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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: 000-22651
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3DFX INTERACTIVE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<CAPTION>
CALIFORNIA 77-0390421
<S> <C>
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
4435 FORTRAN DRIVE, SAN JOSE, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 935-4400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
SERIES A PARTICIPATING PREFERRED STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
Amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
February 3, 1999 as reported on the Nasdaq National Market, was approximately
$26,846,828. Shares of Common Stock held by each officer and director and by
each person known to 3Dfx Interactive, Inc. who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of January 31, 1998, registrant had outstanding 15,769,413 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: None
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FORWARD LOOKING STATEMENTS
This Report contains forward-looking statements that involve risks and
uncertainties. When used in this Report, the words "expects," "anticipates,"
"estimates," and similar expressions are intended to identify forward-looking
statements. 3Dfx's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, consummation of the STB merger described below, fluctuations
in 3Dfx's quarterly and annual operating results, intense competition, 3Dfx's
dependence on the PC and emerging 3D interactive electronic entertainment
markets, 3Dfx's dependence on the retail distribution channel, 3Dfx's ability to
manage growth, 3Dfx's dependence on third party developers and publishers, rapid
technological change in 3Dfx's markets, 3Dfx's customer and product
concentration, continued acceptance and adoption of Glide, 3Dfx's proprietary,
low-level 3D API, 3Dfx's dependence on independent manufacturers and other third
parties, and 3Dfx's dependence on achieving acceptable semiconductor
manufacturing yields, as well as those discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Factors Affecting
Operating Results" and elsewhere in this Report.
PART I
ITEM 1. BUSINESS
3Dfx Interactive, Inc. develops high performance, cost-effective media
processors, software and related technology that enables a highly immersive,
interactive and realistic 3D experience across multiple hardware platforms.
3Dfx's products include 3D accelerators that enable highly interactive and
realistic entertainment experiences and that have primarily been focused on the
retail add-in card market. In addition, 3Dfx develops products with 2D and 3D
functionality that optimize both entertainment and general PC graphics
applications and that are well suited to both the PC-OEM and retail add-in card
markets. 3Dfx's media processors are comprised of hardware and embedded software
designed around a common architecture.
3Dfx's technology is optimized to alleviate the traditional consumer
trade-off between visual quality and gaming performance by providing a 3D
solution with both high fill rates and frame rates. To promote the rapid
adoption of its products, 3Dfx's architecture supports industry standard 3D
application programming interfaces, or APIs, including Microsoft Corporation's
Direct3D, or D3D, and Silicon Graphics, Inc.'s ("SGI") OpenGL. Additionally,
3Dfx has developed Glide, its proprietary low-level 3D API, which facilitates
the virtually seamless portability of software content across multiple
entertainment platforms utilizing 3Dfx's 3D and 3D/2D media processors. As a
result, developers can leverage the significant development and marketing
expenses associated with a given title.
3Dfx's current products, Voodoo Banshee and Voodoo2, as well as its
recently announced Voodoo3 product family, are designed around a common
architecture to be utilized as the 3D graphics engine for PCs and coin-operated
("coin-op") arcade systems. Voodoo Banshee, which began shipping in the third
quarter of 1998, is a high performance, fully featured single chip, 3D/2D media
processor for the PC and coin-op arcade markets. Current customers include
Creative Technology, Ltd. ("Creative"), Diamond Multimedia Systems, Inc.
("Diamond"), Elitetron Electronic Co., Ltd. ("Elitetron") and STB Systems, Inc.
All of 3Dfx's products are manufactured, packaged and tested by third parties.
PROPOSED STB MERGER
General. On December 13, 1998, 3Dfx entered into a Merger Agreement (the
"Merger Agreement") with STB Systems Inc., a Texas corporation ("STB"). The
Merger Agreement provides for the merger of a newly formed, wholly owned
subsidiary of 3Dfx with and into STB (the "Merger"). STB will be the surviving
corporation of the Merger and will become a wholly owned subsidiary of 3Dfx. The
Merger will be accounted for under purchase accounting. In the event that the
Merger is consummated, the combination of 3Dfx's and STB's operations will
result in many significant changes in 3Dfx's business.
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Effective Time of the Merger. The Merger will become effective upon the
filing of the executed Articles of Merger with the Secretary of State of Texas
(the "Effective Time"). The Merger Agreement provides that the parties thereto
will cause the Articles of Merger to be filed as soon as practicable after the
occurrence of the following events:
- The 3Dfx shareholders have approved the Merger, the Merger Agreement and
issuance of 3Dfx Common Stock pursuant to the Merger Agreement;
- The STB shareholders have approved and adopted the Merger Agreement and
approved the Merger; and
- The parties have obtained all required regulatory approvals, taken all
required actions and satisfied or waived all other conditions to the
consummation of the Merger.
These conditions precedent to the Merger may not be satisfied. Moreover, either
3Dfx or STB may terminate the Merger Agreement under various conditions
specified in the Merger Agreement. Therefore, there can be no assurance as to
whether or when the Merger will become effective.
Conversion of Securities. Upon consummation of the Merger, each outstanding
share of STB Common Stock will automatically be converted into 0.65 of a share
of 3Dfx Common Stock (the "Exchange Ratio"). No fractional shares of 3Dfx Common
Stock will be issued in the Merger. Pursuant to the Merger Agreement, each STB
shareholder who would otherwise be entitled to receive a fraction of a share of
3Dfx Common Stock will receive from 3Dfx an amount of cash equal to the per
share market value of 3Dfx Common Stock multiplied by the fraction of a share of
3Dfx Common Stock to which such shareholder would otherwise be entitled. Under
the Merger Agreement, the per share market value of 3Dfx Common Stock will be
based on the closing price of a share of 3Dfx Common Stock as reported on the
Nasdaq National Market ("Nasdaq") on the last full trading day prior to the
Effective Time. Based upon the number of shares of 3Dfx Common Stock and STB
Common Stock outstanding at December 31, 1998, an aggregate of approximately
8,193,800 shares of 3Dfx Common Stock would be issued in connection with the
Merger. This amount represents approximately 34.3% of the total number of shares
of 3Dfx Common Stock outstanding after giving effect to such issuance (excluding
shares issuable upon the exercise of options or warrants). In addition, pursuant
to the Merger Agreement, certain outstanding options to purchase shares of STB
Common Stock, as well as a warrant to purchase shares of STB Common Stock, will
be converted into options and a warrant to purchase 65% of as many shares of
3Dfx Common Stock at an adjusted exercise price.
The Exchange Ratio is fixed and will not increase or decrease due to
fluctuations in the market price of either 3Dfx Common Stock or the STB Common
Stock. In the event that the market price of 3Dfx Common Stock decreases or
increases prior to the Effective Time, the value at the Effective Time of 3Dfx
Common Stock to be received by STB shareholders in the Merger would
correspondingly decrease or increase.
Other Agreements Executed With the Merger Agreement. Concurrently with the
signing of the Merger Agreement, STB and 3Dfx entered into the STB Stock Option
Agreement, pursuant to which STB granted 3Dfx the right to purchase up to
1,890,883 shares of STB Common Stock (representing 15.0% of the outstanding
shares of STB Common Stock as of December 31, 1998 on an undiluted basis) at an
exercise price of $5.78 per share. The option can be exercised only if a person
or group acquires beneficial ownership, or the right to acquire beneficial
ownership, of more than 20% of the outstanding STB Common Stock, any person
shall have made a tender offer or exchange for at least 20% of the outstanding
STB Common Stock, or STB shall have entered into an agreement relating to
liquidation, dissolution, recapitalization, merger, consolidation or
acquisition. In certain circumstances, 3Dfx may, in lieu of exercising the
option described above, require that STB pay to 3Dfx a cancellation fee. In
connection with the execution of the Merger Agreement, all executive officers
and directors and certain affiliated shareholders of STB, who beneficially owned
in the aggregate approximately 12.1% of the outstanding shares of STB Common
Stock (excluding shares subject to options) as of December 31, 1998, have agreed
with 3Dfx that they will vote their shares of STB Common Stock in favor of
approval of the Merger Agreement, the Merger and any matter that could
reasonably be expected to facilitate the Merger and against approval of any
proposal opposing or competing against the 3Dfx Merger. Also, all executive
officers and directors and certain affiliated shareholders of 3Dfx
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who beneficially owned, in the aggregate, approximately 13.3% of the outstanding
shares of 3Dfx Common Stock (excluding shares subject to options) as of December
31, 1998, have agreed with STB that they will vote their shares of 3Dfx Common
Stock in favor of the Merger Agreement, the Merger, the issuance of 3Dfx Common
Stock pursuant to the Merger and any matter that could reasonably be expected to
facilitate the Merger.
INDUSTRY BACKGROUND
The goal of interactive electronic entertainment is to create a realistic
and immersive environment in which users can actively participate. Interactive
electronic entertainment began in the 1970s with Atari's introduction of Pong, a
simplistic, 2D, black and white, coin-op arcade game resembling ping pong, and
has evolved to realistic and engaging 3D action games such as Madden 99, Unreal
and Tomb Raider 3.
