not on any date be less than the greater of the full replacement value or the Stipulated Loss Value of the Equipment as of such date. Each insurance policy will name Lessor as additional insured and as loss payee, and shall contain a clause requiring the insurer to give to Lessor at least 30 days prior written notice of any alteration in or cancellation of the terms of such policy. Lessee shall furnish to Lessor a certificate or other evidence satisfactory to Lessor that such insurance coverage is in effect, provided, however, that Lessor shall be under no duty to ascertain the existence or adequacy of such insurance. 12. TAXES; INDEMNITY. Lessee agrees to pay, and to indemnify and hold Lessor harmless from, all license fees, assessments, and sales, use, property, excise, and other taxes and charges (other than federal income taxes and taxes imposed by any other jurisdiction which are based on, or measured by, the net income of Lessor for reasons other than the ownership or leasing of the Equipment in such jurisdiction) imposed upon or with respect to (a) the Equipment or any part thereof arising out of or in connection with the shipment of Equipment or the possession, ownership, use or operation thereof, or (b) this Agreement or the consummation of the transactions herein contemplated. The agreements and indemnities contained in this paragraph shall survive the expiration or earlier termination of this Agreement. 13. DEPRECIATION INDEMNITY. (1) Lessor, as the owner of the Equipment, shall be entitled to such deductions, credits and other benefits as are provided by the Internal Revenue Code of 1954, as amended (IRC), to an owner of property. -2- 3 (2) Lessee agrees that neither it nor any corporation controlled by it, in control of it, or under common control with it, directly or indirectly, will at any time take any action or file any returns or other documents inconsistent with the foregoing and that each of such corporations will file such returns, take such action, and execute such documents as may be reasonable and necessary to facilitate accomplishment of the intent thereof. Lessee agrees to copy and make available for inspection and copying by Lessor such records as will enable Lessor to determine whether it is entitled to the benefit of any amortization or depreciation deduction, or other deduction or credit which may be available from time to time with respect to the Equipment. (3) If Lessor, under any circumstances or for any reason whatsoever, except for acts of Lessor or future changes in the IRC, shall lose or shall not have the right to claim or there shall be disallowed or recaptured, all or any portion of the federal tax depreciation deductions with respect to any item of Equipment based on depreciation of the Lessor's full cost of such item of Equipment and computed on the basis of a method of depreciation provided by the IRC as Lessor in its complete discretion may select, then Lessee agrees to pay Lessor upon demand an amount which, after deduction of all taxes required to be paid by Lessor in respect of the receipt thereof under the laws of any federal, state, or local government or taxing authority of the United States or of any taxing authority or government subsidiary of any foreign country, shall be equal to the sum of (i) an amount equal to the additional income taxes paid or payable by Lessor in consequence of the failure to obtain the benefit of a depreciation deduction, and (ii) any interest and/or penalty which may be assessed in connection with any of the foregoing. The provisions of this paragraph shall survive the expiration or earlier termination of this Agreement. 14. INDEMNIFICATION COVENANT. The Lessee agrees to indemnify, reimburse, and hold harmless each indemnitee from and against all claims, damages, losses, liabilities, demands, suits, judgments, causes of action, civil and criminal legal proceedings, penalties, fines and other sanctions, and any attorney fees and other reasonable costs and expenses, arising or imposed with or without the Lessor's fault or negligence (whether active or passive) or under the doctrine of strict liability (collectively, "claims"), relating to or arising in any manner out of: (1) This Agreement or the breach of any representation, warranty, or covenant made by the Lessee under this Agreement; (2) Manufacture, purchase, lease, delivery, nondelivery, acceptance, rejection, ownership, possession, use, operation, return or disposition of the Equipment; (3) The Equipment's condition or any discoverable or nondiscoverable defect in it arising from its design, testing, or construction; any article used in the Equipment; or any maintenance, service, or repair, whether or not the Equipment is in the Lessee's possession and regardless of where the Equipment is locate Anyd; or (4) transaction, approval, or document contemplated by this Agreement. The Lessee waives and releases each indemnitee from any existing or future claims in any way connected with injury to or death of the Lessee's personnel, loss or damage of the Lessee's property, or loss of use of any property, which may: (a) Result from or arise in any manner out of the ownership, leasing, condition, use, or operation of the Equipment; or (b) Be caused by any defect in the Equipment; its design, testing, or construction; any article used in the Equipment, or any maintenance, service, or repair, whether or not the Equipment is in the Lessee's possession and regardless of where the Equipment is located. The indemnities described in this clause will continue in full force and effect notwithstanding the expiration or other termination of this Agreement and are expressly made for the benefit and will be enforceable by each indemnitee. 