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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 1998
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)
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CALIFORNIA 77-0390421
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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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 [X] No [ ]
As of April 30, 1998 there were 15,335,590 shares of the Registrant's
Common Stock outstanding.
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3DFX INTERACTIVE, INC.
FORM 10-Q
INDEX
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PAGE
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Cover Page.................................................. 1
Index....................................................... 2
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PART I. FINANCIAL INFORMATION
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Item 1. Financial statements
Condensed Consolidated Balance Sheets -- March 31, 1998 and
December 31, 1997......................................... 3
Condensed Consolidated Statements of Operations -- Three
Months Ended March 31, 1998 and March 31,1997............. 4
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended March 31, 1998 and March 31,1997............. 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings................................... 25
Item 6. Exhibits and Reports on Form 8-K.................... 25
Signatures.................................................. 26
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ITEM 1. FINANCIAL STATEMENTS
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
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Assets:
Cash and cash equivalents................................. $ 62,750 $ 28,937
Short-term investments.................................... 30,351 5,984
Accounts receivable, net.................................. 37,706 13,387
Inventory................................................. 15,635 3,845
Other current assets...................................... 1,802 2,400
-------- --------
Total current assets.............................. 148,244 54,553
Property and equipment, net............................... 7,502 6,816
Other assets.............................................. 493 548
-------- --------
$156,239 $ 61,917
======== ========
Liabilities and Shareholders' Equity:
Line of credit............................................ $ 486 $ 777
Accounts payable.......................................... 34,405 12,573
Accrued liabilities....................................... 13,502 2,969
Current portion of capitalized lease obligations.......... 599 778
-------- --------
Total current liabilities......................... 48,992 17,097
-------- --------
Capitalized lease obligations, less current portion......... 421 546
-------- --------
Shareholders' equity:
Common Stock.............................................. 121,685 66,717
Warrants.................................................. 242 242
Deferred compensation..................................... (1,060) (1,181)
Accumulated deficit....................................... (14,041) (21,504)
-------- --------
Total shareholders' equity........................ 106,826 44,274
-------- --------
$156,239 $ 61,917
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
--------------------------
1998 1997
---------- ------------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
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Revenues.................................................... $50,008 $ 5,247
Cost of revenues............................................ 25,730 2,582
------- -------
Gross profit................................................ 24,278 2,665
------- -------
Operating expenses:
Research and development.................................. 5,826 1,953
Selling, general and administrative....................... 9,638 1,846
------- -------
Total operating expenses.......................... 15,464 3,799
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Income (loss) from operations............................... 8,814 (1,134)
Interest and other income (expense), net.................... 514 (27)
------- -------
Income (loss) before income taxes........................... 9,328 (1,161)
Provision for income taxes.................................. 1,866 --
------- -------
Net income (loss)........................................... $ 7,462 $(1,161)
======= =======
Net income (loss) per share
Basic..................................................... $ 0.57 $ (0.13)
======= =======
Diluted................................................... $ 0.50 $ (0.13)
======= =======
Shares used in net income (loss) per share calculations
Basic..................................................... 13,107 9,226
------- -------
Diluted..................................................... 15,012 9,226
------- -------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
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(IN THOUSANDS)
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Cash flows from operating activities:
Net income (loss)......................................... $ 7,462 $(1,161)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation........................................... 894 385
Stock compensation..................................... 121 121
Increase in allowance for doubtful accounts............ 1,456 50
Changes in assets and liabilities:
Accounts receivable.................................. (25,775) (2,642)
Inventory............................................ (11,790) 1,961
Other assets......................................... 653 (575)
Accounts payable..................................... 21,832 (842)
Accrued liabilities.................................. 10,533 99
Deferred revenue..................................... -- 800
-------- -------
Net cash provided by (used in) operating activities.... 5,386 (1,804)
-------- -------
Cash flows from investing activities:
Purchases of short-term investments....................... (24,367) --
Purchases of property and equipment....................... (1,580) (334)
-------- -------
Net cash used in investing activities.................. (25,947) (334)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock,
net.................................................... -- 521
Proceeds from secondary public offering, net.............. 54,830 --
Proceeds from issuance of Common Stock, net............... 139 44
Principal payments of capitalized lease obligations,
net.................................................... (304) (150)
(Payments) proceeds on drawdown on line of credit, net...... (291) 573
-------- -------
Net cash provided by financing activities.............. 54,374 988
-------- -------
Net increase (decrease) in cash and cash equivalents........ 33,813 (1,150)
-------- -------
Cash and cash equivalents at beginning of period............ 28,937 5,291
-------- -------
Cash and cash equivalents at end of period.................. $ 62,750 $ 4,141
======== =======
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest.................. $ 58 $ 63
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</TABLE>
See accompanying notes to condensed consolidated financial statements.
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3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the design, development
and marketing of 3D media processors specifically designed for interactive
electronic entertainment applications.
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information or footnote disclosure
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
information included therein. While the Company believes that the disclosures
are adequate to make the information not misleading, it is suggested that these
financial statements be read in conjunction with the audited financial
statements and accompanying notes included in the Company's Prospectus dated
March 6, 1998 filed as part of a Registration Statement on Form S-1 (Reg. No.
333-25365), as amended, and the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 as filed with the Securities and Exchange
Commission. The results of operations for the quarter ended March 31, 1998 are
not necessarily indicative of the results to be expected for the full year.
Three customers represented 41%, 22%, and 13% and two customers represented
59%, and 15% of the Company's revenue during the three months ended March 31,
1998 and 1997, respectively.
NOTE 2 -- PUBLIC OFFERINGS:
In March 1998, the Company completed its secondary public offering of
2,900,000 shares of common stock at a price of $23.75 per share. Of the
2,900,000 shares offered, 2,028,140 were sold by the Company and 871,860 were
sold by selling shareholders. The Company received cash of approximately $45.5
million, net of underwriting discounts and commissions and other offering costs.
The Company did not receive any of the proceeds from the sale of shares by the
selling shareholders. On March 23, 1998, the Company's underwriters exercised an
option to purchase an additional 435,000 shares of common stock at a price of
$23.75 per share to cover over-allotments. The Company received cash of
approximately $9.3 million, net of underwriting discounts and commissions and
other offering costs.
In June 1997, the Company completed its initial public offering and issued
3,000,000 shares of its common stock to the public at a price of $11.00 per
share. The Company received cash of approximately $30.4 million, net of
underwriting discounts and commissions. Upon the 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 $3.9 million,
net of underwriting discounts and commissions.
NOTE 3 -- DEVELOPMENT CONTRACT:
In February 1997, the Company entered into a development and license
agreement with Sega Enterprises, Ltd. ("Sega"), under which the Company is
entitled to receive development contract revenues and royalties based upon a
cumulative volume of units sold by Sega which include the Company's product. The
Company recognized development contract revenues of $1,817,000 in the year ended
December 31, 1997, of which $750,000 was recognized in the first quarter of
fiscal 1997, representing a non-refundable amount due for the delivery of
certain engineering designs and revenue recognized under the percentage of
completion method of accounting. The Company has no further obligations to Sega
with regard to the $1,817,000 of
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3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
development contract revenue recognized. The Company has an outstanding
receivable for $267,000 related to the Sega agreement which in light of the
litigation noted below, is classified as a long-term asset. The Company did not
earn any royalty revenue in the year ended December 31, 1997. Costs incurred
during the period relating to this contract are included in research and
development expense.
In July 1997, Sega terminated the development and license agreement with
the Company. In August 1997, the Company filed a lawsuit against Sega alleging
breach of contract, interference with the contract, misrepresentation, unfair
competition and threatened misappropriation of trade secrets. Discovery in the
case is presently under way. There can be no assurance that this litigation will
be resolved in the Company's favor. The resolution of this matter could have a
material adverse impact on the Company's financial position, results of
operations and liquidity. No future revenues will be recognized under the Sega
agreement.