While interactive electronic entertainment started in the arcade, it was
brought to the mass market through the advent of inexpensive, dedicated home
game consoles that attached to televisions. Over the past 15 years, Nintendo
Corporation ("Nintendo"), Sega Enterprises, Ltd. ("Sega"), Sony Corporation
("Sony") and other OEMs have introduced successive generations of these consoles
that, combined with better quality games, have provided increasing realism and
enhanced game play. The overall entertainment experience on these platforms has
been improving as a result of the introduction of successive generations of 3D
hardware and software in the arcade and console markets.
The ultimate goal of the use of 3D for entertainment applications is to
create an interactive experience with video quality comparable to that of motion
pictures. Interactive electronic entertainment applications employing 3D
graphics create plausible illusions of reality and thus provide more engaging
presentations of complex action and scenery than traditional 2D graphics. 3Dfx
believes that once consumers experience high quality 3D technology on any
entertainment platform, they will demand it from all interactive entertainment
experiences.
Interactive electronic entertainment products today are generally played on
three hardware platforms -- the PC, the coin-op arcade system and the home game
console. Coin-op arcade games have traditionally offered the most compelling and
immersive experience for game players and, as a result, 3D gaming was first
introduced in this high-end market. However, coin-op arcade games are based on
high cost, proprietary hardware and, consequently, the coin-op arcade market has
remained a relatively small segment of the overall 3D market. Like coin-op
arcade systems, home game console hardware is typically proprietary. However,
the attractive price point, traditionally $200 or less, continual technological
improvements and the convenience of home play that home game consoles offer have
fueled the platform's substantial consumer adoption even though performance
still trails that of the arcade.
Although 3D interactive electronic entertainment has historically enjoyed
success on both the coin-op arcade and home game console platforms, both of
which are optimized for game play, only recently has 3D entertainment begun to
penetrate the PC market. Several recent developments, however, are enabling the
PC to become a more suitable platform for interactive electronic entertainment.
First, the emergence of more powerful microprocessors and dedicated graphics
processors have provided the necessary computing power to handle the
computationally intensive processing of 3D graphics at acceptable costs. Second,
the PC industry has adopted wider data buses in the PC architecture that are
capable of transmitting the vast streams of data needed for high quality 3D
graphics. Third, cost reductions in memory and other components have allowed PC
OEMs to offer lower cost, general purpose computing platforms that are ideal for
3D interactive electronic entertainment. Finally, the industry has developed and
adopted industry standard 3D APIs, like Microsoft's D3D, SGI's OpenGL, and
3Dfx's own Glide, which serve as software bridges between applications and the
3D graphics processor.
In addition to the performance capabilities of the hardware, the success of
any game platform ultimately depends on the quality and quantity of software
titles developed for the platform and the ease with which developers can create
new software for, or port existing software to, a platform. Porting is the
adaptation of software code written for one platform for use on another. For
example, software written for a coin-op arcade system must be ported so that it
can be played on PCs or home game consoles. Historically, porting has been
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technically challenging, costly and time consuming. Even though the coin-op
arcade market is the proving ground for new game titles with hits in the arcade
market virtually guaranteeing success in the PC and home game console markets,
software developers often decide not to pursue these opportunities because of
the significant engineering effort required to port a title from one platform to
another. As a result, game developers and publishers have not been able to fully
capitalize on their investment in software content. Consumers have been
frustrated by the long delays between their first experience with a game in an
arcade and the availability of the game for home use and by the significant
decrease in game quality typically experienced when software titles migrate from
the arcade platform to home game platforms. Thus, content developers are
demanding an entertainment solution that facilitates virtually seamless porting
across platforms and consumers are demanding a cost-effective solution that
enables a high quality gaming experience on their choice of platform.
THE 3D DILEMMA
The implementation of 3D graphics is extremely complex and mathematically
intensive and requires significant computing power. Consequently, despite the
desirability of 3D graphics, high quality 3D is not fully incorporated in the
majority of PCs shipped. To date, attempts to bring high quality, affordable 3D
solutions to the entertainment market have required consumers to accept a
trade-off between visual realism, or fill rate, and gaming performance, or frame
rate. Today, the interactive electronic entertainment industry is demanding a
no-compromise 3D solution that will deliver both visual realism and performance
at a cost-effective price. The solution must also drive content development by
enabling developers to create a new generation of high quality 3D software that
delivers a realistic and immersive experience.
THE 3DFX SOLUTION
3Dfx has developed hardware and software technology designed to deliver
superior 3D performance across multiple interactive electronic entertainment
platforms in a cost-effective manner. 3Dfx's technology is optimized to
alleviate the traditional consumer trade-off between visual quality and gaming
performance by providing a 3D solution with both high fill rates and frame
rates. To that end, 3Dfx's technology enables a highly immersive, interactive 3D
experience with compelling visual quality, realistic motion and complex
character and scene interaction at real time frame rates. 3Dfx's first products,
its current 3D media processor, Voodoo2, and its 3D/2D media processor, Voodoo
Banshee, are designed around a common architecture to be utilized as the
graphics engine for PCs and coin-op arcade systems.
To promote the rapid adoption of its products, 3Dfx's architecture supports
most industry standard APIs, including Microsoft's D3D and SGI's OpenGL. 3Dfx
believes that game titles using any of these APIs in conjunction with its 3D and
3D/2D media processor products offer compelling performance when compared to
performance achieved by competing hardware solutions. Additionally, 3Dfx has
developed Glide, its proprietary, low-level 3D API. Glide was designed to
optimize the performance of software designed for any entertainment platform
powered by 3Dfx's 3D and 3D/2D media processors, and affords virtually seamless
portability of game content across multiple entertainment platforms. The content
provider's ability to rapidly port software titles to numerous platforms reduces
the developer's time to market from the arcade to the PC, significantly reduces
the costs of porting across multiple platforms, provides a successful title with
enormous exposure and allows both the game developer and the publisher to more
effectively leverage their investment in a given title. 3Dfx believes that these
are powerful incentives for the leading PC OEMs and arcade manufacturers,
software content developers and publishers to use and design applications for
the 3Dfx graphics engine.
STRATEGY
3Dfx's objective is to establish its products as the standard 3D and 3D/2D
media processors in the interactive electronic entertainment market. Key
elements of 3Dfx's business strategy include:
Focus on Interactive Electronic Entertainment Market. The interactive
electronic entertainment market is currently a multi-billion dollar industry
that is growing rapidly. 3Dfx believes that the compelling visual quality and
high performance graphics enabled by its 3D and 3D/2D media processors make its
3D solution
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ideal for use in this market in which users demand a high quality 3D experience.
3Dfx's strategy is to develop and introduce products that cost-effectively
deliver 3D performance levels that meet the demanding requirements of the major
interactive electronic entertainment platforms. Moreover, given the technical
challenge of offering a high quality 3D solution, 3Dfx believes that this market
offers significant potential for continued innovation of cost-effective, high
performance 3D and 3D/2D media processors.
Promote Content Development. 3Dfx believes that the availability of a
sufficient number of high quality, commercially successful software game titles
and applications drives hardware sales. Therefore, to become the standard in the
3D interactive electronic entertainment arena, 3Dfx is collaborating with
content developers to create software entertainment titles designed to work with
3Dfx's hardware. Currently, over 250 such software entertainment titles are
commercially available. 3Dfx attracts these developers by giving them the
opportunity to differentiate their software products with high quality 3D
graphics, feature rich special effects and real time frame rates. With a
solution that enables game content to be easily ported across the major
interactive entertainment platforms, 3Dfx offers its software partners easy
access to multiple platform outlets for their products. To encourage developers
and publishers to develop content based on 3Dfx's technology, 3Dfx has devoted
significant resources to its developer relations program, which currently
includes over 1,000 content developers, game publishers and independent software
vendors, or ISVs.
Pursue Branding Strategy. 3Dfx continues to devote substantial marketing
resources towards establishing 3Dfx as a recognizable brand. In addition to
on-going efforts with both software developers and publishers in the PC market
to promote the 3Dfx brand and the software's compatibility with 3Dfx's products,
3Dfx continues to invest in its branding efforts. 3Dfx has partnered with
several high profile marketing and advertising agencies to execute its
innovative global branding campaign. This campaign includes widespread print and
media advertising as well as various internet-based initiatives.
Extend Technical Leadership. 3Dfx offers leading performance 3D and
integrated 2D/3D media processors primarily targeted toward the high-end of the
interactive electronic entertainment market. 3Dfx intends to continue to
leverage its technology at the high-end of the 3D interactive electronic
entertainment market in order to optimize and cost-reduce such solutions for
more mainstream applications in the volume market. 3Dfx believes this strategy
will create an effective barrier to entry to potential competitors.
Leverage Success in Retail Distribution Channel into OEM Channel. 3Dfx's
efforts to date have largely been focused on the multimedia add-in card market.
