UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q/A
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from _______ to _______
COMMISSION FILE NUMBER: 0-22651
3DFX INTERACTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 77-0390421
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
4435 FORTRAN DRIVE
SAN JOSE, CALIFORNIA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER (408) 935-4400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all 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 October 30, 1998 there were 15,592,912 shares of the Registrant's
Common Stock outstanding.
================================================================================
<PAGE>
3DFX INTERACTIVE, INC.
FORM 10-Q/A
INDEX
Cover Page
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial statements
Condensed Consolidated Balance Sheets -- September 30, 1998 and
December 31, 1997
Condensed Statements of Operations -- Three Months and Nine Months
Ended September 30, 1998 and September 30, 1997
Condensed Consolidated Statements of Cash Flows -- Nine Months
Ended September 30, 1998 and September 30, 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Assets:
Cash and cash equivalents......................... $81,148 $28,937
Short-term investments............................ 13,623 5,984
Accounts receivable, net.......................... 26,561 13,387
Inventory......................................... 25,471 3,845
Other current assets.............................. 3,237 2,400
------------ ------------
Total current assets...................... 150,040 54,553
Property and equipment, net....................... 13,785 6,816
Other assets...................................... 150 548
------------ ------------
$163,975 $61,917
============ ============
Liabilities and Shareholders' Equity:
Line of credit.................................... $ -- $777
Accounts payable.................................. 34,744 12,573
Accrued liabilities............................... 8,475 2,969
Current portion of capitalized lease obligations.. 537 778
------------ ------------
Total current liabilities................. 43,756 17,097
------------ ------------
Capitalized lease obligations, less current portion. -- 546
------------ ------------
Shareholders' equity:
Common Stock...................................... 122,686 66,717
Warrants.......................................... 242 242
Deferred compensation............................. (818) (1,181)
Accumulated deficit............................... (1,891) (21,504)
------------ ------------
Total shareholders' equity................ 120,219 44,274
------------ ------------
$163,975 $61,917
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues................................ $33,206 $10,018 $141,858 $21,772
Cost of revenues........................ 24,971 5,352 81,144 11,211
--------- --------- --------- ---------
Gross profit............................ 8,235 4,666 60,714 10,561
--------- --------- --------- ---------
Operating expenses:
Research and development.............. 10,038 3,201 24,172 7,552
Selling, general and administrative... 6,971 2,684 24,650 7,052
--------- --------- --------- ---------
Total operating expenses...... 17,009 5,885 48,822 14,604
--------- --------- --------- ---------
Income (loss) from operations........... (8,774) (1,219) 11,892 (4,043)
Interest and other income, net.......... 13,045 347 14,610 256
--------- --------- --------- ---------
Income (loss) before income taxes....... 4,271 (872) 26,502 (3,787)
Provision for income taxes.............. 1,153 -- 6,889 --
--------- --------- --------- ---------
Net income (loss)....................... $3,118 ($872) $19,613 ($3,787)
========= ========= ========= =========
Net income (loss) per share
Basic................................. $0.20 ($0.07) $1.34 ($0.37)
========= ========= ========= =========
Diluted............................... $0.20 ($0.07) $1.22 ($0.37)
========= ========= ========= =========
Shares used in net income (loss) per
share calculations:
Basic................................. 15,437 12,454 14,674 10,169
--------- --------- --------- ---------
Diluted............................... 15,819 12,454 16,024 10,169
--------- --------- --------- ---------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................... $19,613 ($3,787)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 3,538 1,492
Stock compensation................................... 363 363
Increase in allowance for doubtful accounts.......... 1,561 --
Changes in assets and liabilities:
Accounts receivable................................ (14,735) (4,734)
Inventory.......................................... (21,626) 1,682
Other assets....................................... (657) (2,336)
Accounts payable................................... 22,171 3,645
Accrued liabilities................................ 5,506 1,115
---------- ----------
Net cash provided by (used in) operating activities.. 15,734 (2,560)
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments..................... (7,639) (3,652)
Purchases of property and equipment..................... (10,289) (4,020)
---------- ----------
Net cash used in investing activities................ (17,928) (7,672)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock,
net.................................................. -- 521
Proceeds from secondary public offering, net............ 54,752 --
Proceeds from issuance of Common Stock, net............. 1,217 34,395
Proceeds from exercise of warrants, net................. -- 385
Principal payments of capitalized lease obligations,
net.................................................. (787) (520)
(Payments) proceeds on drawdown on line of credit, net.. (777) (8)
---------- ----------
Net cash provided by financing activities............ 54,405 34,773
---------- ----------
Net increase (decrease) in cash and cash equivalents...... 52,211 24,541
Cash and cash equivalents at beginning of period.......... 28,937 5,291
---------- ----------
Cash and cash equivalents at end of period................ $81,148 $29,832
========== ==========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest................ $122 $127
========== ==========
Cash paid for income taxes.............................. $6,210 $1
========== ==========
Acquisition of property and equipment under
capitalized lease obligations.......................... $ -- $571
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company and Its Significant Accounting Policies:
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the design,
development, marketing and support of 3D media processors, subsystems and
API software for the interactive electronic entertainment market.