NOTE 4 -- RELATED PARTY TRANSACTIONS
In April 1997, an officer of the Company resigned and subsequently founded
Quantum3D, Inc., a supplier of advanced graphic subsystems based on 3Dfx
technology. As of March 31, 1998, the Company has an outstanding trade
receivable from Quantum3D, Inc. of approximately $290,000. The Company believes
its reserves are adequate as it relates to this receivable.
NOTE 5 -- EARNINGS (LOSS) PER SHARE:
During the quarter ended December 31, 1997, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128).
Basic earnings (loss) per share is computed using the weighted average number of
common shares outstanding during the periods. Diluted earnings (loss) per share
is computed using the weighted average number of common and potentially dilutive
common shares during the periods, except those that are antidilutive. SFAS 128
requires a reconciliation of the numerators and denominators of the basic and
diluted per share computations as follows (in thousands, except per share data):
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THREE MONTHS ENDED
MARCH 31,
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1998 1997
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Net income (loss) available to common shareholders
(numerator)............................................... $ 7,462 $(1,161)
Weighted average common shares outstanding (denominator for
basic computation)........................................ 13,107 9,226
Effect of dilutive securities -- common stock equivalents... 1,905 --
------- -------
Weighted average shares outstanding (denominator for diluted
computation).............................................. 15,012 9,226
======= =======
Basic earnings (loss) per share............................. $ 0.57 $ (0.13)
======= =======
Diluted earnings (loss) per share........................... $ 0.50 $ (0.13)
======= =======
</TABLE>
During the quarter ended March 31, 1997, options to purchase approximately
365,700 shares were outstanding but not included in the computation because they
were antidilutive.
NOTE 6 -- INCOME TAXES:
The Company recorded for the three months ended March 31, 1998 an effective
tax rate of 20%. The effective tax rate is different from the statutory rate due
to the utilization of federal and state net operating loss carryforwards and tax
credits. No provision for income taxes was recorded in the three months ended
March 31, 1997 as the Company incurred losses during such period.
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3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- COMPREHENSIVE INCOME:
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This Statement
establishes standards for reporting and displaying comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Such items may include foreign currency
translation adjustments, unrealized gains/losses from investing and hedging
activities, and other transactions. Comprehensive income for each of the three
months ended March 31, 1998 and 1997 is equal to net income.
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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 revenue growth; the sentences
in the second paragraph under "Overview" regarding availability of Banshee; the
last sentence in the second paragraph under "Overview" regarding expected
customer concentration; the sentence in the third paragraph under "Overview" and
the first paragraph under "Results of Operations" regarding the Sega Agreement;
the sentence in the fourth paragraph under "Overview" regarding availability of
raw materials; the sentence in the third paragraph under "Results of Operations"
regarding factors affecting gross margin; the sentences in the fourth and fifth
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 net losses in every quarter
since inception except the fourth quarter of fiscal 1997 and the first quarter
of fiscal 1998. The Company incurred net losses of approximately $5.0 million,
$14.8 million and $1.7 million in 1995, 1996 and 1997, respectively. The Company
generated net income of $7.5 million in the three months ended March 31,1998 and
incurred a net loss of $1.2 million in the three months ended March 31, 1997.
The Company had an accumulated deficit of $14.0 million at March 31, 1998. These
net losses incurred were attributable to the lack of substantial revenue and
continuing significant costs incurred in the research, development and testing
of the Company's products. Although the Company has experienced revenue growth
in recent periods, historical growth rates will not be sustained and are not
indicative of future operating results. There can be no assurance that
significant revenues or profitability will be sustained or increased on a
quarterly or annual basis in the future.
The Company derives revenue from the sale of 3D media processors designed
for use in PCs, coin-op arcade and location based entertainment ("LBE") systems.
The Company began commercial shipments of its first 3D graphics product, the
Voodoo Graphics chipset, in September 1996. The Company's second product, the
Voodoo Rush chipset began commercial shipments in April 1997. The Company's
third product, Voodoo2, became commercially available in the first quarter of
1998. The Company has also commenced development of Banshee, which is intended
to be a high performance, full-featured single chip 3D/2D media processor for
the PC markets. As a result of the Company's limited operating history and early
stage of development, it has only a limited number of customers. Revenues
derived from sales to Diamond Multimedia Systems, Inc. ("Diamond"), Elitetron
Electronic Co., Ltd ("Elitetron") and Creative Technology, Ltd. ("Creative")
accounted for approximately 41%, 22% and 13%, respectively, of revenues for the
first quarter of fiscal 1998. Revenues derived from sales to Diamond and WMS
Industries, Inc. ("Williams") accounted for approximately 59%and 15%,
respectively of revenues for the first quarter in fiscal 1997. The Company
expects that a small number of customers will continue to account for a
substantial portion of its total revenues for the
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foreseeable future. The loss of any one of these customers could have a material
impact on the Company's results of operations, cash flows, or financial
position.
In February 1997, the Company and Sega entered into a Technology
Development and License Agreement ("the Sega Agreement") pursuant to which the
Company began developing a 3D media processor chipset for Sega's next generation
home game console. During 1997, the Company recognized development contract
revenues of $1.8 million under the Sega Agreement representing 4.1% and 1.4% of
total revenues during the year ended December 31,1997 and the three months ended
March 31, 1997, respectively. In July 1997, Sega terminated the Sega Agreement.
In August 1997, the Company filed a lawsuit against Sega, and in October 1997,
filed an amended complaint naming as additional defendants NEC Corporation
("NEC") and VideoLogic Group Plc ("VideoLogic"). The complaint alleges breach of
contract, interference with contract, misrepresentation, unfair competition, and
threatened misappropriation of trade secrets. Discovery in the case is currently
being conducted. The Company expects to incur significant legal expenses in
connection with this litigation which could have a material adverse effect on
the Company's financial condition and results of operations. In addition,
pursuing this litigation is likely to result in the diversion of management's
attention from the day-to-day operations of the business. There can be no
assurance that the litigation will be resolved in the Company's favor or that
the litigation will be resolved quickly. Any prolonged litigation could have a
material adverse effect on the Company's business, financial condition and
results of operations. An adverse outcome of the litigation could have a
material adverse effect on the Company's business, financial condition and
results of operations.
As part of its manufacturing strategy, the Company leverages the expertise
of third party suppliers in the areas of wafer fabrication, assembly, quality
control and assurance, reliability and testing. This strategy allows the Company
to devote its resources to research and development and sales and marketing
activities while avoiding the significant costs and risks associated with owning
and operating a wafer fabrication facility and related operations. The Company
does not manufacture the semiconductor wafers used for its products and does not
own or operate a wafer fabrication facility. All of the Company's wafers are
currently manufactured by Taiwan Semiconductor Manufacturing Corporation
("TSMC") in Taiwan. The Company obtains manufacturing services from TSMC on a
purchase order basis. The Company provides TSMC with a rolling six month
forecast of its supply needs and TSMC builds to the Company's orders. The
Company purchases wafers and die from TSMC. Once production yield for a
particular product stabilizes, the Company pays an agreed price for wafers
meeting certain acceptance criteria pursuant to a "good die" only pricing
structure for that particular product. Until production yield for a particular
product stabilizes, however, the Company must pay an agreed price for wafers
regardless of yield. Such wafer and die purchases constitute a substantial
portion of cost of products revenues once products are sold. TSMC is responsible
for procurement of raw materials used in the production of the Company's
products. The Company believes that raw materials required are readily
available. The Company's products are packaged and tested by a third party
subcontractor, Advanced Semiconductor Engineering Group ("ASE"). Such assembly
and testing is conducted on a purchase order basis rather than under a long-term
agreement.
In connection with the grant of stock options to employees since inception
(August 1994) through the effective date of the Company's IPO, the Company
recorded aggregate deferred compensation of approximately $1.9 million,
representing the difference between the deemed fair value of the Common Stock
for accounting purposes and the option exercise price at the date of grant. This
amount is presented as a reduction of shareholders' equity and is amortized
ratably over the vesting period of the applicable options. These valuations
resulted in charges to operations of $484,000 (of which $194,000 and $290,000
were recorded in research and development expenses and selling, general and
administrative expenses, respectively), $196,000 (of which $50,000 and $146,000
were recorded in research and development expenses and selling, general and
administrative expenses, respectively) and $121,000 (of which $48,000 and
$73,000 were recorded in research and development expenses and selling, general
and administrative expenses, respectively) in the years ended December 31, 1997
and 1996 and the three months ended March 31, 1998, respectively, and will
result in charges over the next 9 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).