With the introduction of Voodoo Banshee, which provides a single chip,
integrated 2D/3D solution, 3Dfx has extended its focus to include the more
mainstream PC OEM market. 3Dfx believes that its success in branding both 3Dfx
and its Voodoo technology at the consumer level through its efforts in the
retail channel, as well as its success in working with the software content
community, provide an incentive for PC OEMs to design 3Dfx products into their
future product lines. 3Dfx believes that its brand equity provides PC OEMs with
a differentiating feature that consumers will recognize. Additionally, using
3Dfx products enables OEMs to offer their customers immediate access to a
substantial software title library, including a number of entertainment titles
that function in 3D accelerated mode only when 3Dfx technology is present in the
system.
Leverage Core Technology to Address New Market Opportunities. 3Dfx is
investigating opportunities to apply its 3D technology to other product
applications such as set-top boxes, mobile computers, personal data assistants
("PDAs"), Internet/intranet exploration, including virtual reality mark-up
language ("VRML") browsers, 3D graphical user interface ("GUI"), visual
simulation, education and training applications and other 3D visualization
applications.
PRODUCTS
3Dfx's product strategy is to offer an integrated 2D/3D media processor
solution comprised of hardware and embedded software designed around a common
architecture that will become the standard graphics engine for the interactive
electronic entertainment market. Voodoo Graphics, 3Dfx's first product, began
commercial shipment in September 1996. Voodoo Rush, 3Dfx's second product
commenced commercial shipment in April 1997. 3Dfx has also developed Voodoo2,
which was released in the first quarter of 1998. Voodoo Banshee, a high
performance, fully featured single chip 3D/2D media processor was released
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commercially in the third quarter of 1998. 3Dfx's newest product family,
Voodoo3, was announced in late 1998 and is scheduled to begin commercial
shipments in the second quarter of 1999. 3Dfx's current products, Voodoo Banshee
and Voodoo2, as well as the Voodoo3 product family, are designed around a common
architecture, which offers developers a clear compatible upgrade path, to be
utilized as the 3D graphics engine for PCs and coin-operated ("coin-op") arcade
systems.
Voodoo2. Voodoo2, introduced in November 1997, is 3Dfx's second generation
3D-only accelerator and provides a significant increase in performance over
3Dfx's first generation Voodoo Graphics product. Commercial shipment of Voodoo2
began in the first quarter of 1998. Voodoo2 is targeted at the same markets as
3Dfx's first generation Voodoo Graphics accelerator. Voodoo2 has garnered wide
acceptance with customers, including Diamond, Creative and STB.
Voodoo2 is offered to the consumer in a configuration previously marketed
by 3Dfx for use in the arcade and simulation markets. Voodoo2 is delivered as a
3-chip chipset that includes a pixel chip for controlling the display memory and
two texture units that process texture maps in parallel. Voodoo2 maintains
compatibility with Voodoo Graphics so virtually all existing games for Voodoo
Graphics operate unchanged with Voodoo2. In addition to the features supported
by Voodoo Graphics, Voodoo2 now has a more advanced triangle setup unit that
increases triangle throughput to 3,000,000 triangles per second measured on a
Pentium II-300 MHz MMX system. The second texture unit doubles the texturing
performance for games that include support for the second texture unit. Voodoo2
provides performance of 90 Megapixels per second and 90 Megatexels per second;
when the second texture unit is activated, Voodoo2 provides up to 180 Megatexels
per second. Voodoo2 boards also incorporate a scan-line interleave connector
that allows two boards to operate in parallel thus doubling rendering
capability. In this configuration, Voodoo2 provides performance of 180
Megapixels per second and 180 Megatexels per second; when the second texture
unit is activated, Voodoo2 provides up to 360 Megatexels per second.
Voodoo Banshee. 3Dfx has also developed Voodoo Banshee, a high performance,
fully featured single chip 3D/2D media processor for the PC and coin-op arcade
markets. 3Dfx began commercial shipment of Banshee during the third quarter of
1998. 3Dfx developed Banshee with the intent of delivering quality 3D/2D to a
broader portion of the interactive electronic entertainment market. In addition,
Banshee is designed to reduce graphics system costs and to be compatible with
applications designed for use with Voodoo Graphics, Voodoo Rush and Voodoo2.
Voodoo3. The Voodoo3 product family, introduced in November 1998, is a
range of new generation, integrated single chip, 3D/2D media processors targeted
for the PC market. The first Voodoo3 products are expected to begin commercial
shipment in the second quarter of 1999 and to be compatible with applications
for earlier Voodoo family products. Voodoo3 is intended to be faster and more
fully featured than previous 3Dfx products. Voodoo3's target customer base is
both the retail and broader PC-OEM markets.
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3DFX PRODUCTS
<TABLE>
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COMMERCIAL
PRODUCT AVAILABILITY TARGET MARKET KEY FEATURES
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<S> <C> <C> <C>
Voodoo Graphics September 1996 PCs, coin-op Add-in 3D solution; systems
arcade systems scalability; consistent sustained
performance will all features
enabled; fill rate of 45 Mpixel/sec;
fully-featured triangle rate of
1.0M/sec; texture streaming; fully-
featured architecture
Voodoo Rush April 1997 PCs Single board 3D/2D solution;
consistent sustained performance will
all features enabled; fill rate of 45
Mpixel/sec; fully-featured triangle
rate of 800K/sec; texture streaming;
fully-featured architecture; 3D in a
window
Voodoo2 March 1998 PCs, coin-op Add-in 3D solution; systems
arcade systems scalability; consistent sustained
performance will all features
enabled; fully-featured triangle rate
of up to 3.0M/sec; texture streaming;
on-chip triangle set up;
fully-featured architecture
Voodoo Banshee August 1998 PCs, coin-op Single chip 3D/2D solution; large
arcade systems feature set; fully integrated
architecture; high sustained fill
rate and triangle rate with all
features enabled; compatible 3D
architecture with Voodoo Graphics and
Voodoo 2
Voodoo3 Expected PCs, coin-op Single chip 3D/2D solution; large and
second quarter arcade systems enhanced feature set; fully
1999 integrated architecture; AGP2X; high
sustained fill rate and triangle rate
with all features enabled; compatible
3D architecture with Voodoo Graphics,
Voodoo 2, and Voodoo Banshee
</TABLE>
CUSTOMERS
3Dfx markets its products to PC and graphics board OEMs and manufacturers
of coin-op arcade systems. 3Dfx works closely with its customers and software
developers during the design process of entertainment platforms and the
development phase of software titles and applications. 3Dfx believes that this
close technical collaboration facilitates the integration of 3Dfx's products
into its customers' entertainment platforms. There can be no assurance, however,
that design wins will ultimately result in orders or that 3Dfx will retain such
customers through the ongoing and recurring design-in process. The following is
a representative list of the companies that are either direct or indirect
customers of 3Dfx or companies with which 3Dfx has design wins:
A-trend Technology(1)
Creative Technology, Ltd.
Diamond Multimedia Systems, Inc.
Elitetron Electronic Co., Ltd.
ELSA A.G.
Fountain Technology
Gateway 2000, Inc.(1)
Guillemot International
Micron Electronics, Inc.(1)
Quantum3D, Inc.
Skywell Technology Corp.(1)
STB Systems, Inc.
TechWorks, Ltd.
Tiny Computers
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(1) Indirect customer that purchases products from 3Dfx's board level customers.
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Because of 3Dfx's limited operating history and early stage of development,
it has only a limited number of customers and its sales are highly concentrated.
Revenues derived from sales to Diamond (and its subsidiaries), Creative (and its
subsidiaries) and Elitetron accounted for approximately 32%, 26% and 16%,
respectively, of revenues for 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 Technology, Diamond and WMS
Industries, Inc. ("Williams") accounted for approximately 44%, 33% and 11%,
respectively, of revenues for 1996. 3Dfx expects that a small number of
customers will continue to account for a substantial portion of its total
revenues for the foreseeable future.
SALES AND MARKETING
3Dfx sells its products to manufacturers of graphics and multimedia
accelerator subsystems for PCs and coin-op arcade systems and to PC OEMs through
a network of domestic and international independent sales representatives and
distributors. In the United States and Canada, 3Dfx has 8 sales representatives.
3Dfx also sells its products directly to certain OEM customers in each of 3Dfx's
target markets. Outside the United States and Canada, primarily in the Far East
and Europe, 3Dfx's products are sold through 8 sales representatives. 3Dfx
maintains a sales management organization that is primarily responsible for
supporting independent sales representatives and distributors and making direct
sales to customers that prefer to transact directly with 3Dfx. As of December
31, 1998, 3Dfx employed 52 individuals in its sales, marketing and customer
support organization.
To meet customer requirements and achieve design wins, 3Dfx's sales and
marketing personnel work closely with customers, potential customers and leading
industry software and hardware developers to define product features,
performance, price and market timing of new products. 3Dfx provides customers
with early access to technical design information and specifications,
documentation, in-house engineering support, first chip product samples and
product development plans. This effort is coordinated by 3Dfx's sales management
organization and is supported by in-house applications engineers and marketing
personnel. 3Dfx's applications engineers frequently work with existing and
potential customers to assist them with their design projects. 3Dfx believes
that these efforts contribute to 3Dfx's understanding of customer needs and
assist 3Dfx in developing products that meet customer requirements.