15. COVENANT TO KEEP FREE OF LIENS. The Lessee will not directly or indirectly create, incur, assume, or suffer to exist any lien on the Equipment, its title, or any interest in the lien, except for: (1) The respective rights of the Lessor and Lessee under this Agreement; (2) Liens granted by the Lessor with respect to the Equipment; (3) Liens for taxes either not yet due or being contested in good faith by the Lessee as long as adequate reserves are maintained with respect to those liens and the Equipment is not, in the Lessor's reasonable opinion, in danger of being sold, confiscated, forfeited, or seized as a result of the liens; and (4) Inchoate materialmen's, mechanics', workmen's, repairmen's, employees', or other like liens arising in the ordinary course of business, which either are not delinquent or are being contested in good faith by the Lessee, as long as the Equipment is not, in the Lessor's reasonable opinion, in danger of being sold, confiscated, forfeited, or seized as a result of the liens. The Lessee will promptly, at its sole expense, take any action that may be necessary to discharge any lien except for the liens referred to in paragraphs (1) and (2) arising at any time with respect to the Equipment. 16. WAIVER OF CONSEQUENTIAL DAMAGES. The Lessee will not be entitled to recover, and hereby disclaims and waives any right that it may otherwise have to recover, consequential damages as a result of any breach or alleged breach by the Lessor of any of the agreements, representations, or warranties of the Lessor contained in this Agreement. 17. LESSOR'S RIGHT TO PERFORM. If Lessee fails to make any payment required to be made thereunder or fails to comply with any other provisions of this Agreement, Lessor may make such payment or comply with such provisions, and the amount of such payment and the reasonable expenses of Lessor incurred in connection with such payment or compliance, shall be payable by Lessee. 18. DEFAULT. Any one of the following occurrences shall, in the Lessor's sole discretion, constitute a material default by Lessee of this Agreement: (1) Failure by Lessee to make any payment of rent or other amount owing thereunder when due; (2) Failure by Lessee to perform or observe any other covenant, agreement, or condition thereunder; (3) Any representation or warranty made by Lessee herein or in any document or certificate furnished to Lessor in connection herewith shall prove to be incorrect at any time; (4) Lessee shall become insolvent or make an assignment for the benefit of creditors or consent to the appointment of a trustee or receiver, or a trustee or receiver shall be appointed for Lessee or for a substantial part of its property or for the Equipment, or reorganization, arrangement, insolvency, dissolution, or liquidation proceedings shall be instituted by or against Lessee. In such event, Lessor may declare this Agreement to be in default, and may proceed in accordance with the provisions of Paragraph 19 hereof. 19. REMEDIES. (1) Remedies. On the occurrence of any event of default and at any time afterwards as long as it continues, the Lessor may, at its option and without notice to the Lessee, declare this Agreement to be in default and exercise one or more of the following remedies: (a) Declare the then Stipulated Loss Value immediately due and payable with respect to any or all items of Equipment without notice or demand to Lessee; (b) Sue for and recover all rent and other payments, then accrued or thereafter accruing, with respect to any or all items of Equipment; (c) Take possession of and render unusable any or all items of Equipment, without demand or notice, wherever same may be located, without any court order or other process of law and without liability for any damages occasioned by such taking of possession (any such taking of possession will not constitute a termination of this lease as to any or all items of Equipment unless Lessor expressly so notifies Lessee in writing); (d) Require Lessee to assemble any or all items of Equipment at the original equipment location, such location to which the equipment may have been moved with the prior written consent of Lessor, or such other location in reasonable proximity to either of the foregoing as Lessor designates; (e) Sell or otherwise dispose of any or all items of Equipment whether or not in Lessor's possession, in a commercially reasonable manner at public or private sale and with or without notice to Lessee and apply the net proceeds of such sale, after deducting all costs of such sale, including, but not limited to, costs of transportation, repossession, storage, refurbishing, advertising and broker's fees, to the obligations of Lessee thereunder with Lessee remaining liable for any deficiency and with any excess being retained by Lessor; (f) Retain any repossessed items of Equipment and credit the reasonable value thereof, after deducting all such sales related costs incurred to the date of crediting, to the obligations of Lessee thereunder with Lessee remaining liable for any deficiency and with Lessor having no obligation to reimburse Lessee on account of any excess of such reasonable value over such obligations; (g) Terminate this lease as to any or all items of Equipment; (h) Utilize any other remedy available to Lessor at law or in equity. In each case, plus the amount, if any, as reasonably calculated by the Lessor, required for the Lessor to receive the same after tax economic return from this lease that the Lessor would have received if the Lessee had performed all of its obligations under this Agreement through the end of the lease term. In addition to the foregoing, the Lessee will be liable for interest on unpaid amounts at an annual interest rate of 18 percent from the date the same became due until payment in full, and for all reasonable legal fees and other reasonable costs and expenses incurred by the Lessor in connection with the occurrence of any event of default or the exercise of its remedies. A termination hereunder will occur only upon written notice by Lessor to Lessee and only with respect to such items of Equipment as to which Lessor specifically elects to terminate in such notice. Except as to such items with respect to which there is a termination, this lease will remain in full force and effect and Lessee will be and remain liable for the full performance of all its obligations thereunder. -3- 4 No right or remedy conferred herein is exclusive of any right or remedy conferred herein or by law, but all such rights and remedies are cumulative of every other right or remedy conferred thereunder