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RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Revenues. Revenues from product sales are recognized upon product shipment.
The Company's total product revenues were $50.0 million in the three months
ended March 31, 1998, and $5.2 million in the three months ended March 31, 1997.
Revenues in the three months ended March 31,1997 included $750,000 of
development contract revenues earned under the Sega Agreement which was
terminated by Sega in July 1997. No future revenues will be recognized under the
Sega Agreement.
Revenues in the three months ended March 31, 1998 were principally
attributable to sales of the Company's Voodoo2 and Voodoo Graphics chipsets.
Substantially all of the revenues in the three months ended March 31, 1997 were
derived from sale of the Company's Voodoo Graphic chipset and, to a lesser
extent, sale of Obsidian graphics subsystems.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of revenues consists primarily of costs associated with the
purchase of components, the procurement of semiconductors and printed circuit
board assemblies from the Company's contract manufacturers, labor and overhead
associated with such procurement and warehousing, shipping and warranty costs.
Cost of revenues does not include expenses related to development contract
revenues. Cost of revenues increased 897% from $2.6 million in the first quarter
of fiscal 1997 to $25.7 million in the first quarter of fiscal 1998. Gross
profit as a percentage of revenues was 51% and 49% in the first quarters of 1997
and 1998, respectively. The increase in cost of revenues resulted from the
significant increase in revenues in the three months ended March 31, 1998 as
compared with the same period in 1997. Given the Company's limited operating
history and limited history of product shipments, the Company believes that an
analysis of gross profit as a percentage of total revenues is not meaningful.
The Company's future gross profit will be affected by the overall level of
sales; the mix of products sold in a period; manufacturing yields; and the
Company's ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
the Company's foundries in connection with manufacturing start-up of new
products. In addition, costs associated with development contracts are included
in research and development. Research and development expenses increased 198%
from $2.0 million in the three months ended March 31, 1997 to $5.8 million in
the three months ended March 31, 1998. The increase reflects an increase in
personnel costs, common cost allocations and non-recurring engineering costs
resulting from the commencement of manufacturing of the Voodoo 2 chipset and the
development of the Banshee chip. 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 422% from $1.8 million in
the three months ended March 31, 1997 to $9.6 million in the three months ended
March 31, 1998. The increase resulted primarily from the addition of personnel
in sales, marketing, finance and administration as the Company expanded
operations, increased commission expenses and general bad debt reserves
associated with the increase in commercial sales and increased involvement in
tradeshow and advertising activities. The Company expects that selling, general
and administrative expenses will increase in absolute dollars in future periods,
although such expenses as a percentage of total revenues will fluctuate.
Interest and Other Income(Expense), Net. Interest and other income, net
increased from net interest and other expense of $27,000 in the three months
ended March 31, 1997 to net interest and other income of $514,000 in the three
months ended March 31, 1998. The increase is related to increased earnings from
investments of higher cash balances resulting from the completion of the
Company's initial public offering in
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June 1997 and a secondary offering in March 1998, partially offset by interest
expense on outstanding equipment line of credit and capital lease balances.
Provision For Income Taxes. The Company recorded a provision for income
taxes of $1.9 million for the three months ended March 31, 1998, an effective
tax rate of 20%. The Company's effective tax rate differs from the federal
statutory rate due to utilization of net operating loss carryforwards and other
tax credits. The Company recorded no provision for income taxes in the three
months ended March 31, 1997 as it incurred losses during such periods.
At December 31, 1997, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $18.5 million and $17.5
million, respectively, which expire beginning in 2010 and 2000, respectively.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. The completion of the Company's initial public
offering in June 1997 resulted in an annual limitation of the Company's ability
to utilize net operating losses incurred prior to that date. The annual
limitation is approximately $5.4 million.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private placements of equity securities yielding approximately $29.4 million,
through an initial public offering in June 1997 yielding approximately $34.3
million, net of underwriting fees and offering expenses and most recently
through a secondary offering in March 1998 yielding approximately $54.8 million,
net of underwriting fees and offering expenses. As of March 31, 1998, the
Company had approximately $5.0 million of equipment line financing in place. As
of March 31, 1998, the Company had approximately $93.1 million in cash, cash
equivalents and short-term investments.
Net cash provided by operating activities in the first quarter of fiscal
1998 was due primarily to net income of $7.5 million, and increases of $21.8
million and $10.5 million in accounts payable and accrued liabilities,
respectively, partially offset by a $25.8 million and $11.8 million increase in
inventory and accounts receivable, respectively, due to the increase in
manufacturing to meet customer demand associated with the generation of
revenues. Net cash used in operating activities in the first quarter of fiscal
1997 was due primarily to the net loss of $1.1 million, and a $2.6 million
increase in accounts receivable offset by a $2.0 million decrease in inventory.
Net cash used in investing activities was approximately $25.9 million and
$0.3 million in the three months ended March 31, 1998 and March 31, 1997,
respectively, and was due to the purchase of investments in 1998 and, in each
period, to the purchase of property and equipment. The Company does not have any
significant capital spending or purchase commitments other than normal purchase
commitments and commitments under leases. As of March 31,1998, the Company had
capital equipment of $11.9 million less accumulated depreciation of $4.4 million
to support its research and development and administrative activities. The
Company has financed approximately $2.8 million of its capital equipment from
capital lease obligations through March 31, 1998. The Company has two equipment
lines of credit, which provide for the purchase of up to $2.0 million and $3.0
million of property and equipment, respectively. Approximately $3.0 million is
available under these equipment lines of credit. Borrowings under these lines
are secured by all of the Company's owned assets and bear interest at the bank's
prime rate plus 1.50% and 0.75% per annum, respectively (10.00% and 9.25%,
respectively, as of March 31, 1998). The agreement requires that the Company
maintain certain financial ratios and levels of tangible net worth profitability
and liquidity. The Company was in compliance with its covenants as of March 31,
1998. The lease lines of credit expire in August 1998 and December 2001,
respectively. The Company expects capital expenditures to increase over the next
several years as it expands facilities and acquires equipment to support the
planned expansion of its operations.
Net cash provided by financing activities was approximately $54.4 million
and $1.0 million in the first quarter of fiscal 1998 and fiscal 1997,
respectively, due primarily to proceeds from the secondary public
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offering in March 1998 and the issuance of preferred stock and the proceeds on a
drawdown on the line of credit in the three months ended March 31, 1997.
The Company has a line of credit agreement with Silicon Valley Bank, which
provides for maximum borrowings in an amount up to the lesser of 80% of eligible
accounts receivable plus 100% of cash and cash equivalents or $7.0 million.
Borrowings under the line are secured by all of the Company's owned assets and
bear interest at the bank's prime rate plus 0.25% per annum. The agreement
requires that the Company maintain certain financial ratios and levels of
tangible net worth, profitability and liquidity. The line of credit was renewed
in December 1997. The Company is in compliance with its covenants as of March
31, 1998. At March 31, 1998, there were no borrowings outstanding under this
line of credit.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the costs and timing of expansion of research and
product development efforts and the success of these development efforts, the
costs and timing of expansion of sales and marketing activities, the extent to
which the Company's existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining and
enforcing patent claims and other intellectual property rights, and available
borrowings under line of credit arrangements and other factors. The Company
believes that the proceeds from its March 1998 public offering, the Company's
current cash balances and cash generated from operations and from available or
future debt financing will be sufficient to meet the Company's operating and
capital requirements through December 1998. However, there can be no assurance
that the Company will not require additional financing within this time frame.