To encourage software title developers and publishers to develop games
optimized for platforms utilizing 3Dfx's products, 3Dfx seeks to establish and
maintain strong relationships in the software development community. 3Dfx has
branded a marketing effort named the "Buddy Program" that employs 3Dfx's
expertise in software development to assist developers through an on-site
assistance program, sample source code and electronic communication. As part of
the Buddy Program, 3Dfx has assigned a software engineer to each strategic
developer to assist with product development. Generally 3Dfx's assigned software
engineer interacts with the developer both remotely and through on-site visits
and, by working closely with the development team, attempts to ensure that the
developer fully exploits the 3D graphics capabilities of 3Dfx's products.
Another key element of 3Dfx's sales and marketing strategy has been the
development of manufacturing qualified reference design kits for 3Dfx's 3D and
3D/2D media processors. 3Dfx uses the reference design kits to seed important
developers before the commercial introduction of 3Dfx's products to ensure early
software availability, and after commercial introduction to encourage on-going
support of 3Dfx's products. 3Dfx believes that its close relationships with and
attention to content developers encourages the development of software for
3Dfx's hardware, provides 3Dfx with information regarding the needs and concerns
of the development community and enables 3Dfx to continually assess
opportunities for future software projects.
As of December 31, 1998, more than 300 game titles for the PC and more than
10 arcade titles using 3Dfx's hardware were commercially available. The PC game
titles use different APIs, including Glide, D3D
8
<PAGE> 10
and OpenGL, or some combination thereof. The following table is a representative
list of game titles for use with platforms utilizing 3Dfx's hardware that were
commercially available as of December 31, 1998:
<TABLE>
<CAPTION>
TITLE PUBLISHER DEVELOPER API PLATFORM
----- --------- --------- --- --------
<S> <C> <C> <C> <C>
Need for Speed III..... Electronic Arts EA Canada Glide/D3D PC
Thief: The Dark
Project.............. Eidos Looking Glass Technology D3D PC
Star Wars Rogue
Squadron............. Lucas Arts Factor 5 Glide/D3D PC
Uprising 2............. 3DO Cyclone Studios Glide PC
SiN.................... Activision Ritual Entertainment OpenGL PC
Star Seige Tribes...... Sierra Dynamix Glide/OpenGL PC
Populous: The
Beginning............ Electronic Arts Bullfrog D3D PC
Myth 2: Soulblighter... Bungie Bungie Glide/D3D PC
Dark Vengeance......... GT Interactive Reality Bites D3D PC
X Games Pro Boarder.... Electronic Arts Radical Entertainment D3D PC
Half Life.............. Sierra Valve Entertainment OpenGL PC
Madden 99.............. Electronic Arts Tiburon Glide/D3D PC
Unreal................. GT Interactive Epic Megaganes Glide/OpenGL/D3D PC
FIFA 99................ Electronic Arts EA Canada Glide/D3D PC
Gameday 99............. 989 Studios 989 Studios Glide/D3D PC
Tomb Raider 3.......... Eidos Core Design D3D PC
Test Drive 5........... Accolade Pitbull Syndicate Glide/D3D PC
SCARS.................. Ubisoft Ubisoft Glide/D3D PC
Red Guard.............. Bethesda Softworks Bethesda Softworks Glide PC
Tiger Woods Golf 99.... Electronic Arts Electronic Arts Glide/D3D PC
Klingon Honor Guard.... Microprose Microprose Glide PC
Heretic 2.............. Activision Raven Software OpenGL PC
NFL Blitz 99........... Midway Atari Games Glide Coin-op arcade
Gauntlet Legends....... Midway Atari Games Glide Coin-op arcade
</TABLE>
To enhance awareness of 3Dfx's 3D graphics solutions, 3Dfx has created
several proprietary demonstrations that showcase the performance and features
made possible by 3Dfx's products. These demonstrations, which are sometimes
bundled with an OEM's product, are shown to software developers, OEMs, VARs
(value-added resellers) and tradeshow audiences. 3Dfx believes that these
demonstrations effectively demonstrate the immediate potential for high quality
3D graphics in interactive electronic entertainment and effectively
differentiate 3Dfx's product offerings from competing products. 3Dfx continues
to devote substantial marketing resources towards establishing 3Dfx as a
recognizable brand. 3Dfx has been working with both software developers and
publishers in the PC market to prominently display the 3Dfx logo on their
software product boxes to indicate that the software is compatible with 3Dfx's
products. To further identify 3Dfx in the marketplace, several software products
display a spinning version of the 3Dfx logo on the screen while loading. 3Dfx
believes that this strategy creates brand awareness. 3Dfx further believes that
consumer awareness of its products will speed adoption of 3Dfx's architecture in
the mass market, lead to increasing availability of 3Dfx enabled software
content and help establish 3Dfx as the standard 3D solution for the interactive
electronic entertainment market.
3Dfx's marketing activities also consist of participation in industry
tradeshows, marketing communications and market development activities designed
to generate awareness of 3Dfx and its products. Such activities include ongoing
contact with industry press and analysts and selective advertising in
entertainment and game industry publications. In March 1998, Dimension
Publishing introduced a quarterly magazine dedicated exclusively to 3Dfx
products. This magazine includes software title and hardware release schedules,
product reviews, gaming tips and other information that enhance the return on
the consumer's investment in 3Dfx based products. 3Dfx believes that this
magazine helps build 3Dfx's brand image while concurrently
9
<PAGE> 11
increasing awareness in the marketplace about 3Dfx products. 3Dfx is also active
in the promotion of its products through 3D graphics news groups on the
Internet. 3Dfx intends to continue to promote the 3Dfx name and trademarks to
create a recognizable industry standard for high quality 3D entertainment.
TECHNOLOGY
3D Technology
The technology necessary to create interactive, realistic and visually
engaging 3D at high frame rates is extremely compute intensive, complex and
technically challenging. Today, 3D graphics companies face the challenge of
designing affordable products that offer realistic 3D graphics with full screen
resolution in real time for the mainstream PC market. The substantial complexity
and technical demands of achieving this level of 3D graphic performance requires
compute and pixel processing power and memory bandwidths well beyond what is
available in typical general purpose CPUs. Specialized 3D graphics processors
address this limitation by implementing all or part of what is referred to as
the "3D Pipeline" by providing dedicated 3D graphics processing capability.
The 3D Pipeline is a sequence of operations, which starts with three
dimensional model data, position and desired lighting models and results in 2D
pixels displayed on a computer monitor or television display. The creation of a
single 3D image from the numerical mode is comprised of three primary steps:
tessellation, geometry and rendering.
- Tessellation. Tessellation is the creation of a numerical description
(the "three dimensional model data") of an object and the conversion of
this model into a set of polygons. Polygons are often defined to be
triangles because triangles are simple geometric shapes which can be
easily defined by only a few data points and can be quickly modified by
mathematical operations. Each triangle requires a separate set of
calculations, which means that the more complex an object is, the more
compute intensive it is. As a result, triangles-per-second is one of the
essential performance metrics of 3D graphics.
- Geometry. The geometry phase of the 3D Pipeline includes three stages:
transformation, lighting and triangle setup, although triangle setup is
often considered a separate stage. The transformation stage converts the
native three dimensional model data from its native numerical
representation into a viewer-dependent model space by using 4x4 matrix
operations. The triangle setup operation takes in the transformed,
lighted triangles and calculates the edge and slope information required
to paint each individual triangle on the screen.
- Rendering or Rasterization. The third primary phase of the 3D Pipeline,
called triangle rendering or triangle rasterization, is the most
important phase for creating a quality 3D image. During this phase, a
two-dimensional image, capable of being displayed on a PC monitor or
television set, is created from the discrete, three-dimensional model
that emerged from the geometry phase. Within each particular triangle,
pixels are computed, rendered and displayed according to a complex set of
rules. Final image quality depends on the number and types of techniques
applied to each particular pixel. Various techniques are applied in the
rendering phase to achieve photo-realistic images, including scan
conversion, shading, texture-mapping and various perspective
enhancements. More advanced techniques in rendering include MIP mapping,
texture filtering, anti-aliasing, subpixel correction, fogging,
alpha-blending, and depth cueing.
The rasterization stage of the 3D Pipeline permits a significant level of
quality improvements, which can be achieved by the application of many
techniques. While these techniques can make a qualitative difference in the
realism that a 3D image conveys to the viewer, many of these techniques are
highly compute intensive. As a result, if performance is not sufficient given
the number and type of techniques used, the overall experience of the user will
be diminished. In order for a 3D image to achieve realistic animation on a
monitor screen in real-time and with excellent visual quality, as many as twenty
billion operations per second might be necessary. Most PC systems that are
equipped with 3D hardware accelerators perform the tessellation, transformation,
lighting, and clipping operations on the CPU and pass the results to the 3D
acceleration
10
<PAGE> 12
hardware for triangle setup and rendering to complete the 3D pipeline. In most
cases, the rasterization stages of the 3D Pipeline is handled by a graphics
processor, which has a focused range of operation.