The unaudited condensed consolidated financial statements included
herein have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information or footnote disclosure normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the accompanying unaudited
condensed consolidated financial statements contain all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial information included therein. While the Company
believes that the disclosures are adequate to make the information not
misleading, it is suggested that these financial statements be read in
conjunction with the audited financial statements and accompanying 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, as amended, for the fiscal year
ended December 31, 1997 as filed with the Securities and Exchange
Commission. The results of operations for the quarter ended September 30,
1998 are not necessarily indicative of the results to be expected for the
full year.
Three customers represented 25%, 20% and 10% and three customers
represented 35%, 20% and 15% of the Company's revenue during the third
quarter and first nine months of 1998, respectively. Two customers
represented 47% and 15% and two customers represented 47% and 12% of the
Company's revenue during the third quarter and first nine months of 1997,
respectively.
Note 2 - Public Offerings:
In March 1998, the Company completed a public offering of 2,900,000
shares of common stock at a price of $23.75 per share. Of the 2,900,000
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.
In connection with the exercise of such option, 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. In
connection with the exercise of such option, 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 $1.8
million in the year ended December 31, 1997. The Company has no further
obligations to Sega with regard to the $1.8 million of development
contract revenue recognized. The Company did not earn any royalty revenue
in the nine months ended September 30, 1998 or 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. In July 1998, the parties to the litigation participated in
a court-ordered mediation and reached an agreement in principle to settle
the lawsuit. A favorable settlement was finalized in the third quarter of
fiscal 1998, resulting in a one-time recognition of income.
Note 4 - Earnings (Loss) per Share:
During the quarter ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per
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):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- -------------------
Sept 30, Sept 30, Sept 30, Sept 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) available to common
shareholders (numerator).............. $3,118 ($872) $19,612 ($3,787)
Weighted average common shares
outstanding (denominator for basic
computation).......................... 15,437 12,454 14,674 10,169
Effect of dilutive securities --
common stock equivalents.............. 382 -- 1,350 --
--------- --------- --------- ---------
Weighted average shares outstanding
(denominator for diluted computation). 15,819 12,454 16,024 10,169
========= ========= ========= =========
Basic earnings (loss) per share......... $0.20 ($0.07) $1.34 ($0.37)
========= ========= ========= =========
Diluted earnings (loss) per share....... $0.20 ($0.07) $1.22 ($0.37)
========= ========= ========= =========
</TABLE>
During the three and nine months ended September 30, 1998, options to
purchase approximately 1,832,850 and 863,000 shares, respectively were
outstanding but not included in the computation because they were
antidilutive.
Note 5 - Income Taxes:
The Company recorded for the three months and the nine months ended
September 30, 1998 an effective tax rate of 27% and 26%, respectively.
The effective tax rate is different from the statutory rate due to the
utilization of federal and state net operating loss carryforwards and tax
credits. No provision for income taxes was recorded in the three months
and the nine months ended September 30, 1997 as the Company incurred
losses during such periods.
Note 6 - Comprehensive Income:
In January 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which
establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. Such items may include foreign
currency translation adjustments, unrealized gains/losses from investing
and hedging activities, and other transactions. Comprehensive income for
each of the three and nine months ended September 30, 1998 and 1997 was
equal to net income.