The Company's forecast of the period of time through which its financial
resources will be 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 OPERATING RESULTS
Potential Fluctuations in Quarterly Results. The Company's quarterly and
annual results of operations have in the past varied significantly and are
expected to vary significantly in the future as a result of a variety of factors
that could materially adversely affect revenues, gross profit and income from
operations. These factors include, among others, demand and market acceptance
for the Company's products; changes in the relative volume of sales of the
Company's various products; changes in the relative volume of sales to the
Company's various direct and indirect customers; unanticipated delays or
problems in the introduction or performance of the Company's next generation of
products; unanticipated delays or problems experienced by the Company's product
development partners; market acceptance of the products of the Company's
customers; an adverse effect on consumers' attraction to the Company's
acceleration technology in the retail channel; new product announcements or
product introductions by the Company's competitors; the Company's ability to
introduce on a timely basis new products in accordance with OEM design
requirements and design cycles; the ability of the Company's products to perform
favorably relative to competitive benchmarks; changes in the timing of product
orders due to unexpected delays in the introduction of products of the Company's
customers or due to the life cycles of such customers' products ending earlier
than anticipated; expenditures in connection with enforcing contractual and
other rights, including the cost of litigation in connection therewith;
fluctuations in manufacturing capacity; competitive pressures resulting in lower
average selling prices; the volume of orders that are received and can be
fulfilled in a quarter; the rescheduling or cancellation of customer orders;
supply constraints for the other components incorporated into its customers'
products; the unanticipated loss of any strategic relationship; seasonal
fluctuations associated with the tendency of PC sales to increase in the second
half of each calendar year; the level of expenditures for research and
development and sales, general and
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administrative functions of the Company; costs associated with protecting the
Company's intellectual property; and foreign exchange rate fluctuations. Any one
or more of these factors could result in the Company failing to achieve its
expectations as to future revenues and profitability. Because most operating
expenses are relatively fixed in the short term, the Company may be unable to
adjust spending sufficiently in a timely manner to compensate for any unexpected
sales shortfall, which could materially adversely affect quarterly results of
operations. Accordingly, the Company believes that period-to-period comparisons
of its results of operations should not be relied upon as an indication of
future performance. In addition, the results of any quarterly period are not
indicative of results to be expected for a full fiscal year. Finally, the
Company's results of operations in any given quarter may be below the
expectations of public market analysts or investors, in which case the market
price of the Common Stock could be materially adversely affected.
Limited Operating History. The Company has a limited operating history, has
been engaged primarily in research and product development and has incurred net
losses in every quarter since inception except the quarters ended December 31,
1997 and March 31, 1998. 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 $1.7 million in 1995, 1996 and 1997, respectively. The Company
generated net income of $7.5 million in the three months ended March 31, 1998
and incurred a net loss of $1.2 million in the three months ended March 31,
1997. At March 31, 1998, the Company had an accumulated deficit of $14.0
million. These net losses were attributable to the lack of substantial revenue
and continuing significant costs incurred in the research, development and
testing of the Company's products. Although the Company has experienced revenue
growth in recent quarterly periods, historical growth rates will not be
sustained and are not indicative of future operating results. In addition,
approximately 4.1% of the Company's revenues for 1997 were attributable to
development contract revenues recognized under the Sega Agreement between the
Company and Sega. No future revenues will be recognized under the Sega
Agreement. There can be no assurance that significant revenues or profitability
will be sustained or increased on a quarterly or annual basis in the future.
Competition. The Company's strategy of targeting the interactive electronic
entertainment market across multiple platforms requires the Company to compete
against different companies in several market segments, all of which are
intensely competitive. The interactive electronic entertainment market is
comprised of interactive games played on PCs, coin-op arcade systems and home
game consoles as well as LBE.
Within the entertainment segment of the PC market, the Company competes
primarily against companies that typically have operated in the PC 2D graphics
market and that now offer 3D capability as an enhancement to their 2D solutions,
such as ATI Technologies, Inc., Cirrus Logic, Inc., S3 Incorporated and Trident
Microsystems, Inc. Many of these competitors have introduced 3D functionality on
new iterations of existing graphics chips. The Company also competes with
companies that have recently entered the market with an integrated 3D/2D
solution but which have not traditionally manufactured 2D solutions, such as
3Dlabs, Inc., Ltd ("3Dlabs"), Chromatic Research, Inc., nVidia Corporation and
Rendition, Inc. In addition, the Company competes with NEC/Videologic which have
partnered to focus exclusively on developing a 3D solution for the interactive
electronic entertainment market.
In addition to competition from companies in the entertainment segment of
the PC market, the Company also faces potential competition from companies that
have focused on the high-end of the 3D market and the production of 3D systems
targeted for the professional engineering market, such as 3Dlabs, Intergraph
Corporation, Real 3D, Inc. which is owned by Lockheed Martin Corp. and Intel
Corporation ("Intel"), and Silicon Graphics, Inc. These companies are developing
lower cost versions of their 3D technology to bring workstation-like 3D graphics
to mainstream applications. There can be no assurance that these companies will
not enter the interactive electronics entertainment market or that the Company
would be able to compete successfully against them if they did.
Furthermore, a substantial number of companies including Intel have
announced plans to release 3D graphics chips in 1998 that promise to provide low
cost 3D functionality for PCs and workstations. Intel recently announced a
single chip 2D/3D graphics accelerator. Intel has been very active in the
graphics
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market, having previously invested in 3Dlabs and having recently signed a
development agreement with 3Dlabs in late 1997 targeting the high end
workstation market. In early 1998, Intel acquired Chips and Technologies, Inc.
("CHIPS") a leading graphics semiconductor supplier. To the extent that Intel's
initiatives in the graphics sector are successful, it could materially adversely
affect the Company's financial position and results of operations. The Company
has had a relationship with Intel since November 1996, when, in conjunction with
Intel's investment in the Company, 3Dfx and Intel entered into an agreement to
license an early version of Glide, the Company's proprietary low level 3D API.
Intel also has an option to license future versions of Glide on terms no less
favorable than licenses of Glide to other third party 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. In connection with the
Company's March 1998 public offering, Intel sold all of its shares of the
Company's Common Stock which it held.
The market for interactive electronic arcade entertainment is comprised of
a small number of companies, including Namco, Ltd., Sega, Taito Corporation,
Ltd., Williams, and its subsidiaries Atari Corporation and Midway Games, Inc. In
the coin-op arcade segments, the Company primarily faces competition from
in-house divisions of the companies which currently comprise such markets. In
addition, there can be no assurance that any of the companies which currently
compete in the 3D PC markets, will not enter the coin-op arcade market, or if
they do, that the Company will be able to compete against them successfully. The
home game console segment is dominated by three companies, Nintendo Company,
Ltd., Sega and Sony Corporation. As a result of the termination of the Company's
contract with Sega and the related litigation, the Company currently does not
participate in the home game console market.
The Company expects competition to increase in the future from existing
competitors and from new market entrants with products that may be less costly
than the Company's 3D media processors or provide better performance or
additional features not currently provided by the Company. The Company believes
that the principal competitive factors for 3D graphics solutions are product
performance, conformity to industry standard APIs, software support, access to
customers and distribution channels, manufacturing capabilities and price. The
Company seeks to use strategic relationships to augment its capabilities, but
there can be no assurance that the benefits of these relationships will be
realized or be sufficient to overcome the entrenched positions of the Company's
largest competitors as incumbent suppliers to the large PC OEMs. Regardless of
the relative qualities of the Company's products, the market power, product
breadth and customer relationships of its larger competitors, including Intel,
can be expected to provide such competitors with substantial competitive
advantages. The Company does not seek to compete on the basis of price alone.
Many of the Company's current and potential competitors have substantially
greater financial, technical, manufacturing, marketing, distribution and other
resources, greater name recognition and market presence, longer operating
histories, lower cost structures and larger customer bases than the Company. As
a result, they may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements. In addition, certain of the Company's
principal competitors offer a single vendor solution, since they maintain their
own semiconductor foundries and may therefore benefit from certain capacity,
cost and technical advantages. The Company's ability to compete successfully in
the rapidly evolving market for 3D interactive electronic entertainment will
depend upon certain factors, many of which are beyond the Company's control,
including, but not limited to, success in designing and subcontracting the
manufacture of new products; implementing new technologies; access to adequate
sources of raw materials and foundry capacity; the price, quality and timing of
new product introductions by the Company and its competitors; the emergence of
new multimedia and PC standards; the widespread development of 3D applications
by independent software vendors ("ISVs"); the ability of the Company to protect
its intellectual property; market acceptance of the Company's 3D solution and
API; success of the competitors' products; and industry and general economic
conditions. There can be no assurance that the Company will be able to compete
successfully in the emerging 3D interactive electronic entertainment market.