3Dfx Architecture and Technology
The primary goal of Voodoo2 and Voodoo Banshee and 3Dfx's 3D and 3D/2D
media processors under development is to provide workstation-quality 3D
performance at an affordable price. Furthermore, the scaleable nature of the
3Dfx solution is applicable across different markets and different price targets
without re-engineering the core logic. The block diagram below is an outline of
3Dfx's Voodoo Graphics product:
In the above diagram, the pixelfx chip is responsible for managing the
frame buffer, while the texelfx chip accesses dedicated texture memory. The
pixelfx chip performs triangle setup, Gouraud shading, texture, fogging,
alpha-blending and Z-buffering. The pixelfx chip is also responsible for sending
information to a low-cost external digital to analog converter ("DAC") for
display on a computer monitor or television set. The texelfx chip is responsible
for triangle setup of the texture coordinates, texture address calculations,
perspective-correction of the texture coordinates, MIP Mapping calculations to
properly select the appropriate texture map and texture lookup. Subsequent to
texture lookup, the texelfx chip formats the incoming texture and decompresses
the texture element if the texture map is stored in a proprietary compressed
format and performs bilinear blending. Finally, the processed texel is sent to
the pixelfx chip for final storage into the frame buffer.
The performance benefits of having separate, dedicated frame buffer memory
distinct from texture memory is dramatic. While traditional consumer-oriented 3D
and 3D/2D media processors have utilized a common pool of memory for both frame
buffer and texture storage, the 3Dfx solution allows for Z-buffering and
alpha-blending operations, performed in the frame buffer memory, to operate
independently from texture map lookup, performed in the dedicated texture
memory. The result is an architecture which maintains full performance when all
of the advanced 3D rendering features are enabled.
Due to the design's scalability, multiple texelfx chips may be chained
together to form a "texture streaming" architecture, where multiple texture maps
may be accessed independently and blended together, a technique known as
"texture compositing" with no degradation in quality. In addition, multiple
complete pixelfx/texelfx subsystems may be chained together to double the raw
rendering capability for high performance solutions.
To further reduce the solution cost of its products and to specifically
address PC-OEM designs, 3Dfx developed Voodoo Banshee, which is a high
performance, fully-featured single chip, 3D/2D media processor for the PC and
coin-op arcade markets. In addition, 3Dfx offers Glide, its proprietary API, as
a development tool to enable the optimal performance and easy, low cost cross
platform portability of software content developed for 3Dfx's 3D and 3D/2D media
processor products.
Research and development expenses were $34.0 million, $12.4 million and
$9.4 in 1998, 1997 and 1996, respectively.
11
<PAGE> 13
MANUFACTURING
3Dfx has adopted a "fabless" manufacturing strategy for its semiconductor
products whereby 3Dfx employs world class suppliers for all phases of the
manufacturing process, including, manufacturing, assembly, testing, and
packaging. This strategy leverages the expertise of its industry leading, ISO
Certified, suppliers in such areas as fabrication, packaging, quality control
and assurance, reliability, and testing, and allows 3Dfx to avoid the
significant costs and risks associated with owning and operating such
operations. Third party suppliers manufacture 3Dfx's semiconductor products.
These suppliers are responsible for procurement of raw materials used in the
production of these products. 3Dfx believes that raw materials required are
readily available. As a result, 3Dfx can focus its resources on product design,
quality assurance, marketing and customer support.
Wafers for 3Dfx's Voodoo family of products are currently fabricated for
3Dfx by Taiwan Semiconductor Manufacturing Corporation ("TSMC"), which is the
largest independent foundry in the world. TSMC currently produces the
semiconductor die for 3Dfx using standard 0.35 micron and 0.25 micron
Application Specific Integrated Circuit ("ASIC") Complimentary-symmetry
Metal-Oxide Semiconductor ("CMOS") process technology. The semiconductor die is
packaged by Advanced Semiconductor Engineering Group ("ASE") and Caesar
Technology, Inc. Additionally, ASE tests the semiconductor die, tests the
finished product and ships the finished product to 3Dfx or to its customers. All
of 3Dfx's suppliers have their manufacturing operations located in Taiwan,
R.O.C. The fabrication of semiconductors is a complex and precise process.
Minute levels of contaminants in the manufacturing environment, defects in masks
used to print circuits on a wafer, difficulties in the fabrication process or
other factors can cause a substantial percentage of wafers to be rejected or a
significant number of die on each wafer to be nonfunctional. Many of these
problems are difficult to diagnose and time consuming or expensive to remedy. As
a result, semiconductor companies often experience problems in achieving
acceptable wafer manufacturing yields, which are represented by the number of
good die as a proportion of the total number of die on any particular wafer.
Once production yield for a particular product stabilizes, 3Dfx pays an agreed
price for wafers meeting certain acceptance criteria pursuant to a "good die"
only pricing structure for that particular product. Until production yield for a
particular product stabilizes, 3Dfx must pay an agreed price for wafers
regardless of yield. Accordingly, in this circumstance, 3Dfx bears the risk of
final yield of good die. Poor yields would materially adversely affect 3Dfx's
revenues, gross margin and results of operations. As 3Dfx's relationships with
TSMC and any additional manufacturing partners develop, yields could be
adversely affected due to difficulties associated with adapting 3Dfx's
technology and product design to the proprietary process technology and design
rules of each manufacturer. Because of 3Dfx's potentially limited access to
wafer fabrication capacity from its manufacturers, any decrease in manufacturing
yields could result in an increase in 3Dfx's per unit costs and force 3Dfx to
allocate its available product supply among its customers, thus potentially
adversely impacting customer relationships as well as revenues and gross profit.
All of 3Dfx's commerce is performed through purchase orders without
additional or supplementary agreements. While there can be no assurance that
3Dfx will be able to secure sufficient manufacturing capacity to meet product
demand in the future, which could have material adverse effects on 3Dfx's
business, 3Dfx believes that it has developed strong relationships with its
suppliers, and has experienced no material manufacturing concerns to date.
Although 3Dfx is confident in its suppliers' abilities to fulfill product
requirements, 3Dfx has been in active contact with other semiconductor
fabrication foundries in an effort to further diversify its supplier
manufacturing base. 3Dfx has held discussions with certain potential suppliers
and, in the case of one supplier, has reviewed the technology and facilities of
such supplier and has run test wafers to qualify its process. However, 3Dfx has
not yet selected a second source of supply for wafers. 3Dfx has two sources for
assembly.
In the event of production difficulties, shortages or delays experienced by
any one of its suppliers, 3Dfx's business, financial condition, or results of
operation may be adversely impacted. Furthermore, although quality assurance
measures have been taken, there can be no guarantee against defects affecting
the quality, performance or reliability of 3Dfx's products. Any such defects
could require costly product recalls or cessation of shipments, adversely
affecting 3Dfx's business, financial condition and results of operations, and
12
<PAGE> 14
resulting in a decline of revenues, increased costs (associated with return,
repair, replacement and shrinkage associated with such defects), cancellations
or reschedulings of customer orders and shipments.
COMPETITION
The markets in which 3Dfx compete are intensely competitive and are likely
to become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than 3Dfx's products. 3Dfx does not compete on the basis
of price alone. 3Dfx believes that the principal competitive factors for 3D
graphics products are:
- Product performance and quality
- Conformity to industry standard APIs
- Access to customers and distribution channels
- Price
- Product support
- Ability to bring new products to the market in a timely way
Many of 3Dfx's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than 3Dfx. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than 3Dfx. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. In
addition, certain of 3Dfx's principal competitors offer a single vendor solution
because they maintain their own semiconductor foundries and may therefore
benefit from certain capacity, cost and technical advantages.
3Dfx seeks to use strategic relationships to augment its capabilities.
However, the benefits of these relationships may not be realized or sufficient
to overcome the established positions of 3Dfx's largest competitors as suppliers
to the PC OEM and retail markets. Regardless of the relative qualities of 3Dfx's
products, the market power, product breadth and customer relationships of its
larger competitors can be expected to provide such competitors with substantial
competitive advantages.
3Dfx 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. These competitors include ATI Technologies, Inc., S(3)
Incorporated and Trident Microsystems, Inc. Many of these competitors have
introduced 3D functionality on new iterations or existing graphics chips. 3Dfx
also competes with companies that have recently entered the market with an
integrated 3D/2D solution but which have not traditionally manufactured 2D
solutions. These competitors include 3Dlabs, Inc., Ltd., nVidia Corporation and
Micron Technology, Inc. 3Dfx also competes with Videologic Group Plc which has
partnered with NEC to focus exclusively on developing a 3D solution for the
interactive electronic entertainment market. 3Dfx also faces potential
competition from companies that have focused on the high-end of the 3D market
and the production of 3D systems targeted for the professional engineering
market. These competitors include 3Dlabs, Integraph Corporation, Real 3D, an
operating unit of Lockheed Martin Corp., and Silicon Graphics, Inc. These
companies are developing lower cost versions of their 3D technology to bring
workstation-like 3D graphics to mainstream applications. Additionally, Intel has
recently entered the 3D graphics market, targeting its efforts at the mainstream
PC market. These companies may enter the interactive electronics entertainment
market and, if they do, 3Dfx may not be able to compete successfully against
them.