or at law or in equity, by statute or otherwise, and may be exercised concurrently or separately from time to time. (2) In effecting any repossession, the Lessor and its representatives and agents, to the extent permitted by law, will: (a) Have the right to enter on any premises where the Lessor reasonably believes the Equipment is located; (b) Not be liable, in conversion or otherwise, for the taking of any personal property of the Lessee that is in or attached to the repossessed Equipment as long as the Lessor promptly returns that property to the Lessee; (c) Not be liable in any manner for any damage to any of the Lessee's property in repossessing and holding the Equipment, except for damage caused by the Lessor's gross negligence or willful misconduct; and (d) Have the right to maintain possession of and dispose of the Equipment on any premises owned by the Lessee or under the Lessee's control. If reasonably required by the Lessor, the Lessee, at its sole expense, will assemble and make the Equipment available at a place designated by the Lessor. If the Equipment is returned to or repossessed by the Lessor, any rights in any express or implied warranty previously assigned to the Lessee or otherwise held by it will without further act, notice, or writing be assigned or reassigned to the Lessor, if assignable. The Lessee will be liable to the Lessor for all reasonable expenses, costs, and fees incurred in (1) repossessing, storing, preserving, shipping, maintaining, repairing, and refurbishing the Equipment to the condition required by this Agreement; and (2) preparing the Equipment for sale or lease, advertising the sale or lease, and selling or re-letting the Equipment. No remedy referred to in this paragraph is intended to be exclusive, but, to the extent permissible under applicable law, each will be cumulative and operate in addition to any other remedy referred to above or otherwise available to the Lessor at law or in equity. The exercise or beginning or exercise by the Lessor of any one or more of its remedies will not preclude the simultaneous or later exercise by the Lessor of any other remedies. No express or implied waiver by the Lessor of any default or event of default will be construed as a waiver of any future or subsequent default or event of default. 20. CONDITIONS PRECEDENT. The obligation of Lessor contained in paragraph 1 of this Agreement shall be subject to the following conditions precedent: (1) There shall have occurred no material adverse change in the business or the financial condition of Lessee from the date hereof until the Commencement Date of any Supplement; (2) Lessee shall have furnished Lessor with a certificate or other evidence satisfactory to Lessor that insurance coverage as required by this Agreement is in effect as to the item of Equipment desired to be leased; (3) Unless specifically waived by Lessor, Lessee shall have furnished Lessor opinions of counsel as to the Agreement, in form and substance acceptable to Lessor; (4) Unless specifically waived by Lessor, Lessee shall have furnished Lessor waivers, in form and substance acceptable to Lessor, of all rights in or to the Equipment of any landlord or mortgagee of any real property upon which the Equipment is or is to be situated; and (5) All other instruments and legal and corporate proceedings in connection with the transactions contemplated by this Agreement shall be satisfactory in form and substance to Lessor, and counsel to Lessor shall have received copies of all documents which it may have requested in connection therewith. If any of the above conditions is not satisfied at the time Lessee submits any Supplement, Lessor shall have no obligation under this Agreement to lease the Equipment covered thereby to Lessee. 21. FINANCIALS. Lessee agrees that for so long as any item of Equipment shall be leased under the Agreement, Lessee will deliver or cause to be delivered to Lessor (a) as soon as practicable, and in any event within 60 days after the end of each quarterly period (other than the fourth quarterly period) together with the related statements of income and expense for such quarterly period all in reasonable detail prepared in accordance with generally accepted accounting principles consistently applied throughout the period involved and certified by Lessee's chief financial officer; and (b) as soon as practicable, and in any event within 120 days after the close of each fiscal year of Lessee, the audited balance sheet of Lessee as of the end of such fiscal year together with the related statements of income and surplus for such fiscal year all in reasonable detail, prepared in accordance with generally accepted accounting principles consistently applied throughout the period involved and certified by an independent certified public accountant acceptable to Lessor. 22. REPRESENTATIONS, WARRANTIES AND COVENANTS. As a material inducement to Lessor entering into this Agreement with Lessee, Lessee represents, warrants, and covenants as follows: (1) If Lessee is a corporation, or a limited liability company, Lessee is duly organized and validly existing and is in good standing under the laws of the state of its incorporation, and is duly qualified and licensed to do business as a foreign corporation and is in good standing in those jurisdictions where such qualifications are necessary to authorize Lessee to carry on its present business and operations, and to own its properties or to perform its obligations thereunder; (2) If Lessee is a partnership, Lessee is duly organized and validly existing under the partnership laws of its state of domicile and is duly authorized in any foreign jurisdiction where such qualification is necessary to authorize Lessee to carry on its present business and operations and to own its properties and to perform its obligations thereunder; (3) Lessee has full power, authority, and legal right to execute, deliver, and carry out as Lessee the terms and provisions of this Agreement, and any other necessary documents in connection with this transaction; (4) If Lessee is a corporation, Lessee's execution, delivery, and performance of this Agreement and the