<PAGE>
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 sentence in the second paragraph under
"Overview" regarding expected customer concentration; the sentence in the
fourth paragraph under "Overview" regarding availability of raw materials;
the sentences in the second and tenth paragraphs under "Results of
Operations" regarding factors affecting gross margin; the sentences in
the third, fourth, eleventh and twelfth 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 until the
fourth quarter of fiscal 1997 and each of the first three quarters 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 $19.6 million in the
nine months ended September 30,1998 and incurred a net loss of $3.8
million in the nine months ended September 30, 1997. The Company had an
accumulated deficit of $1.9 million at September 30, 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 and coin-op arcade systems. The Company began
commercial shipments of its first 3D graphics product, the Voodoo Graphics
chipset, in September 1996. The Company's second product, the Voodoo Rush
chipset began commercial shipments in April 1997. The Company's third
product, Voodoo2, became commercially available in the first quarter of
1998. In August 1998, the Company began shipping Voodoo Banshee, which is a
high performance, full-featured single chip 3D/2D media processor for the PC
and coin-op arcade markets. As a result of the Company's limited operating
history and early stage of development, it has only a limited number of
customers. Revenues derived from sales to Creative Technology, Ltd.
("Creative"), Elitetron Electronic Co., Ltd ("Elitetron"), and Guillemot
International ("Guillemot") accounted for approximately 25%, 20% and 10% of
revenues for the quarter ended September 30, 1998. Revenues derived from
Diamond Multimedia Systems, Inc. ("Diamond"), Creative and Elitetron accounted
for approximately 35%, 20% and 15%, respectively, of revenues for the first
nine months of fiscal 1998. Revenues derived from sales to Diamond and
Elitetron accounted for approximately 47% and 15%, respectively of revenues
for the quarter ended September 30, 1997. Revenues derived from sales to
Diamond and Elitetron accounted for approximately 47% and 12%, respectively of
revenues for the first nine months of fiscal 1997. The Company expects that a
small number of customers will continue to account for a substantial portion
of its total revenues for the foreseeable future. The loss of any one of
these customers could have a material impact on the Company's results of
operations, cash flows, or financial position. In addition, sales to
these customers can fluctuate and could have a material impact on the
Company's revenues and profitability on a quarterly basis.
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 8% and 4% of total revenues during the nine months ended
September 30, 1997 and the year ended December 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 alleged breach of
contract, interference with contract, misrepresentation, unfair
competition, and threatened misappropriation of trade secrets. A
favorable settlement was finalized in September 1998. Included in the
statement of operations for the quarter ended September 30, 1998 is a one-
time recognition of income as a result of the recent Sega litigation
settlement.
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 $363,000 (of which $146,000 and $217,000 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 nine months ended September 30, 1998, respectively,
and will result in charges over the next 7 quarters aggregating
approximately $121,000 per quarter (of which $48,000 and $73,000 will be
recorded in research and development expenses and selling, general and
administrative expenses, respectively).
Results of Operations
Three Months Ended September 30, 1998 and 1997
Revenues. Revenues are recognized upon product shipment. The Company's
total revenues were $33.2 million in the three months ended September 30,
1998, and $10.0 million in the three months ended September 30, 1997.
Revenues in the three months ended September 30, 1998 were principally
attributable to sales of the Company's Voodoo Banshee chip and Voodoo2
chipset. Revenues in the quarter ended September 30, 1998 were significantly
lower than revenues in the quarter ended June 30, 1998 due to reduced sales of
the Company's Voodoo2 chipset, primarily attributable to a significant decrease
in orders as compared to historical order rates from a large customer and a
greater than expected seasonal slowdown. Substantially all of the
revenues in the three months ended September 30, 1997 were derived from the
sale of the Company's Voodoo Graphics and Voodoo Rush chipsets.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of revenues consists primarily of costs associated with the
purchase of components and the procurement of semiconductors from the
Company's contract manufacturers, labor and overhead associated with such
procurement and warehousing, shipping and warranty costs. Cost of revenues
increased 367% from $5.4 million in the third quarter of fiscal 1997 to
$25.0 million in the third quarter of fiscal 1998. Gross profit as a
percentage of revenues was 47% and 25% in the third quarters of 1997 and
1998, respectively. The increase in cost of revenues resulted from lower
margins associated with the Voodoo Banshee product as compared with the
margins of Voodoo2 and Voodoo Graphics and the significant increase in
revenues in the three months ended September 30, 1998 as compared with the
same period in 1997. In addition, included in cost of revenues in the quarter
ended September 30, 1998 is an increase in inventory reserves due to an
exceptionally rapid rate of product lifecycle obsolescence combined with the
greater than expected seasonal slowdown in the retail channel. 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. Research and development expenses
increased 214% from $3.2 million in the three months ended September 30,
1997 to $10.0 million in the three months ended September 30, 1998. The
increase reflects an increase in personnel costs, common cost allocations
and non-recurring engineering costs resulting from the development of
Voodoo Banshee and other future products. 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 160% from $2.7 million in the three
months ended September 30, 1997 to $7.0 million in the three months ended
September 30, 1998. The increase resulted from the addition of personnel
in sales, marketing, finance and administration as the Company expanded
operations, increased commission expenses associated with increased
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, Net. Interest and other income, net
increased from $347,000 in the three months ended September 30, 1997 to
net interest and other income of $13.0 million in the three months ended
September 30, 1998. The increase is primarily related to a one-time
recognition of income as a result of the recent Sega litigation
settlement, as well as to increased earnings from higher cash balances
resulting from the completion of the Company's initial public offering in
June 1997 and a public offering in March 1998, partially offset by
interest expense on the outstanding equipment line of credit and capital
lease balances.