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Dependence on Emerging 3D Interactive Electronic Entertainment Market. The
market for 3D interactive electronic entertainment for use in PCs, coin-op
arcade systems and home game consoles has only recently begun to emerge. The
Company's ability to achieve sustained revenue growth and profitability in the
future will depend to a large extent upon the demand for 3D multimedia
functionality in PCs, coin-op arcade systems and home game consoles. There can
be no assurance that the market for 3D interactive electronic entertainment will
continue to develop or grow at a rate sufficient to support the Company's
business. If the market for 3D interactive electronic entertainment fails to
develop, or develops more slowly than expected, or if the Company's products do
not achieve market acceptance, even if such market does develop, the Company's
business, financial condition and results of operations could be materially
adversely affected. Demand for the Company's products is also dependent upon the
widespread development of 3D interactive electronic entertainment applications
by ISVs, the success of the Company's customers in effectively implementing the
Company's technology and developing a market for the Company's products and the
willingness of end users to pay for full function 3D capabilities in PCs,
coin-op arcade systems and home game consoles.
Dependence on the PC Market. For 1996 and 1997 and the three months ended
March 31, 1998, 82%, 93% and 100%, respectively, of the Company's revenues were
derived from products sold for use in PCs. The Company expects to continue to
derive a significant portion of revenues from the sale of its products for use
in PCs. The PC market is characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and significant price
competition, resulting in short product life cycles and regular reductions of
average selling prices over the life of a specific product. Although the PC
market has grown substantially in recent years, there can be no assurance that
such growth will continue. A reduction in sales of PCs, or a reduction in the
growth rate of such sales, would likely reduce demand for the Company's
products. Moreover, such changes in demand could be large and sudden. Since PC
manufacturers often build inventories during periods of anticipated growth, they
may be left with excess inventories if growth slows or if they have incorrectly
forecast product transitions. In such cases, the PC manufacturers may abruptly
suspend substantially all purchases of additional inventory from suppliers such
as the Company until the excess inventory has been absorbed. Any reduction in
the demand for PCs generally, or for a particular product that incorporates the
Company's 3D media processors, could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's ability to compete in the future will depend on its ability
to identify and ensure compliance with evolving industry standards.
Unanticipated changes in industry standards could render the Company's products
incompatible with products developed by major hardware manufacturers and
software developers, including Intel and Microsoft Corporation. The Company
could be required, as a result, to invest significant time and resources to
redesign the Company's products to ensure compliance with relevant standards. If
the Company's products are not in compliance with prevailing industry standards
for a significant period of time, the Company could miss opportunities to have
its products specified as standard 3D media processors for new hardware
components or subassemblies designed by PC manufacturers and OEMs (a "design
win"). The failure to achieve any such design win would result in the loss of
any potential sales volume that could be generated by such newly designed
hardware component or subassembly and would also competitively advantage the 3D
media processor manufacturer that achieves such design win, either of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. To the extent that future developments in
other PC components or subassemblies incorporate one or more of the advantages
offered by the Company's products, the market demand for the Company's products
may be negatively impacted, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
In July 1997, the Company learned from Sega that Sega will not use the
Company's chipset for the next generation Sega home game console. As a result,
the Company currently has no arrangements for developing, marketing and selling
a product for the home game console market. There can be no assurance that the
Company will be able to find a strategic partner that will produce a home game
console incorporating a chipset developed by the Company. The failure to access
the home game console market may limit the Company's ability to diversify its
product offerings and may have the effect of increasing the Company's dependency
on the PC market. See "-- Pending Litigation."
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Dependence on Retail Distribution Channel. The Company's products are
distributed primarily in the retail distribution channel through graphics board
manufacturers which in turn sell to consumers. Accordingly, the Company is
dependent upon these graphics board manufacturers to assist in promoting market
acceptance of its products. The graphics board manufacturers which purchase the
Company's products are generally not committed to make future purchases of the
Company's products and therefore could discontinue incorporating the Company's
products into their graphics boards in favor of a competitor's product, or for
any other reason. Because the Company sells a significant portion of its
products to such graphics board manufacturers, it is difficult to ascertain
current demand for existing products and anticipated demand for newly introduced
products, regardless of any such manufacturers' level of inventory for the
Company's products. Such manufacturers have in the past been subject to product
allocation by the Company. As a result, such manufacturers may overstate their
needs for the Company's products in order to ensure an adequate supply. In
addition, such manufacturers could overestimate consumer demand for their
graphics boards. In either case, the Company's business, financial condition and
results of operations could be materially adversely affected. Moreover, initial
orders for a new product may be caused by the interest of graphics board
manufacturers in integrating the latest accelerator product for potential future
sale to consumers. As a result, initial orders for a new product, such as
Voodoo2, may not be indicative of long-term consumer demand. In addition, the
Company is dependent upon the continued viability and financial stability of
these graphics board manufacturers, some of which are small organizations with
limited capital. The Company believes that its future growth and success will
continue to depend in large part upon its sales into the retail channel through
graphics board manufacturers. Accordingly, if a significant number of graphics
board manufacturers were to experience financial difficulties, or otherwise
become unable or unwilling to promote, sell or pay for the Company's products,
the Company's business, financial condition and results of operations could be
materially adversely affected.
Acceptance of the Company's 3D/2D Solution for the PC Market; Dependence on
Development of a Single Chip Solution. The Company's success depends upon market
acceptance of its 3D media processor products as a broadly accepted standard for
high performance 3D interactive electronic entertainment in PC applications.
Currently, the majority of multimedia PCs incorporate only 2D graphics
acceleration technology. As a result, the majority of entertainment titles
currently available for play on PCs are written for 2D acceleration technology.
Because of the substantial installed base of 2D acceleration technology and
related game content, the Company believes that for its 3D media processor
products to gain wide market acceptance, such products must also offer 2D
performance comparable or superior to existing 2D technology. To address this
demand, the Company works with Alliance Semiconductor Corporation, Macronix
International Co., Ltd., Media Reality Technology, Inc. and Trident to offer the
3D/2D chipset branded as the Company's Voodoo Rush product. Voodoo Rush
functions with a partner's companion 2D or 2D/3D accelerator within a single PCI
solution. There can be no assurance, however, that the Company's 3D/2D chipset
will perform the desired functions, offer significant price/performance benefits
or meet the technical or other requirements of potential buyers to realize
market acceptance. Further, there can be no assurance that the Company's
partners will manufacture their respective 2D or 2D/3D accelerators for use in
the Company's 3D/2D chipset on a timely basis and with acceptable quality, or
that, if demand for the Company's products increases, such vendors will be able
to accelerate production of their respective chipsets to meet demand for such
increases.
The Company's 3D media processors for use in PC applications are currently
designed as a two or three chip solution. Typically, as the functionality of a
given semiconductor becomes technologically stable and widely accepted by users,
the cost of providing the functionality is reduced by means of large scale
integration of such functionality onto a single semiconductor chip. The Company
expects that such integration onto a single chip will occur with respect to the
functionality provided by the Company's current products used in PC
applications. Therefore, the Company's success will be largely 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 plans to have in production quantities in the third 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
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single chip product to be designed into the OEM's system, the Company must
complete the development of its product to meet the deadline for the start of
the OEM's evaluation cycle. If the Company is unable to complete the timely
development of, and successfully manufacture and deliver, a single chip 3D/2D
solution, the Company's business, financial condition and results of operations
would be materially adversely affected.