PATENTS AND PROPRIETARY RIGHTS
3Dfx relies primarily on a combination of patent, mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. 3Dfx has seven patent applications pending in the United States Patent
and Trademark Office ("PTO") and 10 foreign patent applications pending. In
addition, five United States patents have been
13
<PAGE> 15
issued to 3Dfx. There can be no assurance that 3Dfx's pending patent
applications or any future applications will be approved, that any issued
patents will provide 3Dfx with competitive advantages or will not be challenged
by third parties, or that the patents of others will not have an adverse effect
on 3Dfx's ability to do business. In addition, there can be no assurance that
others will not independently develop substantially equivalent intellectual
property or otherwise gain access to 3Dfx's trade secrets or intellectual
property, or disclose such intellectual property or trade secrets, or that 3Dfx
can meaningfully protect its intellectual property. The failure of 3Dfx to
meaningfully protect its intellectual property could have a material adverse
effect on 3Dfx's business, financial condition and results of operations.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions, which have resulted in
significant and often protracted and expensive litigation. There is currently no
pending intellectual property litigation against 3Dfx. However, 3Dfx may from
time to time receive notice of claims that 3Dfx has infringed patents or other
intellectual property rights owned by others. 3Dfx may seek licenses under such
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to 3Dfx. The failure to obtain a license from a
third party for technology used by 3Dfx could cause 3Dfx to incur substantial
liabilities and to suspend the manufacture of products. Furthermore, 3Dfx may
initiate claims or litigation against third parties for infringement of 3Dfx's
proprietary rights or to establish the validity of 3Dfx's proprietary rights.
Litigation by or against 3Dfx could result in significant expense to 3Dfx and
divert the efforts of 3Dfx's technical and management personnel, whether or not
such litigation results in a favorable determination for 3Dfx. In the event of
an adverse result in any such litigation, 3Dfx could be required to pay
substantial damages, cease the manufacture, use and sale of infringing products,
expend significant resources to develop non-infringing technology, discontinue
the use of certain processes or obtain licenses for the infringing technology.
There can be no assurance that 3Dfx would be successful in such development or
that such licenses would be available on reasonable terms, or at all, and any
such development or license could require expenditures by 3Dfx of substantial
time and other resources. Although patent disputes in the semiconductor industry
have often been settled through cross-licensing arrangements, there can be no
assurance that, in the event that any third party makes a successful claim
against 3Dfx or its customers, a cross-licensing arrangement could be reached.
If a license is not made available to 3Dfx on commercially reasonable terms,
3Dfx's business, financial condition and results of operations could be
materially adversely affected.
There can be no assurance that infringement claims by third parties or
claims for indemnification by other customers or end users of 3Dfx's products
resulting from infringement claims will not be asserted in the future or that
such assertions, if proven to be true, will not materially adversely affect
3Dfx's business, financial condition and results of operations. Any limitations
on 3Dfx's ability to market its products, or delays and costs associated with
redesigning its products or payments of license fees to third parties, or any
failure by 3Dfx to develop or license a substitute technology on commercially
reasonable terms could have a material adverse effect on 3Dfx's business,
financial condition and results of operations.
EMPLOYEES
As of December 31, 1998, 3Dfx had 247 employees, 151 of whom were engaged
in engineering, and 96 of whom were engaged in marketing, sales, operations and
administrative positions. As of December 31, 1998, all of 3Dfx's employees were
located in the United States. No employee of 3Dfx is covered by collective
bargaining agreements, and 3Dfx believes that its relationship with its
employees is good.
3Dfx's ability to operate successfully depends in significant part upon the
continued service of certain key technical and managerial personnel, and its
continuing ability to attract and retain additional highly qualified technical
and managerial personnel. Competition for such personnel is intense, and there
can be no assurance that 3Dfx can retain such personnel or that it can attract
or retain other highly qualified technical and managerial personnel in the
future, including key sales and marketing personnel. The loss of key personnel
or the inability to hire and retain qualified personnel could have a material
adverse effect upon 3Dfx's business, financial condition and results of
operations.
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<PAGE> 16
ITEM 2. PROPERTIES
3Dfx leases approximately 77,805 square feet for its headquarters in one
building in San Jose, California pursuant to a lease the expires on April 30,
2007, with an option to extend the lease for an additional five-year term. In
addition, 3Dfx leases approximately 52,040 square feet in a building adjacent to
its San Jose headquarters pursuant to a lease that expires in 2007, with an
option to extend the lease for an additional three-year term. 3Dfx also leases
approximately 787 square feet in Dresher, Pennsylvania for its regional sales
offices. 3Dfx also has engineering offices located in Bellevue, Washington
(approximately 2,134 square feet), Austin, Texas (approximately 10,420 square
feet) and Fort Collins, Colorado (approximately 1,215 square feet) and a
European office (approximately 1,000 square feet) located in London, England.
3Dfx believes that its current facilities are adequate for its current needs and
will be adequate to meet its needs for the foreseeable future. 3Dfx also
believes that additional space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
On September 21, 1998, 3Dfx Interactive, Inc. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
3Dfx Interactive's common stock has been quoted on the Nasdaq National
Market under the symbol "TDFX" since 3Dfx's initial public offering on June 25,
1997. Prior to such time, there was no public market for 3Dfx's common stock.
The following table sets forth for the periods indicated the high and low sale
prices per share for 3Dfx's common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1997
Second Quarter (from June 25, 1997)....................... $14.75 $12.50
Third Quarter............................................. 18.63 8.88
Fourth Quarter............................................ 23.00 13.75
FISCAL YEAR 1998
First Quarter............................................. 29.94 20.75
Second Quarter............................................ 35.25 15.06
Third Quarter............................................. 22.50 8.00
Fourth Quarter............................................ 17.38 8.75
FISCAL YEAR 1999
First Quarter (through February 3, 1999).................. 16.00 11.63
</TABLE>
On February 3, 1999, the reported last sale price of the Common Stock on
the Nasdaq National Market was $12.31 per share. As of December 31, 1998, there
were approximately 318 holders of record of 3Dfx's Common Stock.
DIVIDEND POLICY
3Dfx has never declared or paid cash dividends on its capital stock. 3Dfx
currently expects to retain future earnings, if any, for use in the operation
and expansion of its business and does not anticipate paying any cash dividends
in the foreseeable future.
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<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this Report.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996 1995
-------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)................................................ $202,601 $ 44,069 $ 6,390 $ --
Cost of revenues........................................... 119,618 22,611 5,123 --
-------- -------- -------- -------
Gross profit............................................. 82,983 21,458 1,267 --
-------- -------- -------- -------
Operating expenses:
Research and development................................. 34,045 12,412 9,435 2,940
Selling, general and administrative...................... 35,441 11,390 6,642 2,166
-------- -------- -------- -------
Total operating expenses.......................... 69,486 23,802 16,077 5,106
-------- -------- -------- -------
Income (loss) from operations.............................. 13,497 (2,344) (14,810) (5,106)
Interest and other income, net(2).......................... 15,869 630 59 67
-------- -------- -------- -------
Income (loss) before income taxes.......................... 29,366 (1,714) (14,751) (5,039)
Provision for income taxes................................. 7,663 -- -- --
-------- -------- -------- -------
Net income (loss).......................................... $ 21,703 $ (1,714) $(14,751) $(5,039)
======== ======== ======== =======
Basic net income (loss) per share.......................... $ 1.45 $ (0.16) $ (1.74) $ (0.82)
======== ======== ======== =======
Diluted net income (loss) per share........................ $ 1.33 $ (0.16) $ (1.74) $ (0.82)
======== ======== ======== =======
Shares used in basic net income (loss) calculation......... 14,917 10,767 8,467 6,173
======== ======== ======== =======
Shares used in diluted net income (loss) calculation....... 16,353 10,767 8,467 6,173
======== ======== ======== =======
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.......... $ 95,980 $ 34,921 $ 5,291 $ 865
Working capital (deficit).................................. 110,871 37,456 6,637 (307)
Total assets............................................... 184,121 61,917 15,581 2,440
Other long term liabilities................................ 284 546 632 544
Retained Earnings (accumulated deficit).................... 199 (21,504) (19,790) (5,039)
Total shareholders' equity................................. 126,313 44,274 9,621 552
</TABLE>
- ---------------
(1) Fiscal 1997 includes $1.8 million of development contract revenues
recognized under the Sega Agreement. No amounts were recognized in any other
period.
(2) In July 1998, the Company reached an agreement with Sega in conjunction with
a lawsuit which the Company filed against Sega in August 1997. Fiscal 1998
includes a one-time recognition of income based on the settlement.