other documents and agreements referred to herein, and the performance of its obligations under this Agreement have all been authorized by all necessary corporate action, do not require the approval or consent of stockholders, or of any trustee or holders of any indebtedness or obligation of Lessee and will not violate any law, governmental rule, regulation or order binding upon Lessee or any provision of any indenture, mortgage, contract, or other agreement to which Lessee is a party or by which it is bound or to which it is subject, and will not violate any provision of the Certificate or Articles of Incorporation, Bylaws, or any preferred stock agreement of Lessee; (5) If Lessee is a partnership, Lessee's execution, delivery and performance of this Agreement and the other documents and agreements referred to herein, and the performance of its obligations under this Agreement have all been authorized by all necessary partnership actions; (6) There are no pending or threatened investigations, actions, or proceedings before any court or administrative agency or other tribunal body, which seek to question or set aside any of the transactions contemplated by this Agreement, or which, if adversely determined, would materially affect the condition, business, or operation of Lessee; (7) Lessee is not in default in any material manner in the payment or performance of any of its obligations or in the performance of any contract, agreement, or other instrument to which it is a party or by which it or any of its assets may be bound; (8) The balance sheet of Lessee as of the end of its most recent fiscal year and the related profit and loss statement of the Lessee for the fiscal year ended on said date, including the related schedules and notes, together with the report of an independent certified public accountant, heretofore delivered to Lessor, are all true and correct and present fairly (i) the financial position of Lessee as of the date of said balance sheet and (ii) the results of the operations of Lessee for said fiscal year; (9) All proceedings required to be taken to authorize the lease of the Equipment from Lessor and to protect Lessor's interest in such Equipment, free and clear of all liens and encumbrances whatsoever, have been taken; (10) Lessee has no significant liabilities (contingent or otherwise) which are not disclosed by or reserved against the financial statements referred to in 8 above; (11) All the financial statements referred to in 8 above have been prepared in accordance with generally accepted accounting principles and practices applied on a basis consistently maintained throughout the period involved; (12) There has been no change which would have a material adverse effect on the business or financial condition of Lessee from that set forth in the balance sheet referred to in 8 above; (13) No authorization, consent, approval, license, exemption of or filing or registration with any court, governmental unit or department, commission, board, bureau, agency, instrumentality or the like is required or necessary for the valid execution and delivery of the Agreement, any bill of sale, and the other documents and agreements referred to herein; (14) This Master Lease, the Supplements, and any accompanying documents, having been duly authorized, executed and delivered to Lessor, constitute legal, valid and binding obligations of Lessee, enforceable against Lessee in accordance with the terms thereof except as such terms may be limited by bankruptcy, insolvency, or similar laws affecting the enforcement of creditor's rights generally; (15) Each item of Equipment will constitute unused "new Section 38 property" in the hands of Lessor within the meaning of the Internal Revenue Code of 1954, as amended, on the Commencement Date specified in the Supplement pertaining to said item of Equipment; (16) The Equipment is personal property and neither real property nor a fixture; (17) The Equipment will be used for commercial operations only, not for personal, family, or household purposes. (18) As of the Commencement Date of each item of Equipment, a reasonable estimate of the estimated fair market value of such item of Equipment at the end of the lease term thereof will be at least 20% of the Lessor's cost thereof (without including in such value any increase or decrease for inflation or deflation, and after -4- 5 subtracting from such value any cost for removal and delivery of possession of Equipment to Lessor at the end of the lease term thereof); and (19) As of the Commencement Date of each item of Equipment, a reasonable estimate of the estimated useful life of such item of Equipment at the end of the original lease term will be at least two years beyond the lease term thereof. 23. PURCHASE OPTION. Lessor and Lessee hereby agree that so long as no default shall have occurred and be continuing, Lessee shall have the option to purchase the Equipment at the expiration of the lease term for the purchase option price set forth in the applicable Supplement. In order to exercise the option with respect to any given item of Equipment, Lessee must give Lessor written notice at least 90 days prior to the expiration of the lease term with respect thereto, and remit the purchase price in cash to Lessor or its assigns on or before said expiration date. After receipt of the purchase price in accordance with this paragraph, Lessor will transfer to Lessee all of its right, title and interest in the Equipment purchased, as-is, where-is, without recourse, representation or warranty of any kind, express or implied. Fair Market Sales Value for the purpose of this paragraph only shall be determined on the basis of and be equal in amount to the value that would be obtained in a transaction between an informed and willing buyer and an informed and willing seller, and the cost of moving the Equipment from the location of current use shall not be a deduction from such value. 