If successfully introduced, there can be no assurance that the Company's
single chip 3D/2D solution will achieve market acceptance. The market for PC
media processors has been characterized by unpredictable and sometimes rapid
shifts in the popularity of products, by severe price competition and by
frequent new technology and product introductions. Only a small number of
products have achieved broad market acceptance. Such market acceptance has often
been followed by intense competition between alternative solutions. Any
competitive, technological or other factor adversely affecting the introduction
or sales of the Company's single chip 3D/2D solution for PC applications would
have a material adverse effect on the Company's business, financial condition
and results of operations. Even if the Company's single chip 3D/2D solution is
successfully introduced and does gain initial market acceptance, competitors are
likely to introduce products with comparable price and performance
characteristics. This competition may reduce future market acceptance for the
Company's product and result in decreasing sales and lower gross margins. The
failure of the Company to successfully develop and deliver a single chip 3D/2D
solution for PC applications or its failure to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Management of Growth. The ability of the Company to successfully offer
services and products and implement its business plan in a rapidly evolving
market requires an effective planning and management process. The Company's
rapid growth has placed, and is expected to continue to place, a significant
strain on the Company's managerial, operational and financial resources. As of
March 31, 1998, the Company had grown to 168 employees from 35 employees as of
December 31, 1995. If the Company's products achieve market acceptance, the
Company expects that the number of its employees will increase substantially
over the next 12 months. The Company's financial and management controls,
reporting systems and procedures are also very limited. Although some new
controls, systems and procedures have been implemented, the Company's future
growth, if any, will depend on its ability to continue to implement and improve
operational, financial and management information and control systems on a
timely basis, together with maintaining effective cost controls, and any failure
to do so would have a material adverse effect on the Company's business,
financial condition and results of operations. Further, the Company will be
required to manage multiple relationships with various customers and other third
parties. There can be no assurance that the Company's systems, procedures or
controls will be adequate to support the Company's operations or that the
Company's management will be able to achieve the rapid execution necessary to
successfully offer its services and products and implement its business plan.
The Company's inability to effectively manage any future growth would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Third Party Developers and Publishers. The Company believes
that the availability of a sufficient number of high quality, commercially
successful software entertainment titles and applications will be a significant
competitive factor in the sales of multimedia hardware for the interactive
electronic entertainment market. The Company depends on third party software
developers and publishers to create, produce and market software titles that
will operate with the Company's 3D media processor products. Only a limited
number of software developers are capable of creating high quality entertainment
software. Competition for these resources is intense and is expected to
increase. There can be no assurance that the Company will be able to attract the
number and quality of software developers and publishers necessary to develop a
sufficient number of high quality, commercially successful software titles
compatible with the Company's 3D media processor products. Further, there can be
no assurance that these third parties will publish a substantial number of
software entertainment titles or, if software entertainment titles are
available, that they will be of high quality or that they will achieve market
acceptance. Further, the development and marketing of game titles that do not
fully demonstrate the technical capabilities of the Company's 3D media processor
products could create the impression that the Company's technology offers only
marginal, if any, performance improvements over competing 3D media processors.
Because the Company has no control over the content of
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the entertainment titles produced by software developers and publishers, the
software entertainment titles developed may represent only a limited number of
game categories and are likely to be of varying quality.
Dependence on New Product Development; Rapid Technological Change. The
Company's business, financial condition and results of operations will depend to
a significant extent on its ability to successfully develop new products for the
3D interactive electronic entertainment market. As a result, the Company
believes that significant expenditures for research and development will
continue to be required in the future. The PC, coin-op arcade system and home
game console markets for which the Company's products are designed are intensely
competitive and are characterized by rapidly changing technology, evolving
industry standards and declining average selling prices. The Company must
anticipate the features and functionality that consumers will demand,
incorporate those features and functionality into products that meet the
exacting design requirements of the PC, coin-op arcade system and home game
console manufacturers, price its products competitively and introduce the
products to the market within the limited window for OEM design cycles. The
success of new product introductions is dependent on several factors, including
proper new product definition, timely completion and introduction of new product
designs, the ability of the Company's subcontractors to effectively design and
implement the manufacture of new products, quality of new products,
differentiation of new products from those of the Company's competitors and
market acceptance of the Company's and its customers' products. There can be no
assurance that the products the Company expects to introduce will incorporate
the features and functionality demanded by PC, coin-op arcade system and home
game console manufacturers and consumers of interactive electronic
entertainment, will be successfully developed or will be introduced within the
appropriate window of market demand. The failure of the Company to successfully
develop and introduce new products and achieve market acceptance for such
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
Because of the complexity of its technology, the Company has experienced
delays from time to time in completing development and introduction of new
products. In the event that there are delays in the completion of development of
future products, including the products currently expected to be announced over
the next year, the Company's business, financial condition and results of
operations would be materially adversely affected. The time required for
competitors to develop and introduce competing products may be shorter and
manufacturing yields may be better than those experienced by the Company.
As the markets for the Company's products continue to develop and
competition increases, the Company anticipates that product life cycles will
shorten and average selling prices will decline. In particular, average selling
prices and, in some cases, gross margin for each of the Company's products will
decline as such products mature. Thus, the Company will need to introduce new
products to maintain average selling prices and gross margins. There can be no
assurance that the Company will successfully identify new product opportunities
or develop and bring new products to market in a timely manner, that products or
technologies developed by others will not render the Company's products or
technologies obsolete or uncompetitive, or that the Company's products will be
selected for design into the products of its targeted customers. The failure of
the Company's new product development efforts would have a material adverse
effect on the Company's business, financial condition and results of operations.
Customer Concentration. Because of the Company's limited operating history
and early stage of development, it has a limited number of customers and the
Company's sales are highly concentrated. Revenues derived from sales to Diamond,
Elitetron and Creative accounted for approximately 41%, 22% and 13%,
respectively, of revenues in the three months ended March 31, 1998 and revenues
derived from sales to Diamond and Williams accounted for 59% and 15%,
respectively, of revenues for the three months ended March 31, 1997. Revenues
derived from sales to Diamond, Elitetron and Orchid accounted for approximately
37%, 16% and 7%, respectively, of revenues for 1997. Revenues derived from sales
to Orchid, Diamond and Williams accounted for approximately 44%, 33% and 11%,
respectively, of revenues for 1996. All such sales were made pursuant to
purchase orders. Development contract revenues recognized under the Sega
Agreement represented approximately 4.1% of revenues during 1997; no further
revenues are expected under the Sega Agreement. The Company expects that a small
number of customers will continue to account for a substantial portion of its
revenues for the foreseeable future. As a result, the Company's business,
financial condition and results of operations could be materially adversely
affected by the decision of a single customer
19
<PAGE> 20
to cease using the Company's products or by a decline in the number of PCs,
graphics boards or coin-op arcade systems sold by a single customer or by a
small number of customers.
Product Concentration; Risks Associated with Multimedia Products. The
Company's revenues are dependent on the markets for 3D media processors for PCs
and coin-op arcade systems and on the Company's ability to compete in those
markets. Since the Company has no other products, the Company's revenues and
results of operations would be materially adversely affected if for any reason
it were unsuccessful in selling 3D media processors. The PC and coin-op arcade
system markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis. If
the Company's products are unable at the beginning of each such transition to
support the new feature sets or performance levels being required by PC and
coin-op arcade system manufacturers, the Company would be likely to lose design
wins and, moreover, not have the opportunity to compete for new design wins
until the next product transition occurred. Thus, a failure to develop products
with required feature sets or performance standards or a delay as short as a few
months in bringing a new product to market could significantly reduce the
Company's revenues for a substantial period, which would have a material adverse
effect on the Company's business, financial condition and results of operations.
Adoption of Glide. The Company's success will be substantially affected by
the adoption by software developers of Glide, its proprietary, low-level 3D API.
Although the Company's products support game titles developed for most industry
standard APIs, the Company believes that Glide currently allows developers to
fully exploit the technical capabilities of the Company's 3D media processor
products. Glide competes with APIs developed or to be developed by other
companies having significantly greater financial resources, marketing power,
name recognition and experience than the Company. For example, certain industry
standard APIs, such as D3D developed by Microsoft and OpenGL developed by SGI,
have a much larger installed customer base and a much larger base of existing
software titles. Developers may face additional costs to port games developed on
other standard APIs to Glide for play on the Company's architecture. There can
be no assurance that Glide will be adopted by a sufficient number of software
developers or that developers who have utilized Glide will continue to do so in
the future.