Provision For Income Taxes. The Company recorded a provision for income
taxes of $1.2 million for the three months ended September 30, 1998, an
effective tax rate of 27%. 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 September 30, 1997 as it incurred
losses during such period.
At December 31, 1997, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $18.5 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, all of which will be utilized in fiscal 1998.
Nine Months Ended September 30, 1998 and 1997
Revenues. The Company's total revenues increased 552% to $141.9 million
in the nine months ended September 30, 1998 from $21.8 million in the nine
months ended September 30, 1997. Revenues in the nine months ended
September 30, 1997 included $1.8 million of development contract revenues
earned under the Sega Agreement which was terminated by Sega in July 1997.
Revenues in the nine months ended September 30, 1998 were principally
attributable to sales of the Company's Voodoo2, Voodoo Graphics and Voodoo
Banshee chipsets. Substantially all of the revenues in the nine months
ended September 30, 1997 were derived from sale of the Company's Voodoo
Graphics and Voodoo Rush chipsets.
Gross Profit. Cost of revenues increased 624% from $11.2 million in the
nine months ended September 30, 1997 to $81.1 million in the nine months
ended September 30, 1998. Cost of revenues does not include expenses
related to development contract revenues. Gross profit as a percentage of
revenues was 49% and 43% in the nine months ended September 30, 1997 and
1998, respectively. The increase in cost of revenues resulted from the
significant increase in revenues in the nine months ended September 30,
1998 as compared with the same period in 1997. Given the Company's limited
operating history and limited history of product shipments, the Company
believes that an analysis of gross profit as a percentage of total
revenues is not meaningful. The Company's future gross profit will be
affected by the overall level of sales; the mix of products sold in a
period; manufacturing yields; and the Company's ability to reduce product
procurement costs.
Research and Development. Research and development expenses increased
220% from $7.6 million in the nine months ended September 30, 1997 to
$24.2 million in the nine months ended September 30, 1998. The increase
reflects an increase in personnel costs, common cost allocations and non-
recurring engineering costs resulting from the commencement of commercial
sales of the Voodoo2 and Voodoo Banshee products and the development of future
products. The Company expects to continue to make substantial investments in
research and development and anticipates that research and development expenses
will increase in absolute dollars in future periods, although such
expenses as a percentage of total revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses increased 250% from $7.1 million in the nine months ended
September 30, 1997 to $24.7 million in the nine months ended September 30,
1998. The increase resulted from the addition of personnel in sales,
marketing, finance and administration as the Company expanded operations,
increased commission expenses associated with increased 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, Net. Interest and other income, net
increased from $256,000 in the nine months ended September 30, 1997 to net
interest and other income of $14.6 million in the nine months ended
September 30, 1998. The increase is primarily related to a one-time
recognition of income as a result of the recent Sega litigation
settlement, as well as to increased earnings from higher cash balances
resulting from the completion of the Company's initial public offering in
June 1997 and a public offering in March 1998, partially offset by
interest expense on outstanding equipment line of credit and capital lease
balances.
Provision For Income Taxes. The Company recorded a provision for income
taxes of $6.9 million for the nine months ended September 30, 1998, an
effective tax rate of 26%. 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 nine months ended September 30, 1997 as it
incurred losses during such period.
Liquidity and Capital Resources
Since inception, the Company has financed its operations through
private placements of equity securities yielding approximately $29.4
million, through an initial public offering in June 1997 yielding
approximately $34.3 million, net of underwriting fees and offering
expenses and most recently through a public offering in March 1998
yielding approximately $54.8 million, net of underwriting fees and
offering expenses. As of September 30, 1998, the Company had approximately
$3.0 million of equipment line financing available. As of September 30,
1998, the Company had approximately $94.8 million in cash, cash
equivalents and short-term investments.