24. CHOICE OF LAW. The rights and liabilities of the parties under this Agreement, and each Supplement, shall be interpreted, enforced and governed in all respects by the laws of the State of California. Lessee hereby consents and subjects itself to the jurisdiction of every local, state, and federal court within the State of California, and agrees that except as otherwise required by law, Lessee shall never file or maintain any action or proceeding in connection with this Agreement, or any Supplement in any court outside the State of California. Lessee hereby agrees that service of process in connection with any such action upon Lessee may be in the manner provided by the laws of the State of California. 25. ATTORNEY FEES AND COSTS. Lessee will pay or reimburse Lessor for all costs and expenses, including repossession, equipment disposition and court costs and attorney's fees (including a reasonable fee for services of salaried counsel employed by Lessor), not offset against amounts recovered or credited as contemplated in paragraph 19 incurred by Lessor in exercising any of its rights or remedies thereunder or enforcing any of the terms, conditions or provisions hereof. This obligation includes the payment or reimbursement of all such amounts whether an action is ultimately filed and whether an action filed is ultimately dismissed. 26. HEADINGS FOR CONVENIENCE ONLY. The headings for the paragraphs and provisions in this Master Lease, as well as the other documents constituting the Agreement, are intended solely for convenience of reference and are not intended nor shall they be used to construe, explain, modify or place any meaning upon any provisions hereof. 27. MODIFICATION. Neither this Master Lease or any other document or Supplement constituting the Agreement can be modified or amended except by written agreement signed and dated by both Lessor and Lessee. 28. COUNTERPARTS. This Master Lease and any other document or Supplement constituting the Agreement may be executed in any number of counterparts. Any document executed in counterparts shall remain one document. Each counterpart is an original instrument. 29. PROVISIONS SEVERABLE. Should any provision of the Agreement be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect the remaining provisions hereof. 30. ENTIRE AGREEMENT. This Master Lease, the Supplements, and all other documents constituting the Agreement constitute the entire agreement between the parties and not other representation or statements shall be deemed binding, nor shall there be any reliance by either Lessor or Lessee upon any representations, agreements, statements, promises, understandings, or inducements made which are not embodied in the written Agreement. Executed on July 1, 1997, at San Jose, State of California. By execution hereof, the signer hereby certifies that he has read this Agreement, and that he is duly authorized to execute this Master Equipment Lease on behalf of Lessee. LESSEE: 3Dfx Interactive, Inc. By: /s/ GARY P. MARTIN ----------------------------------- Name: Gary Martin Title: VP Finance PENTECH FINANCIAL SERVICES, INC. By: /s/ BENJAMIN E. MILLERBIS ----------------------------------- Benjamin E. Millerbis Title: President -5- 6 PENTECH FINANCIAL SERVICES, INC. ACCEPTANCE SUPPLEMENT Supplement No. One to Master Equipment Lease No. 300198 Commencement Date July 1, 1997 Expiration Date June 1, 2000. THIS ACCEPTANCE SUPPLEMENT is executed and delivered by PENTECH FINANCIAL SERVICES, INC. ("Lessor") and 3Dfx Interactive, Inc. ("Lessee"), pursuant to and in accordance with the Master Equipment Lease dated July 1, 1997 between Lessor and Lessee (the "Agreement"), terms defined therein being used herein with the same definitions. A. The Equipment covered by this Acceptance Supplement is described as follows: See attached Equipment Schedule "A" B. Lessee confirms that said equipment has been delivered to it, on the 30th day of June, 1997, duly assembled and installed in good working order and condition, at the following location: 3Dfx Interactive, Inc. 4435 Fortran Dr. San Jose, CA 95134 C. Lessee hereby: (a) confirms that said Equipment is of the size, design, capacity and manufacture selected by it and meets the provisions of any purchase order pursuant to which Lessor has acquired title thereto; and (b) irrevocably accepts said Equipment as-is, where-is for all purposes of the Agreement as of the Commencement Date set forth above. D. The term of lease of said Equipment under the Agreement shall commence as of the Commencement Date set forth above and, unless earlier terminated pursuant to the provisions of the Agreement, shall expire on the Expiration Date set forth above. E. As rent for said Equipment throughout the term of lease referred to in the preceding paragraph D, Lessee shall pay to Lessor in accordance with the terms of the Agreement, 36 consecutive rental payments of $18,784.88 each. Rental payments shall be made monthly. The first Rent Payment Date shall be July 1, 1997, with subsequent rental payments commencing August 1, 1997, and continuing thereafter to and including June 1, 2000. Lessee shall pay an Interim Rent of $N/A for the period from the Commencement Date to the first Rent Payment Date. Lessee shall pay a sales or use tax of $N/A which shall be added to each Rent Payment. F. The insurance required pursuant to Paragraph 11 of the Agreement shall include: 1. PHYSICAL DAMAGE TO ALL EQUIPMENT LEASED UNDER THIS SUPPLEMENT: a. MINIMUM SCOPE OF COVERAGE: FIRE, EXTENDED COVERAGE, VANDALISM, THEFT, AND MALICIOUS MISCHIEF; b. Minimum Dollar Limits of Coverage: Not less than the higher of the Stipulated Loss Value at the time of payment to Lessor of insurance proceeds or fair market value immediately prior to the physical damage of each item of Equipment leased hereunder; c. Maximum Deductibles: Not more than $1,000.00 per occurrence. Lessee is liable for all deductible amounts. -6- 7 2. PUBLIC LIABILITY. a. Minimum Scope of Coverage: Public liability including bodily injury and property damage; b. Minimum Dollar Limits of Coverage: (i) Bodily Injury: $1,000,000. per person per occurrence and $1,000,000. aggregate per occurrence; and (ii) Property Damage: $1,000,000. per occurrence; c. Maximum Deductibles: Not more than $1,000.00 per occurrence. Lessee is liable for all deductible amounts. G. Lessor has made certain tax assumptions pursuant to Section 13 of the Agreement. These assumptions are as follows: 1. The Accelerated Cost Recovery System (ACRS) property class for the Equipment is 5 years. 