Dependence on Independent Manufacturers and Other Third Parties; Absence of
Manufacturing Capacity; Manufacturing Risks. The Company does not manufacture
the semiconductor wafers used for its products and does not own or operate a
wafer fabrication facility. The Company's products require wafers manufactured
with state-of-the-art fabrication equipment and techniques. All of the Company's
wafers are currently manufactured by TSMC in Taiwan. The Company obtains
manufacturing services from TSMC on a purchase order basis. Because the lead
time needed to establish a strategic relationship with a new manufacturing
partner could be several months, there is no readily available alternative
source of supply for any product. A manufacturing disruption experienced by TSMC
would impact the production of the Company's products for a substantial period
of time, which would have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that
long-term market acceptance for the Company's products will depend on reliable
relationships between the Company and TSMC (and any other independent foundries
qualified by the Company) to ensure adequate product supply responsive to
customer demand. The Company's relationship with TSMC has only recently been
established, and there can be no assurance that this relationship will meet the
business objectives of the Company. In addition, TSMC fabricates wafers for
other companies and could choose to prioritize capacity for other uses or reduce
or eliminate deliveries to the Company on short notice.
There are many other risks associated with the Company's dependence upon
third party manufacturers, including: reduced control over delivery schedules,
quality assurance, manufacturing yields and cost; the potential lack of adequate
capacity during periods of excess demand; limited warranties on wafers supplied
to the Company; and potential misappropriation of the Company's intellectual
property. The Company is dependent on TSMC, and expects in the future to be
dependent upon TSMC, to produce wafers of acceptable quality and with acceptable
manufacturing yields, to deliver those wafers to the Company and its independent
assembly and testing subcontractors on a timely basis and to allocate to the
Company a portion of their manufacturing capacity sufficient to meet the
Company's needs. The Company's wafer requirements represent a very small portion
of the total production of TSMC. Although the Company's products are designed
using
20
<PAGE> 21
TSMC's process design rules, there can be no assurance that TSMC will be able to
achieve or maintain acceptable yields or deliver sufficient quantities of wafers
on a timely basis or at an acceptable cost. Additionally, there can be no
assurance that TSMC will continue to devote resources to the production of the
Company's products or continue to advance the process design technologies on
which the manufacturing of the Company's products are based. Any such
difficulties would have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's products are packaged and tested by a third party
subcontractor, ASE. Such assembly and testing is conducted on a purchase order
basis rather than under a long-term agreement. As a result of its reliance on
ASE to assemble and test its products, the Company cannot directly control
product delivery schedules, which could lead to product shortages or quality
assurance problems that could increase the costs of manufacturing or assembly of
the Company's products. Due to the amount of time normally required to qualify
assembly and test subcontractors, product shipments could be delayed
significantly if the Company is required to find alternative subcontractors. Any
problems associated with the delivery, quality or cost of the assembly and test
of the Company's products could have a material adverse effect on the Company's
business, financial condition and results of operations.
Manufacturing Yields. The fabrication of semiconductors is a complex and
precise process. Minute levels of contaminants in the manufacturing environment,
defects in masks used to print circuits on a wafer, difficulties in the
fabrication process or other factors can cause a substantial percentage of
wafers to be rejected or a significant number of die on each wafer to be
nonfunctional. Many of these problems are difficult to diagnose and time
consuming or expensive to remedy. As a result, semiconductor companies often
experience problems in achieving acceptable wafer manufacturing yields, which
are represented by the number of good die as a proportion of the total number of
die on any particular wafer. Once production yield for a particular product
stabilizes, the Company pays an agreed price for wafers meeting certain
acceptance criteria pursuant to a "good die" only pricing structure for that
particular product. Until production yield for a particular product stabilizes,
however, the Company must pay an agreed price for wafers regardless of yield.
Accordingly, in this circumstance, the Company bears the risk of final yield of
good die. Poor yields would materially adversely affect the Company's revenues,
gross profit and results of operations.
Semiconductor manufacturing yields are a function both of product design,
which is developed largely by the Company, and process technology, which is
typically proprietary to the manufacturer. Since low yields may result from
either design or process technology failures, yield problems may not be
effectively determined or resolved until an actual product exists that can be
analyzed and tested to identify process sensitivities relating to the design
rules that are used. As a result, yield problems may not be identified until
well into the production process, and resolution of yield problems would require
cooperation by and communication between the Company and the manufacturer. This
risk is compounded by the offshore location of the Company's manufacturer,
increasing the effort and time required to identify, communicate and resolve
manufacturing yield problems. As the Company's relationships with TSMC and any
additional manufacturing partners develop, yields could be adversely affected
due to difficulties associated with adapting the Company's technology and
product design to the proprietary process technology and design rules of each
manufacturer. Because of the Company's potentially limited access to wafer
fabrication capacity from its manufacturers, any decrease in manufacturing
yields could result in an increase in the Company's per unit costs and force the
Company to allocate its available product supply among its customers, thus
potentially adversely impacting customer relationships as well as revenues and
gross profit. There can be no assurance that the Company's manufacturers will
achieve or maintain acceptable manufacturing yields in the future. The inability
of the Company to achieve planned yields from its manufacturers could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, the Company also faces the risk of product
recalls resulting from design or manufacturing defects which are not discovered
during the manufacturing and testing process. In the event of a significant
number of product returns due to a defect or recall, the Company's revenues and
gross profit could be materially adversely affected.
Dependence on Key Personnel. The Company's performance will be
substantially dependent on the performance of its executive officers and key
employees, most of whom have worked together for only a short period of time. In
particular, the Company's Chief Financial Officer and Vice President,
Administration,
21
<PAGE> 22
David Zacarias, joined the Company in February 1998. None of the Company's
officers or employees are bound by an employment agreement, and the
relationships of such officers and employees with the Company are, therefore, at
will. Given the Company's early stage of development, the Company will be
dependent on its ability to attract, retain and motivate high quality personnel,
especially its management and development teams. The Company does not have "key
person" life insurance policies on any of its employees. The loss of the
services of any of its executive officers, technical personnel or other key
employees would have a material adverse effect on the business, financial
condition and results of 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.
Future Capital Needs; Uncertainty of Additional Funding. As the Company
continues to increase the volume of commercial production of its products, it
will be required to invest significant working capital in inventory and accounts
receivable. The Company intends also to continue to invest heavily in research
and development for its existing products and for new product development. The
Company's future liquidity and capital requirements will depend upon numerous
factors, including the costs and timing of expansion of research and product
development efforts and the success of these development efforts, the costs and
timing of expansion of sales and marketing activities, the extent to which the
Company's existing and new products gain market acceptance, competing
technological and market developments, the costs involved in maintaining and
enforcing patent claims and other intellectual property rights, the level and
timing of development contract revenues, available borrowings under line of
credit arrangements and other factors. The Company believes that the proceeds
from its March 1998 public offering of common stock, as well as 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.
Risks Relating to Intellectual Property. The Company relies primarily on a
combination of patent, mask work protection, trademarks, copyrights, trade
secret laws, employee and third-party nondisclosure agreements and licensing
arrangements to protect its intellectual property. The Company has 2 U.S.
patents granted by the U.S. Patent and Trademark Office ("PTO"), 5 U.S. patent
applications pending in the PTO, 3 international patent applications pending
under the Patent Cooperation Treaty, and 4 applications in process. There can be
no assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not be challenged by third
22
<PAGE> 23
parties, or that the patents of others will not have an adverse effect on the
Company's ability to do business. In addition, there can be no assurance that
others will not independently develop substantially equivalent intellectual
property or otherwise gain access to the Company's trade secrets or intellectual
property, or disclose such intellectual property or trade secrets, or that the
Company can meaningfully protect its intellectual property. A failure by the
Company to meaningfully protect its intellectual property could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There can be no
assurance that infringement claims by third parties or claims for
indemnification by other customers or end users of the Company's products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. Any
limitations on the Company's ability to market its products, or delays and costs
associated with redesigning its products or payments of license fees to third
parties, or any failure by the Company to develop or license a substitute
technology on commercially reasonable terms could have a material adverse effect
on the Company's business, financial condition and results of operations.