Net cash provided by operating activities in the first nine months of
fiscal 1998 was due primarily to net income of $19.6 million, and
increases of $22.2 million and $5.5 million in accounts payable and
accrued liabilities, respectively, partially offset by a $21.6 million and
$14.7 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 nine months of fiscal 1997 was due primarily to the net loss of
$3.8 million, a $4.7 million increase in accounts receivable partially offset
by a $3.6 million increase to accounts payable and a $1.7 million decrease in
inventory.
Net cash used in investing activities was approximately $17.9 million
and $7.7 million in the nine months ended September 30, 1998 and September
30, 1997, respectively, and was due in each period to the purchase of
investments and 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
September 30, 1998, the Company had capital equipment of $20.6 million
less accumulated depreciation of $6.8 million to support its research and
development, operations and administrative activities. The Company has
financed approximately $2.5 million of its capital equipment from capital
lease obligations through September 30, 1998. The Company has an equipment
line of credit which provides for the purchase of up to $3.0 million of
property and equipment. At September 30, 1998, there were no borrowings
outstanding under this line of credit. Borrowings under this line is
secured by all of the Company's owned assets and bear interest at the
bank's prime rate plus 0.75% per annum (8.75% as of September 30, 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 September 30, 1998. The lease
line of credit expires in December 2001. 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 $35 million in the first nine months of fiscal 1998 and fiscal
1997, respectively, due primarily to proceeds from the public offering in
March 1998, to proceeds from the initial public offering in June 1997, and
the issuance of preferred stock in the nine months ended September 30, 1997.
The Company has a line of credit agreement with Silicon Valley Bank,
which provides for maximum borrowings in an amount up to the lesser of 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 September 30, 1998. At September
30, 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 at least December 1999. 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 and differences in the
margins between different 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 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 each of the first three quarters of fiscal
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 $19.6 million in the nine months ended
September 30, 1998 and incurred a net loss of $3.8 million in the nine
months ended September 30, 1997. At September 30, 1998, the Company had
an accumulated deficit of $1.9 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%
of the Company's revenues for 1997 were attributable to development
contract revenues recognized under the Sega Agreement between the Company
and Sega, which was terminated in 1997. 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 location based
entertainment ("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., 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"),
nVidia Corporation and Micron Technology, 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
released or announced plans to release 3D graphics chips in 1998 that
promise to provide low cost 3D functionality for PCs and workstations.
In 1998, Intel began shipping a single chip 2D/3D graphics accelerator. Intel
has been very active in the graphics 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, the Company and Intel entered into
an agreement to license an early version of Glide, the Company's
proprietary low level 3D API. Intel also has an option to license 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 Acclaim Entertainment, Inc.,
Namco, Ltd., Sega, Taito Corporation, Ltd., WMS Industries, Inc.
("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.
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 nine months ended
September 30, 1998, 82%, 93% and 100%, respectively, of the Company's
revenues were derived from products sold for use in PCs. The Company
expects to continue to primarily derive its revenues from the sale of its
products for use in PCs. The PC market is characterized by rapidly
changing technology, evolving industry standards, frequent new product
introductions and significant price competition, resulting in short
product life cycles and regular reductions of average selling prices 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 will have the effect of increasing the Company's dependency on the PC
market.
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
or Voodoo Banshee, may not be indicative of long-term consumer demand. In
addition, the Company is dependent upon the continued viability and
financial stability of these graphics board manufacturers, some of which
are small organizations with limited capital. The Company believes that
its future growth and success will continue to depend in large part upon
its sales into the retail channel through graphics 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. 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. In
August 1998, the Company began shipping Voodoo Banshee, a proprietary 3D/2D
single chip solution. There can be no assurance that Voodoo Banshee will
perform the desired functions, offer sufficient price/performance benefits
or meet the technical or other requirements of potential buyers to realize
market acceptance. The 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 Voodoo Banshee for PC applications would have a
material adverse effect on the Company's business, financial condition and
results of operations. Although Voodoo Banshee has gained 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 Voodoo Banshee to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
Management of Growth. The ability of the Company to successfully offer
services and products and implement its business plan in a rapidly
evolving market requires an effective planning and management process. The
Company's rapid growth has placed, and is expected to continue to place, a
significant strain on the Company's managerial, operational and financial
resources. As of September 30, 1998, the Company had grown to 242
employees from 35 employees as of December 31, 1995. If the Company's
newer products achieve market acceptance, the Company expects that the
number of its employees will increase substantially over the next 12
months. The Company's financial and management controls, reporting systems
and procedures are also very limited. Although some new 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. In addition, the development and marketing of game
titles that do not fully demonstrate the technical capabilities of the
Company's 3D media processor products could create the impression that the
Company's technology offers only marginal, if any, performance
improvements over competing 3D media processors. Because the Company has
no control over the content of the entertainment titles produced by
software developers and publishers, the software entertainment titles
developed may represent only a limited number of game categories and are
likely to be of varying quality.