2. The Depreciation Method is the method selected by the Lessor's tax department as being more favorable to Lessor, given the facts and circumstances of each transaction. H. The purchase option price for the Equipment pursuant to paragraph 23 of the Agreement shall be either: (check one box) [ ] a price equal to the then appraised Fair Market Sales Value of the Equipment, as determined (at Lessee's expense) by an independent appraiser selected by Lessor; or [X] the sum of $57,062.20. The purchase price shall be payable as set forth in Paragraph 23 of the Agreement. I. All provisions of the Agreement are hereby incorporated by reference in this Acceptance Supplement to the same extent as if they were set forth at length herein. APPROVED AND AGREED to by the parties hereto as of the Commencement Date set forth above. LESSOR: PENTECH FINANCIAL SERVICES, INC. LESSEE: 3Dfx Interactive, Inc. The undersigned affirms that he is duly authorized to execute and deliver this Acceptance Supplement on behalf of Lessee. By: /s/ BENJAMIN E. MILLERBIS By: /s/ GARY MARTIN -------------------------------- ----------------------------------- BENJAMIN E. MILLERBIS Name: Gary Martin Title: President Title: VP Finance -7- 8 PENTECH FINANCIAL SERVICES, INC. MASTER EQUIPMENT LEASE NO. 300198 ACCEPTANCE SUPPLEMENT NO. One PAGE 1 OF 2 SCHEDULE A EQUIPMENT VENDOR: ACCLAIM TECHNOLOGY, INC., 2125 HAMILTON AVE., SAN JOSE, CA 95125
ITEM NO. QUANTITY DESCRIPTION (TYPE, MODEL AND/OR SERIAL NUMBER) - ---------------- ------------- ----------------------------------------------------------------------- 1 8 S-A14UEC19S8CD ULTRA ENT.2 MODEL 1300, 300MHZ 128MB, 4.2 S/N'S 720F032F, 720F0330, 720F0336, 720F0337, 720F033B, 720F033D, 720F0349, 720F03B9 2 32 S-X132P-B 32MB MEMORY EXPANSION BLT 3 64 S-X7003A 128MB SIMMS EXPANSION KIT 4 8 S-X311L N. AMER/ASIA POWER CORD KIT 5 8 1-A00 INH BASE (BASIC CHRGE PER CPU) 6 144 1-A01 INHBCPU INT MEM INTEG & TEST TOTAL INVOICE AMOUNT $174,560.40 - -------------------------------------------------------------------------------------------------------------
VENDOR: CHORD SYSTEMS, INC., 2155 S. BASCOM AVE., SUITE 106, CAMPBELL, CA 95008
ITEM NO. QUANTITY DESCRIPTION (TYPE, MODEL AND/OR SERIAL NUMBER) - ---------------- ------------- ----------------------------------------------------------------------- 1 8 A3227128 AXIL ULTIMA 200E WORKSTATIONS, S/N'S U02129, U02127, U02144, U02143, U02135, U02116, U02125, U02115 2 44 C021-64 64 MBYTE SIMM FOR ULTRASPARC OR SPARC 20 3 8 D4043 R.3 GB DISK DRIVE 4 1 DOUBLE SPEED CDROM DRIVE & CABLE TOTAL INVOICE AMOUNT $99,203.27 - -------------------------------------------------------------------------------------------------------------
LESSOR: PENTECH FINANCIAL SERVICES, INC. LESSEE: 3DFX INTERACTIVE, INC. By: /s/ BENJAMIN E. MILLERBIS By: /s/ GARY MARTIN ----------------------------------- --------------------------------- Benjamin E. Milleis Name: Gary Martin Title: President Title: VP Finance Date: 7/1/97 Date: 6/30/97 -8- 9 PENTECH FINANCIAL SERVICES, INC. MASTER EQUIPMENT LEASE NO. 300198 ACCEPTANCE SUPPLEMENT NO. One PAGE 2 OF 2 SCHEDULE A EQUIPMENT VENDOR: CHORD SYSTEMS, INC., 2155 S. BASCOM AVE., SUITE 106, CAMPBELL, CA 95008
ITEM NO. QUANTITY DESCRIPTION (TYPE, MODEL AND/OR SERIAL NUMBER) - ---------------- ------------- ----------------------------------------------------------------------- 1 2 A3227128 AXIL ULTIME 200E WORKSTATIONS, S/N'S U02120, U02128 2 8 C21-256 256 MBYTE KIT (2X128MB) FOR ULTRA 1:140, 170 170E 3 2 D4043 4.3GB DISK DRIVE 4 10 S7101 LSF HOST LICENSE 5 10 S7103 SUPPORT LICENSE TOTAL INVOICE AMOUNT $53,262.98 - -------------------------------------------------------------------------------------------------------------
VENDOR: SYNOPSYS, INC., 700 E. MIDDLEFIELD RD., MOUNTAIN VIEW, CA 94043
ITEM NO. QUANTITY DESCRIPTION (TYPE, MODEL AND/OR SERIAL NUMBER) - ---------------- ------------- ----------------------------------------------------------------------- 1 3 00068-000 HDL COMPILER VERILOG, LIC, NE 2 3 00063-000 DESIGN COMPILER EXPERT, LIC, NE 3 3 00053-000 HDL COMPILER VERILOG, UPD, NE 4 3 00018-000 DC EXPERT, UPD, NE 5 1 01575-000 SVCS SITE SERVICE TOTAL INVOICE AMOUNT $243,595.33 - --------------------------------------------------------------------------------
GRAND TOTAL: $570,621.98 LESSOR: PENTECH FINANCIAL SERVICES, INC. LESSEE: 3DFX INTERACTIVE, INC. By: /s/ BENJAMIN E. MILLERBIS By: /s/ GARY MARTIN ----------------------------------- --------------------------------- Benjamin E. Millerbis Name: Gary Martin Title: President Title: VP Finance Date: 7/1/97 Date: 6/30/97 -9- 10 AMENDMENT TO EQUIPMENT SCHEDULE "A" This is an Amendment to Equipment Schedule "A" to that certain Equipment Lease Agreement No. 300198, Supplement No. One, dated July 1, 1997, between Pentech Financial Services, Inc. ("Lessor") and 3Dfx Interactive, Inc. ("Lessee"). The following equipment should be deleted from said schedule: VENDOR: ACCLAIM TECHNOLOGY, INC., 2125 HAMILTON AVE., SAN JOSE, CA 95125
ITEM NO. QUANTITY DESCRIPTION (TYPE, MODEL AND/OR SERIAL NUMBER) - ---------------- ------------- ----------------------------------------------------------------------- 2 32 S-X132P-B 32MB MEMORY EXPANSION BLT 3 64 S-X7003A 128MB SIMMS EXPANSION KIT - -------------------------------------------------------------------------------------------------------------