16
<PAGE> 18
ITEM 7.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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include the
sentence in the first paragraph under "Overview" regarding anticipated revenue
growth; the sentences in the second paragraph under "Overview" regarding
availability of Voodoo3; the sentences in the second paragraph under "Overview"
regarding expected customer concentration and customer loss; the sentence in the
third paragraph under "Overview" regarding availability of raw materials; the
sentences in the third paragraph under "Results of Operations" regarding factors
affecting gross margin; the sentences in the fourth and fifth paragraphs under
"Results of Operations" regarding future research and development and selling,
general and administrative costs, respectively; the sentences under the
subheading "Year 2000 Compliance" regarding the year 2000 issue; the sentence in
the second paragraph under "Liquidity and Capital Resources" regarding capital
expenditures; the statements in the fourth 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
3Dfx Interactive, Inc. was founded in August 1994 to design, develop,
market and support 3D media processors, subsystems and API software for the
interactive electronic entertainment market. 3Dfx had no operations during the
period from inception (August 24, 1994) through December 31, 1994. 3Dfx 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. 3Dfx incurred net losses in every quarter since
inception until the fourth quarter of fiscal 1997 and each quarter in fiscal
1998. 3Dfx incurred net losses of approximately $1.7 million and $14.8 million
in 1997 and 1996, respectively. 3Dfx generated net income of $21.7 million in
1998 and had retained earnings of $199,000 at December 31, 1998. The net losses
were attributable to the lack of substantial revenue and continuing significant
costs incurred in the research, development and testing of 3Dfx's products.
Although 3Dfx 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.
3Dfx derives revenue from the sale of 3D and 3D/2D media processors
designed for use in PCs and coin-op arcade systems. 3Dfx began commercial
shipments of its first 3D graphics product, the Voodoo Graphics chipset, in
September 1996. 3Dfx's second product, the Voodoo Rush chipset, began commercial
shipments in April 1997. 3Dfx's third product, Voodoo2, became commercially
available in March 1998. In August 1998, 3Dfx 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. In November 1998, 3Dfx introduced its Voodoo3
product family of enhanced and more fully-featured, single chip 3D/2D media
processors. 3Dfx expects to begin shipment of the Voodoo3 product family in the
second quarter of 1999. As a result of 3Dfx's limited operating history and
early stage of development, it has only a limited number of customers. Revenues
derived from sales to Diamond (including its subsidiaries), Creative (including
its subsidiaries) and Elitetron accounted for approximately 32%, 26% and 16% of
revenues, respectively, in 1998. Revenues derived from sales to Diamond and
Elitetron accounted for approximately 37% and 16%, respectively, of revenues in
1997. Revenues derived from sales to Orchid Technology, Diamond and Williams
accounted for approximately 44%, 33% and 11%, respectively, of revenues in 1996.
3Dfx 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 3Dfx's results of
operations, cash flows, or financial position. In addition, sales to these
customers can fluctuate and could have a material impact on 3Dfx's revenues and
profitability on a
17
<PAGE> 19
quarterly basis. 3Dfx anticipates that if the merger with STB is consummated, it
will lose several of its current customers.
As part of its manufacturing strategy, 3Dfx leverages the expertise of
third party suppliers in the areas of wafer fabrication, assembly, quality
control and assurance, reliability and testing. This strategy allows 3Dfx to
devote its resources to research and development and sales and marketing
activities while avoiding the significant costs and risks associated with owning
and operating a wafer fabrication facility and related operations. 3Dfx does not
manufacture the semiconductor wafers used for its products and does not own or
operate a wafer fabrication facility. All of 3Dfx's wafers are currently
manufactured by Taiwan Semiconductor Manufacturing Corporation ("TSMC") in
Taiwan. 3Dfx obtains manufacturing services from TSMC on a purchase order basis.
3Dfx provides TSMC with a rolling six month forecast of its supply needs and
TSMC builds to 3Dfx's orders. 3Dfx purchases wafers and die from TSMC. Once
production yield for a particular product stabilizes, 3Dfx pays an agreed price
for wafers meeting certain acceptance criteria pursuant to a "good die" only
pricing structure for that particular product. Until production yield for a
particular product stabilizes, however, 3Dfx must pay an agreed price for wafers
regardless of yield. Such wafer and die purchases constitute a substantial
portion of cost of products revenues once products are sold. TSMC is responsible
for procurement of raw materials used in the production of 3Dfx's products. 3Dfx
believes that raw materials required are readily available. 3Dfx's products are
packaged by two third party subcontractors, Advanced Semiconductor Engineering
Group ("ASE") and Caesar Technology, Inc. All of 3Dfx products are tested by
ASE. Such assembly and testing is conducted on a purchase order basis rather
than under a long-term agreement. All purchases of wafers and assembly and test
services are denominated in U.S. dollars.
In connection with the grant of stock options to employees since inception
(August 1994) through the effective date of 3Dfx's IPO, 3Dfx recorded aggregate
deferred compensation of approximately $1.9 million, representing the difference
between the deemed fair value of the Common Stock for accounting purposes and
the option exercise price at the date of grant. This amount is presented as a
reduction of shareholders' equity and is amortized ratably over the vesting
period of the applicable options. This amortization resulted in charges to
operations of $484,000 (of which $194,000 and $290,000 were recorded in research
and development expenses and selling, general and administrative expenses,
respectively) in each of the years ended December 31, 1998 and 1997, and
$196,000 (of which $50,000 and $146,000 were recorded in research and
development expenses and selling, general and administrative expenses,
respectively) in the year ended December 31, 1996, and will result in charges
over the next 6 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
The following table sets forth certain statement of operations data of 3Dfx
expressed as a percentage of revenue for each of the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1998 1997
----- -----
<S> <C> <C>
Revenues................................................... 100.0% 100.0%
Cost of revenues........................................... 59.0 51.3
----- -----
Gross profit............................................... 41.0 48.7
----- -----
Operating expenses:
Research and development.............................. 16.8 28.2
Selling, general and administrative................... 17.5 25.8
----- -----
Total operating expenses......................... 34.3 54.0
----- -----
Income (loss) from operations.............................. 6.7 (5.3)
Interest and other income, net............................. 7.8 1.4
Provision for income taxes................................. (3.8) --
----- -----
Net income (loss).......................................... 10.7% (3.9)%
===== =====
</TABLE>
18
<PAGE> 20
YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenues. Revenues increased 359.7% from $44.1 million in 1997 to $202.6
million in 1998. Revenues are recognized upon product shipment. Revenues in 1998
were principally attributable to sales of 3Dfx's Voodoo2, Voodoo Banshee and
Voodoo Graphics chipsets. Revenues in 1997 were principally attributable to
sales of 3Dfx's Voodoo Graphics and Voodoo Rush chipsets. In both years, revenue
growth was as a result of increased customer demand for and market acceptance of
these products.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of revenues consists primarily of costs associated with the
purchase of components, the procurement of semiconductors and printed circuit
board assemblies from 3Dfx's contract manufacturers, labor and overhead
associated with such procurement and warehousing, shipping and warranty costs.
Cost of revenues does not include expenses related to development contract
revenues. Cost of revenues increased 429% from $22.6 million in 1997 to $119.6
million in 1998. Gross profit as a percentage of revenues was 41% and 48.7% in
1998 and 1997, respectively, due to a change in product mix. Given 3Dfx's
limited operating history and limited history of product shipments, 3Dfx
believes that analysis of gross profit as a percentage of total revenues is not
meaningful. 3Dfx's future gross profit will be affected by the overall level of
sales, the mix of products sold in a period, manufacturing yields, and 3Dfx's
ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
3Dfx's foundries in connection with manufacturing start-up of new products. In
addition, costs associated with development contracts are included in research
and development during 1997. There were no such costs in 1998. Research and
development expenses increased 174.3% from $12.4 million in 1997 to $34 million
in 1998. The increase reflects an increase in non-recurring engineering costs
and engineering personnel costs resulting from the commencement of manufacturing
of prototypes of the Voodoo Banshee chip and the Voodoo3 chipset. 3Dfx expects
to continue to make substantial investments in research and development and
anticipates that research and development expenses will increase in absolute
dollars in future periods, although such expenses as a percentage of total
revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 211.2% from $11.4 million
in 1997 to $35.4 million in 1998. The increase resulted from the addition of
personnel in sales, marketing, finance and administration as 3Dfx expanded
operations, increased commission expenses associated with the commencement of
commercial sales and increased involvement in tradeshow and advertising
activities. 3Dfx expects that selling, general and administrative expenses will
increase in absolute dollars in future periods, although such expenses as a
percentage of total revenues will fluctuate.
Interest and Other Income, Net. Interest and other income, net increased
from $630,000 in 1997 to $15.9 million in 1998. The increase is primarily
related to a one-time recognition of income as a result of the recent litigation
settlement reached in September 1998 relating to Sega's termination of the
Technology License and Development Agreement (the "Sega Agreement") with 3Dfx in
July 1997. The increase also reflects earnings from higher cash balances
resulting from the completion of 3Dfx's initial public offering in June 1997 and
a public offering in March 1998, partially offset by interest expense on the
outstanding equipment line of credit and capital lease balances.
Provision For Income Taxes. Provision for income taxes was $7.7 million in
1998. 3Dfx recorded no provision for income taxes in 1997 as it incurred losses
during such period. At December 31, 1998, 3Dfx had net operating loss
carryforwards for federal and state income tax purposes of approximately $10.7
million and $9.7 million, respectively, which expire beginning in 2011 and 2001,
respectively. Under the Tax Reform Act of 1986, the amount of and the benefit
from net operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in 3Dfx's tax carryovers include,
but are not limited to, a cumulative ownership change of more than 50% over a
three year period. The completion of
19
<PAGE> 21
3Dfx's initial public offering in June 1997 resulted in an annual limitation of
3Dfx's ability to utilize net operating losses incurred prior to that date. The
annual limitation is approximately $5.4 million.