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 Creative, and Elitetron and Guillemot
accounted for approximately 25%, 20% and 10% of revenues for the
quarter ended September 30, 1998. Revenues derived from sales to Diamond,
Creative and Elitetron accounted for approximately 35%, 20% and 15%,
respectively, of revenues in the nine months ended September 30, 1998.
Revenues derived from sales to Diamond and Elitetron accounted for
approximately 37%, and 16%, 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%
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 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 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, 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 1999.
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 two patents issued from and eight patent applications pending in the
PTO. There can be no assurance that the Company's pending patent
applications or any future applications will be approved, or that any
issued patents will provide the Company with competitive advantages or
will not be challenged by third parties, or that the patents of others
will not have an adverse effect on the Company's ability to do business.
In addition, there can be no assurance that others will not independently
develop substantially equivalent intellectual property or otherwise gain
access to the Company's trade secrets or intellectual property, or
disclose such intellectual property or trade secrets, or that the Company
can meaningfully protect its intellectual property. A failure by the
Company to meaningfully protect its intellectual property could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted
in significant and often protracted and expensive litigation. There can be
no assurance that infringement claims by third parties or claims for
indemnification by other customers or end users of the Company's products
resulting from infringement claims will not be asserted in the future or
that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition and results of
operations. Any limitations on the Company's ability to market its
products, or delays and costs associated with redesigning its products or
payments of license fees to third parties, or any failure by the Company
to develop or license a substitute technology on commercially reasonable
terms could have a material adverse effect on the Company's business,
financial condition and results of operations. Litigation by or against
the Company could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel, whether
or not such litigation results in a favorable determination for the
Company. In the event of an adverse result in any such litigation, the
Company could be required to pay substantial damages, cease the
manufacture, use and sale of infringing products, expend significant
resources to develop non-infringing technology, discontinue the use of
certain processes or obtain licenses for the infringing technology.
International Operations. The Company's reliance on foreign third-party
manufacturing, assembly and testing operations, all of which are located
in Asia, and the Company's expectation of international sales subject it
to a number of risks associated with conducting business outside of the
United States. 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 vendors 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 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.
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.
PART II - Other Information
ITEM 1: Legal Proceedings
In September 1998, the Company, Sega Enterprises, Ltd. ("Sega"), its
U.S. subsidiary, Sega of America, Inc., NEC Corporation and VideoLogic
Group, Plc. settled litigation initiated by the Company in August 1997
following Sega's termination of the Technology Development and License
Agreement entered into by Sega and the Company in February 1997. The
settlement resulted in a one-time recognition of income for the Company.
On September 21, 1998, the Company filed suit against nVidia Corporation
("nVidia") in Northern California District Federal Court. The complaint
alleges patent infringement relating to nVidia's use of multi-texturing
technology in its RIVA TNT product. Discovery in the case is presently
under way.
ITEM 6: Exhibits
(a) Exhibits
3.4.1 Certificate of Amendment of Bylaws dated October 30, 1998
27.1 Financial Data Schedule
(b) Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts
Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
<PAGE>
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: November 13, 1998
<PAGE>
FINANCIAL STATEMENTS SCHEDULE
3DFX INTERACTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
---------------------
Charged to Charged
Beginning Costs and to Other Ending
Balance Expenses Accounts Deductions Balance
- ---------------------------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance For Doubtful
Accounts:
For the nine months
ended September 30, 1998.. $308 $1,836 $ -- $275 $1,869
For the nine months
ended September 30, 1997.. $78 $50 $ -- $20 $108
Inventory Reserve:
For the nine months
ended September 30, 1998.. $661 $10,567 $ -- $1,047 $10,181
For the nine months
ended September 30, 1997.. $632 $40 $ -- $11 $661
</TABLE>
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
- ---------
3.4.1 Certificate of Amendment of Bylaws dated October 30, 1998
27.1 Financial Data Schedule
CERTIFICATE OF AMENDMENT
OF BYLAWS OF
3DFX INTERACTIVE, INC.