Except as herein amended, all other terms and conditions of the Lease and Schedule shall remain in full force and effect. LESSOR: PENTECH FINANCIAL SERVICES, INC. LESSEE: 3DFX INTERACTIVE, INC. By: /s/ BENJAMIN E. MILLERBIS By: /s/ GREG BALLARD ---------------------------------- -------------------------------- Benjamin E. Millerbis Greg Ballard Title: President Title: President Date: Date: -------------------------------- ------------------------------ -10- 11 CERTIFICATE OF SECRETARY AS To ADOPTION OF RESOLUTIONS (Corporate Customer) The undersigned, Gary Martin (Corporate Secretary) hereby certifies that he/she is now, and at all times herein mentioned has been, the duly elected, qualified and acting Secretary of June 30, 1997 (Name of Corporation) a duly organized and existing corporation, and in charge of the minute book and corporate records of said corporation; that the following is a full, true and correct copy of certain resolutions adopted by the Board of Directors of said corporation at a meeting thereof duly held on _____________________________________ (Date), at which meeting a quorum of said Board was at all times present and acting; and that said resolutions have not been modified nor rescinded and are at the date of this certificate in full force and effect: WHEREAS it is in the best interest of this corporation to enter into a certain Equipment Lease Agreement, Equipment Financing Agreement or other agreement with Pentech Financial Services, Inc. ("Lessor/Secured Party") and, where appropriate, commitments now or hereafter contemplating the receipt by this corporation of financial accommodation from Lessor/Secured Party under the terms and conditions of said Equipment Lease Agreement, Equipment Financing Agreement or other agreement and may in the future be in this corporation's best interests to enter into further such agreements or other agreements with Lessor/Secured Party. NOW THEREFORE BE IT RESOLVED: That the officers of this corporation listed below, and each of them, are hereby authorized and directed to execute, acknowledge and deliver in the name of and on behalf of this corporation said Equipment Lease Agreement, Equipment Financing Agreement or other agreement, said commitments and any such further agreement. RESOLVED FURTHER: That the officers, agents and employees of this corporation be and each of them is hereby authorized and empowered to do and perform such other acts and things, and to make, execute, acknowledge, procure and deliver all such other instruments and documents, on behalf of this corporation as may be necessary or be by such officer, agent or employee deemed appro priate to comply with, or to evidence compliance with, the terms, conditions or provisions of said Equipment Lease Agreement, Equipment Financing Agreement or other agreement, any such commitment or any said further agreement and to consummate the transactions from time to time contemplated thereby. RESOLVED FURTHER: That this corporation hereby ratifies and confirms the acts of the officer, agents or employees of this corporation in heretofore entering into any Equipment Lease Agreement, Equipment Financing Agreement, commitment or other agreement with Lessor/Secured Party together with any other acts performed in relation thereto. RESOLVED FURTHER: That the Secretary of this corporation be and he/she is hereby authorized and directed to execute, acknowledge and deliver a certified copy of these resolutions to Lessor/Secured Party and any other person or agency which may require a copy of these resolutions. RESOLVED FURTHER: That the following are the true names and specimen signatures of the incumbent officers of this corporation authorized by these resolutions to so execute, acknowledge and deliver said Equipment Lease Agreement, Equipment Financing Agreement or other agreement, said commitments and said further agreements. (Type names below) (For Signature) , President /s/ GARY MARTIN ------------------------ ------------------------------- GARY MARTIN , Vice Pres. /s/ GARY MARTIN ------------------------ ------------------------------- GARY MARTIN , Secretary ------------------------ ------------------------------- GREG BALLARD , /s/ GREG BALLARD ------------------------ (Title) ------------------------------- RESOLVED FURTHER: That Lessor/Secured Party is authorized to act upon these resolutions until written notice of the revocation thereof is delivered to Lessor/Secured Party, any such revocation in no way to affect the obligations of this corporation to Lessor/Secured Party under any agreements entered into by this corporation pursuant to the terms of these resolutions prior to receipt by Lessor/Secured Party of such notice of revocation. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of July 1, 1997. /s/ GARY MARTIN ------------------------------ (Secretary) -11- 12 Date: July 1, 1997 Mr. Gary Martin 3Dfx Interactive, Inc. 4435 Fortran Drive San Jose, CA 95134 Re: Lease No. 300198 Dear Mr. Martin: You have entered into an Equipment Lease Agreement with us dated as of July 1, 1997 (the "Lease") which covers certain property more fully described in the Lease (the "Equipment). You and we hereby agree that you will purchase AS-IS-WHERE-IS our interest in all, but not less than all, of the Equipment leased or otherwise included under the Lease at the expiration of the term thereof for $57,062.20. As contemplated under the Lease, the term Equipment includes any software as to which we have advanced funds pursuant to the Lease, whether we purchased the software or advanced the purchase price on your behalf of or for your license of the software. As indicated above, our transfer is without representation or warranty. Accordingly, you will be obligated to pay us the purchase price for any relevant software even though we will not necessarily be transferring anything to you and even though any license you or we have for such software may have expired. You also agree to pay us said purchase price together with all taxes on or measured by such purchase price prior to expiration of the term of the Lease. By our respective execution hereof in the space provided below you and we acknowledge the terms and conditions hereof. Yours Very Truly BY: /s/ BENJAMIN E. MILLERBIS ---------------------------------- Acknowledged and Agreed as of July 1, 1997 --------------------- (Lease Execution Date) 3Dfx Interactive, Inc. - ------------------------------------- (Company Name) BY: /s/ GARY MARTIN ---------------------------------- (title) BY: Gary Martin/VP Finance ---------------------------------- (title) -12- 13 PENTECH FINANCIAL SERVICES, INC. MASTER EQUIPMENT LEASE NO. 300198 ACCEPTANCE SUPPLEMENT NO. ONE SCHEDULE C STIPULATED LOSS PERCENTAGE VALUE Terms defined in the Agreement shall have the same meanings when used herein.