Litigation by or against the Company could result in significant expense to the
Company and divert the efforts of the Company's technical and management
personnel, whether or not such litigation results in a favorable determination
for the Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the manufacture, use
and sale of infringing products, expend significant resources to develop
non-infringing technology, discontinue the use of certain processes or obtain
licenses for the infringing technology.
In addition, in connection with the Company's litigation against Sega (see
"-- Pending Litigation"), the Company was granted a preliminary injunction
enjoining Sega from using or providing to any other person or entity access to
the Company's confidential information and trade secrets that were provided to
them in connection with the Sega Agreement. Sega has been ordered by the court
to return to the Company all of the Company's confidential documents and/or
information now possessed by Sega. Sega has notified the Company of its intent
to appeal the Court's order. There can be no assurance that Sega will fully
comply with the court order or that Sega has not used and will not use the
proprietary information to its competitive advantage.
International Operations. The Company's reliance on foreign third-party
manufacturing, assembly and testing operations, all of which are located in
Asia, and the Company's expectation of international sales subject it to a
number of risks associated with conducting business outside of the United
States. While to date the Company has not experienced an adverse impact
associated with economic downturns in Asia, there can be no assurance that the
recent volatility in the Asian economy will not adversely affect the Company's
business, financial condition or results of operations. These risks include
unexpected changes in, or impositions of, legislative or regulatory
requirements, delays resulting from difficulty in obtaining export licenses for
certain technology, tariffs, quotas and other trade barriers and restrictions,
longer payment cycles, greater difficulty in accounts receivable collection,
potentially adverse taxes, the burdens of complying with a variety of foreign
laws and other factors beyond the Company's control. The Company is also subject
to general political risks in connection with its international trade
relationships. Although the Company has not to date experienced any material
adverse effect on its business, financial condition or results of operations as
a result of such regulatory, political and other factors, there can be no
assurance that such factors will not have a material adverse effect on the
Company's business, financial condition and results of operations in the future
or require the Company to modify its current business practices. In addition,
the laws of certain foreign countries in which the Company's products are or may
be manufactured or sold, including various countries in Asia, may not protect
the Company's products or intellectual property rights to the same extent as do
the laws of the United States and thus make the possibility of piracy of the
Company's technology and products more likely. Currently, all of the Company's
product sales and its arrangements with its foundry and assembly and test vendor
provide for pricing and payment in U.S. dollars. There can be no assurance that
fluctuations in currency exchange rates will not have a material adverse effect
on the Company's business, financial condition and results of operations in the
future. In addition, to date the Company has not engaged in any currency hedging
activities, although the Company may do so in the future. Further, there can be
no assurance that one
23
<PAGE> 24
or more of the foregoing factors will not have a material adverse effect on the
Company's business, financial condition and results of operations or require the
Company to modify its current business practices.
Pending Litigation. On July 22, 1997, Sega terminated the Sega Agreement.
The Company filed a lawsuit in California in the Superior Court for the County
of Santa Clara on August 29, 1997 and filed an amended complaint on October 8,
1997. The amended complaint names as defendants, Sega and its U.S. subsidiary
Sega of America, Inc., NEC and VideoLogic and includes claims for breach of
contract, interference with contract, misrepresentation, unfair competition, and
threatened misappropriation of trade secrets. Discovery in the case is currently
being conducted. The Company expects to incur significant legal expenses in
connection with this litigation which could have a material adverse effect on
the Company's financial condition and results of operations. In addition,
pursuing this litigation is likely to result in the diversion of management's
attention from the day-to-day operations of the business. There can be no
assurance that the litigation will be resolved in the Company's favor or that
the litigation will be resolved quickly. Any prolonged litigation could have a
material adverse effect on the Company's business, financial condition and
results of operations. An adverse result could have a material adverse effect on
the Company's business, financial condition and results of operations.
Possible Volatility of Stock Price. The trading price of the Company's
Common Stock has in the past been and could in the future be subject to
significant fluctuations in response to quarterly variations in the Company's
results of operations, announcements regarding the Company's product
developments, announcements of technological innovations or new products by the
Company, its OEM customers or competitors, changes in securities analysts'
recommendations, or other events. The Company's revenues and results of
operations may be below the expectations of public market securities analysts or
investors, resulting in significant fluctuations in the market price of the
Company's Common Stock. It is likely that the Company's future quarterly
revenues or results of operations from time to time will not meet the
expectations of such analysts or investors, which could have an adverse effect
on the market price of the Company's Common Stock. Moreover, stock markets have
from time to time experienced extreme price and volume fluctuations which have
particularly affected the market prices for high technology companies and which
have often been unrelated to the operating performance of such companies. These
broad market fluctuations, as well as general economic, political and market
conditions, may adversely affect the market price of the Company's Common Stock.
In the past, following periods of volatility in the market price of a company's
stock, securities class action litigation has occurred against the issuing
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in substantial
costs and would at a minimum divert management's attention and resources, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Any adverse determination in such
litigation could also subject the Company to significant liabilities.
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 22, 1997, Sega Enterprises, Ltd. ("Sega") terminated the Technology
Development and License Agreement entered into by the Company and Sega on
February 28, 1997. The Company filed suit in Superior Court for the County of
Santa Clara on August 29, 1997; an amended complaint was filed on October 8,
1997. The amended complaint names Sega and its U.S. subsidiary, Sega of America,
Inc., NEC Corporation, and VideoLogic Group, Plc. as defendants, and includes
counts alleging breach of contract, interference with contract,
misrepresentation, unfair competition, and threatened misappropriation of trade
secrets. Discovery in the case is presently under way.
ITEM 6. EXHIBITS
(a) Exhibits
27.1 Financial Data Schedule
Financial Statements Schedule
Schedule II -- Valuation and Qualifying Accounts
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended March
31, 1998.
25
<PAGE> 26
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.
3DFX INTERACTIVE, INC.
(Registrant)
/s/ L. GREGORY BALLARD
--------------------------------------
L. Gregory Ballard
Chief Executive Officer
(Principal Executive Officer)
/s/ DAVID ZACARIAS
--------------------------------------
David Zacarias
Vice President, Administration
and Chief Financial Officer
(Principal Financial and Accounting
Officer)
Dated: May 13, 1998
26
<PAGE> 27
FINANCIAL STATEMENTS SCHEDULE
3DFX INTERACTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE QUARTERS ENDED MARCH 31, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
CHARGED TO CHARGED
ALLOWANCE FOR BEGINNING COSTS AND TO OTHER ENDING
DOUBTFUL ACCOUNTS BALANCE EXPENSES ACCOUNTS DEDUCTIONS BALANCE
----------------- --------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
For the three months ended March 31, 1998... $308 $1,455 $-- $-- $1,763
For the three months ended March 31, 1997... $ 78 $ 50 $-- $-- $ 128
</TABLE>
27
<PAGE> 28
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
- --------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 62,750
<SECURITIES> 30,351
<RECEIVABLES> 39,469
<ALLOWANCES> (1,763)
<INVENTORY> 15,635
<CURRENT-ASSETS> 148,244
<PP&E> 11,878
<DEPRECIATION> (4,376)
<TOTAL-ASSETS> 156,239
<CURRENT-LIABILITIES> 48,992
<BONDS> 0
0
0
<COMMON> 121,685
<OTHER-SE> (14,041)
<TOTAL-LIABILITY-AND-EQUITY> 156,239
<SALES> 50,008
<TOTAL-REVENUES> 50,008
<CGS> 25,730
<TOTAL-COSTS> 41,194
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58
<INCOME-PRETAX> 9,328
<INCOME-TAX> 1,866
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,462
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.50
</TABLE>