The undersigned Secretary of 3Dfx Interactive, Inc. hereby certifies
that Article II of the Bylaws of this corporation was amended on
October 30, 1998, by the Board of Directors of this corporation by
(i) amending Sections 3 and 8(b) and (ii) adding a new Section 11, which
sections now read in their entirety as follows:
"Section 3 Special Meetings. Special meetings of the
shareholders, for the purpose of taking any action permitted by the
shareholders under the California General Corporation Law, may be
called at any time by the Board or, subject to the provisions of
this Section 3, by the Chair of the Board, the President, or one or
more shareholders holding not less than ten percent (10%) of the
votes entitled to be cast at the meeting. For a special meeting of
the shareholders to be properly brought by any person or persons
other than the Board pursuant to the preceding sentence, the person
or persons calling the meeting must have given timely notice thereof
in writing to the Secretary of the Corporation and the business
proposed to be conducted at such meeting must otherwise be a proper
matter for shareholder action. To be timely, such notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor
earlier than the close of business on the 90th day prior to the date
of the meeting proposed by the person or persons calling the
meeting. Such notice shall set forth (a) the proposed date and time
of the meeting, (b) as to each person whom the person or persons
calling the meeting propose to nominate for election or reelection
as a director all information relating to such nominee that is
required to be disclosed in solicitations of proxies for election of
directors in an election contest, or is otherwise required, in each
case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (or any successor thereto) and Rule 14a-11
thereunder (or any successor thereto) (including such nominee's
written consent to being named in the proxy statement as a nominee
and to serving as a director if elected); (c) as to any other
business that the person or persons calling the meeting proposes to
bring before the meeting, a brief description of the business
desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such
business of such person or persons and any other person or entity,
if any, on whose behalf the proposal is made; and (d) as to any
shareholders giving the notice (i) the name and address of such
shareholders, as they appear on the Corporation's books and (ii) the
class and number of shares of the Corporation which are owned
beneficially and of record by such shareholders. Upon notice
meeting the requirements of this Section 3 by any person or persons
entitled to call a special meeting of shareholders, the Corporation
shall cause notice to be given to shareholders entitled to vote that
a meeting will be held. Except in special cases where other express
provision is made by statute, notice of special meetings shall be
given in the same manner as for annual meetings of shareholders. In
addition, to the matters required by items (i), and, if applicable,
(ii) and (iii) of the preceding Section, notice of any special
meeting shall specify the general nature of the business to be
transacted, and no other business may be transacted at such
meeting."
"8(b) Prompt notice shall be given at the taking of any other
corporate action approved by shareholders without a meeting by less
than unanimous written consent, to those shareholders entitled to
vote who have not consented in writing. Such notices shall be given
as provided in Section 2 of these Bylaws.
Any shareholder of record or other person or entity seeking to
have the shareholders authorize or take corporate action by written
consent shall, by written notice to the Secretary, request the Board
of Directors to fix a record date pursuant to Section 6 hereof. The
Board of Directors may, at any time within ten (10) days after the
date on which such a request is received, adopt a resolution fixing
the record date (unless a record date has previously been fixed
pursuant to Section 6 hereof). If no record date has been fixed by
the Board of Directors pursuant to Section 6 hereof or otherwise
within ten (10) days of the date on which such a request is
received, the record date for determining shareholders entitled to
consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is required by applicable
law, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered
to the Corporation by delivery to its principal place of business or
to any officer or agent of the Corporation having custody of the
book in which proceedings of meetings of shareholders are recorded.
Delivery shall be by hand or by certified or registered mail, return
receipt requested. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by
applicable law, the record date for determining shareholders
entitled to consent to corporate action in writing without a meeting
shall be at the close of business on the date on which the Board of
Directors adopts the resolution taking such prior action.