- ------------------------------------------------------------------------------------------------------------- Rent Payment Stipulated Loss Rent Payment Stipulated Loss Rent Payment Stipulated Loss Value Percentage Value Percentage Value Percentage 1 120.00 19 84.00 2 118.00 20 82.00 3 116.00 21 80.00 4 114.00 22 78.00 5 112.00 23 76.00 6 110.00 24 74.00 7 108.00 25 72.00 8 106.00 26 70.00 9 104.00 27 68.00 10 102.00 28 66.00 11 100.00 28 64.00 12 98.00 30 62.00 13 96.00 31 60.00 14 94.00 32 58.00 15 92.00 33 56.00 16 90.00 34 54.00 17 88.00 35 52.00 18 86.00 36 50.00 - -------------------------------------------------------------------------------------------------------------
Dated: JULY 1, 1997 PENTECH FINANCIAL SERVICES, INC. LESSEE: 3DFX INTERACTIVE, INC. LESSOR The undersigned affirms that he is duly authorized to execute and deliver this Acceptance Supplement on behalf of Lessee. By: /s/ BENJAMIN E. MILLERBIS By: /s/ GARY MARTIN -------------------------------- ------------------------------------ Title: PRESIDENT Title: C.F.O. & V.P. Finance/Admin. -13- 14 BILL OF SALE This Bill of Sale, dated as of July 1, 1997, from 3Dfx Interactive, Inc., hereinafter called "Seller" to Pentech Financial Services, Inc., hereinafter called "Purchaser." WITNESSETH In consideration of the receipt of $570,621.98, and other valuable consideration, the receipt of which is hereby acknowledged, Seller does hereby sell, assign, transfer, convey and deliver to Purchaser the equipment and other property (collectively the "Equipment") described or otherwise referred to in Exhibit "A" attached hereto and incorporated herein by this reference. Seller covenants and warrants that: A. It is the owner of, and has absolute title to, each and every item of the Equipment free and clear of any claim, lien, or encumbrance of any kind whatsoever. B. It has not made any prior sale, assignment or transfer of any item of any interest in any of the Equipment to any person, firm or corporation. C. It has the present right, power and authority to sell, assign and transfer each and every item of the Equipment to Pentech Financial Services, Inc. D. Each and every item of the Equipment is in good repair, condition and working order. E. All acts, proceedings and this necessary and required by law and the articles of incorporation and bylaws of Seller to make this Bill of Sale a valid, binding and legal obligation of Seller have been done, taken and have happened; and the execution and delivery hereof have in all respects have been duly authorized in accordance with law, and said articles of incorporation and bylaws. Seller shall forever warrant and defend the sale, assignment, transfer, conveyance and delivery of each and every item of the Equipment to Pentech Financial Services, Inc., its successors and assign, against each and every person whomsoever claiming the same. Possession of said property and equipment shall not be transferred to Purchaser but shall be retained by Seller, it being the intention of Purchaser to lease said property and equipment to Seller. This Bill of Sale is binding upon the successors and assigns of Seller and inures to the benefit of the successors and assigns of Purchaser. IN WITNESS WHEREOF, Seller has caused this Bill of Sale to be executed on the day and year first above appearing, by and through an officer thereunto duly authorized. 3Dfx Interactive, Inc. - ----------------------------------- By: /s/ L. GREGORY BALLARD -------------------------------- L. GREGORY BALLARD - ----------------------------------- (print or type name and title) -14- 15 MASTER LEASE INSURANCE INFORMATION DATE: July 1, 1997 TO: Jan Kellogg Minet Insurance 1530 Page Mill Rd. Palo Alto, CA 94304-1125 Dear Ms. Kellogg: Under the terms of a Master Lease Agreement with Pentech Financial Services, Inc., we are required to provide Physical Damage and Public Liability Insurance coverage on the equipment described in Acceptance Supplement No. One to Master Lease No. 300198. EQUIPMENT LOCATION: As indicated on the Acceptance Supplement. TYPE AND AMOUNT OF COVERAGE REQUIRED: As specified under paragraph F of the Acceptance Supplement. TERMS OF LOSS PAYABLE AND ADDITIONAL INSUREDS ENDORSEMENTS: Loss Payees (Form BFU or its equivalent) and Additional Insureds to be shown as both: Pentech Financial Services, Inc. Imperial Business Credit, Inc. 310 West Hamilton Avenue, Suite 202 AND 16935 West Bernardo Drive Campbell, CA 95008 Suite 150 San Diego, CA 92127 The policy of insurance must include the following: 1. A provision for thirty (30) days written notice to the above payee(s) prior to any cancellation, alteration or modification. 2. The above payee(s) to be shown as sole Loss Payee(s) and Additional Insured(s) with respect to the described equipment. Please provide either a Certificate of Insurance or a copy of the policy itself showing appropriate endorsements IMMEDIATELY to PENTECH FINANCIAL SERVICES, INC. at the above address. Very truly yours, Lessee: 3Dfx Interactive, Inc. By /s/ GARY MARTIN -------------------------------------- Name Gary Martin ------------------------------------ Title V.P. Finance ----------------------------------- -15- EX-11.1 4 STATEMENT OF NET INCOME (LOSS) PER SHARE 1 EXHIBIT 11.1 3DFX INTERACTIVE, INC. COMPUTATION OF NET INCOME (LOSS) PER SHARE (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED SIX MONTHS ENDED JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996 ------------------- ------------------- ---------------- ---------------- Net loss........................ (1,753) $ (4,390) $ (2,916) $ (7,042) ======= ======== ======== ======== Weighted average common shares 9,261 1,918 8,971 1,881 outstanding Weighted average common -- 5,401 -- 4,960 equivalent shares related to convertible preferred stock (using if-converted method) Common equivalent shares 945 2,834 1,890 2,834 relating to stock options and warrants issued (using the treasury stock method) subsequent to April 15, 1996 ------- -------- -------- -------- Shares used in computing net.... 10,206 10,153 10,861 9,675 loss per share ------- -------- -------- -------- Net loss per share.............. $ (0.17) $ (0.43) $ (0.27) $ (0.73) ======= ======== ======== ========
25 EX-27.1 5 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 32,764 0 5,224 (110) 2,083 41,579 6,192 (2,100) 45,734 7,430 0 0 0 62,068 (24,107) 45,734 9,937 11,754 5,860 14,579 27 0 64 (2,916) 0 0 0 0 0 (2,916) (0.27) 0
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