In the event of the delivery, in the manner provided by this
Section 8(b), to the Corporation of the requisite written consent or
consents to take corporate action and/or any related revocation or
revocations, the Corporation may engage independent inspectors of
elections for the purpose of performing promptly a ministerial
review of the validity of the consents and revocations. For the
purpose of permitting the inspectors to perform such review, in the
event such inspectors are appointed, no action by written consent
without a meeting shall be effective until such date as such
appointed independent inspectors certify to the Corporation that the
consents delivered to the Corporation in accordance herewith
represent at least the minimum number of votes that would be
necessary to take the corporate action. Nothing contained in this
Section 8 shall in any way be construed to suggest or imply that the
Board of Directors or any shareholder shall not be entitled to
contest the validity of any consent or revocation thereof, whether
before or after any certification by any independent inspectors, or
to take any other action (including, without limitation, the
commencement, prosecution or defense of any litigation with respect
thereto, and the seeking of injunctive relief in such litigation).
Every written consent shall bear the date of signature of each
shareholder who signs the consent and no written consent shall be
effective to take the corporate action referred to therein unless,
within sixty (60) days of the earliest dated written consent
received in accordance with this Section 8, a written consent or
consents signed by a sufficient number of holders to take such
action are delivered to the Corporation in the manner prescribed
herein.
Any shareholder giving a written consent, or the shareholder's
proxyholder, or a transferee of the shares, or a personal
representative of the shareholder or their respective proxyholders,
may revoke the consent by a writing received by the Corporation
prior to the time that written consents by the number of shares
required to authorize the proposed action have been filed with the
Secretary of the Corporation, but may not do so thereafter. Such
revocation is effective upon its receipt by the Secretary of the
Corporation."
"11 Nominations and Proposals.
Nominations of persons for election to the Board of Directors
of the Corporation and the proposal of business to be considered by
the shareholders may be made at any meeting of shareholders only (a)
pursuant to the Corporation's notice of meeting, (b) by or at the
direction of the Board of Directors or (c) by any shareholder of the
Corporation who was a shareholder of record at the time of giving of
notice provided for in these bylaws, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in
this Section 11.
For nominations or other business to be properly brought
before a shareholders meeting by a shareholder pursuant to clause
(c) of the preceding sentence, the shareholder must have given
timely notice thereof in writing to the Secretary of the Corporation
and such other business must otherwise be a proper matter for
shareholder action. To be timely, a shareholder's notice shall be
delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor
earlier than the close of business on the 90th day prior to the
meeting; provided, however, that in the event that less than 65 days
notice of the meeting is given to shareholders, notice by the
shareholder to be timely must be so delivered not earlier than the
close of business on the seventh (7th) day following the day on
which the notice of meeting was mailed. In no event shall the
public announcement of an adjournment of a shareholders meeting
commence a new time period for the giving of a shareholder's notice
as described above. Such shareholder's notice shall set forth (a)
as to each person whom the shareholder proposes to nominate for
election or reelection as a director all information relating to
such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended (or any successor
thereto) and Rule 14a-11 thereunder (or any successor thereto)
(including such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); (b)
as to any other business that the shareholder proposes to bring
before the meeting, a brief description of the business desired to
be brought before the meeting, the reasons for conducting such
business at the meeting and any material interest in such business
of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (c) as to the shareholder giving
the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made (i) the name and address of such
shareholder, as they appear on the Corporation's books, and of such
beneficial owner, and (ii) the class and number of shares of the
Corporation which are owned beneficially and of record by such
shareholder and such beneficial owner. Notwithstanding any provision
herein to the contrary, no business shall be conducted at a
shareholders meeting except in accordance with the procedures set
forth in this Section 11."
This Certificate of Amendment of Bylaws shall be effective as of
this 30th day of October, 1998.
/S/ DAVID ZACARIAS
David Zacarias, Secretary
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 81,148
<SECURITIES> 13,623
<RECEIVABLES> 26,561
<ALLOWANCES> 0
<INVENTORY> 25,471
<CURRENT-ASSETS> 150,040
<PP&E> 13,785
<DEPRECIATION> 0
<TOTAL-ASSETS> 163,975
<CURRENT-LIABILITIES> 43,756
<BONDS> 0
0
0
<COMMON> 122,686
<OTHER-SE> (2,467)
<TOTAL-LIABILITY-AND-EQUITY> 163,975
<SALES> 141,858
<TOTAL-REVENUES> 141,858
<CGS> 81,144
<TOTAL-COSTS> 81,144
<OTHER-EXPENSES> 48,822
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,502
<INCOME-TAX> 6,889
<INCOME-CONTINUING> 19,613
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,613
<EPS-PRIMARY> $1.34
<EPS-DILUTED> $1.22
</TABLE>