YEARS ENDED DECEMBER 31, 1997 AND 1996
Revenues. Revenues increased 589.7% from $6.4 million in 1996 to $44.1
million in 1997. Revenues in 1997 included $1.8 million of development contract
revenues earned under the Sega Agreement that was terminated by Sega in July
1997. No future revenues will be recognized under the Sega Agreement. Revenues
from product sales are recognized upon product shipment. Revenues in 1997 were
principally attributable to sales of 3Dfx's Voodoo Graphics and Voodoo Rush
chipsets as a result of increased customer demand for and market acceptance of
these products. Substantially all of the revenues in the year ended December 31,
1996 were derived from sale of 3Dfx's Voodoo Graphics chipset, which began
commercial shipments in September 1996 and, to a lesser extent, sale of graphics
subsystems.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of revenues consists primarily of costs associated with the
purchase of components, the procurement of semiconductors and printed circuit
board assemblies from 3Dfx's contract manufacturers, labor and overhead
associated with such procurement and warehousing, shipping and warranty costs.
Cost of revenues does not include expenses related to development contract
revenues. Cost of revenues increased 341.4% from $5.1 million in 1996 to $22.6
million in 1997. Gross profit as a percentage of revenues was 19.8% and 48.7% in
1996 and 1997, respectively. Cost of product revenues in 1996 reflected
significant prototype and manufacturing start-up expenses incurred in connection
with the initial commercial shipment of the Voodoo Graphics chipset.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
3Dfx's foundries in connection with manufacturing start-up of new products. In
addition, costs associated with development contracts are included in research
and development. Research and development expenses increased 31.6% from $9.4
million in 1996 to $12.4 million in 1997. The increase reflects an increase in
non-recurring engineering costs and engineering personnel costs resulting from
the commencement of manufacturing of prototypes of the Voodoo2 chipset and the
Voodoo Banshee chip.
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 71.5% from $6.6 million
in 1996 to $11.4 million in 1997. The increase resulted from the addition of
personnel in sales, marketing, finance and administration as 3Dfx expanded
operations, increased commission expenses associated with the commencement of
commercial sales and increased involvement in tradeshow and advertising
activities.
Interest and Other Income, Net. Interest and other income, net increased
from net interest and other income of $59,000 in 1996 to net interest and other
income of $630,000 in 1997. The increase is related to increased earnings from
investments of higher cash balances resulting from the completion of 3Dfx's
initial public offering in June 1997, partially offset by increased interest
expense on outstanding equipment line of credit and capital lease balances.
Provision For Income Taxes. 3Dfx recorded no provision for income taxes in
1997 and 1996 as it incurred losses during such periods. At December 31, 1997,
3Dfx 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.
20
<PAGE> 22
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
data for each quarter during the years ended December 31, 1997 and 1998. This
unaudited information has been prepared by 3Dfx on a basis consistent with
3Dfx's audited consolidated financial statements appearing elsewhere in this
Report and includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. The unaudited quarterly information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Report. In light of 3Dfx's limited operating history,
3Dfx believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
--------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 5,247 $ 6,507 $10,018 $22,297 $50,008 $58,643 $33,206 $60,743
Cost of revenues...................... 2,582 3,278 5,352 11,399 25,730 30,443 24,971 38,474
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........................ 2,665 3,229 4,666 10,898 24,278 28,200 8,235 22,269
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............ 1,953 2,397 3,201 4,861 5,826 8,308 10,038 9,873
Selling, general and
administrative.................... 1,846 2,521 2,684 4,339 9,638 8,041 6,971 10,791
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 3,799 4,918 5,885 9,200 15,464 16,349 17,009 20,664
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations......... (1,134) (1,689) (1,219) 1,698 8,818(4) 11,851 (8,774) 1,605
Interest and other income (expense),
net................................. (27) (64) 347 374 514 1,052 13,045 1,259
Provision for income taxes............ -- -- -- -- 1,866 3,871 1,153 773
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)..................... $(1,161) $(1,753) $ (872) $ 2,072 $ 7,462 $ 9,032 $ 3,118 $ 2,091
======= ======= ======= ======= ======= ======= ======= =======
Basic net income (loss) per share..... $ (0.13) $ (0.19) $ (0.07) $ 0.17 $ 0.57 $ 0.59 $ 0.20 $ 0.13
Diluted net income (loss) per share... $ (0.13) $ (0.19) $ (0.07) $ 0.15 $ 0.50 $ 0.59 $ 0.20 $ 0.13
</TABLE>
Revenues over the last eight quarters were derived primarily from the sale
of the Voodoo Graphics, Voodoo Rush, Voodoo2, and Voodoo Banshee chipsets.
Revenues increased significantly quarter to quarter in 1997 and in 1998, except
for the third quarter ended September 30, 1998, due primarily to increased sales
volumes resulting from increased customer demand for and market acceptance of
these products. In the third quarter of 1998, 3Dfx experienced a significant
reduction in demand as compared to historical order rates for its Voodoo2
chipset, primarily from one customer, as well as a greater than expected
seasonal slowdown, which resulted in a decrease in revenues from the previous
quarter. In the fourth quarter of 1998, significant increases in demand for
3Dfx's new Voodoo Banshee product, combined with a stable demand as compared to
the third quarter of 1998 for its Voodoo2 chipset, resulted in significant
revenue growth in the fourth quarter of 1998 as compared to the previous
quarter. During the three months ended March 31, 1997 and June 30, 1997, 3Dfx
recognized development contract revenues of $750,000 and $1,067,000,
respectively, under the Sega Agreement for the delivery of certain engineering
designs to Sega and revenues recognized under the percentage of completion
method of accounting based on costs incurred relative to total contract costs.
No future revenues will be recognized under the Sega Agreement.
Cost of revenues in 1998 increased in the first, second and fourth quarters
as a result of increased sales in each of these quarters. Additionally, in the
fourth quarter of 1998, costs of revenues increased due to the product revenue
mix during the quarter which carried lower gross margins than historically
experienced. In the third quarter of 1998, cost of revenues decreased when
compared to the previous quarter primarily due to lower revenues, partially
offset by increased costs associated with the initial shipments of the Company's
Voodoo Banshee product, additional overhead costs with respect to lower revenues
as a result of a greater than expected seasonal slowdown in the retail channel,
and to an increase in inventory reserves due to an exceptionally rapid rate of
product lifecycle obsolescence.
Cost of revenues in 1997 reflects significant prototype and manufacturing
start-up expenses incurred in connection with the initial commercial shipments
of Voodoo Graphics and Voodoo Rush. The increase in cost of revenues in the
three months ended June 30, 1997, September 30, 1997 and December 31, 1997
resulted from the increases in sales in each of the respective periods. Cost of
revenues in the three months ended
21
<PAGE> 23
December 31, 1997, includes a $700,000 charge for the write off of Voodoo2
inventory which was not salable as a result of a manufacturing defect. Given
3Dfx's limited operating and product shipment history, 3Dfx believes that
quarter to quarter comparisons of gross profit as a percentage of revenues are
not meaningful.
Research and development expenses increased quarter to quarter in 1998 and
1997 except for the fourth quarter of 1998. In 1998 and 1997, the increase in
research and development expenses in each quarter through September 1998
reflects an increase in headcount, non-recurring engineering costs resulting
from the commencement of manufacturing of the Voodoo Rush, Voodoo2 chipsets and
the Voodoo Banshee and Voodoo3 chips. In the fourth quarter of 1998, research
and development expenses decreased slightly from the previous quarter primarily
due to a reduction in non-recurring engineering costs.
Selling, general and administrative expenses fluctuated quarter to quarter
in 1997 and 1998 primarily as a result of increased finance and administrative
staffing and related costs necessary to support higher levels of operations,
commission expenses associated with levels of revenues and varying levels of
involvement in tradeshow and advertising activities.
Interest and other income (expense), net fluctuated quarter to quarter in
1997 and 1998. The increase in interest and other income in the three months
ended September 30, 1997 and December 31, 1997 is due to interest income earned
on 3Dfx's investments as a result of higher cash balances from the completion of
3Dfx's initial public offering in June 1997, partially offset by interest
expense on outstanding balances under the equipment line of credit and capital
leases. The increase in interest and other income in the three months ended
September 30, 1998 is primarily related to a one-time recognition of income as a
result of the recent Sega litigation settlement, as well as to increased
earnings from higher cash balances resulting from the completion of 3Dfx's
initial public offering in June 1997 and a public secondary offering in March
1998, partially offset by interest expense on the outstanding equipment line of
credit and capital lease balances.
3Dfx believes that, even if it does achieve significant sales of its
products, quarterly and annual results of operations will be affected by a
variety of factors that could materially adversely affect revenues, gross profit
and income from operations. Accordingly, 3Dfx believes that period to period
comparisons of its results of operations should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year. In
certain future quarters, 3Dfx's results of operations may be below the
expectations of public market analysts or investors. In such event, the market
price of the Common Stock could be materially adversely affected.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" which was adopted by the Company in the
first quarter of fiscal 1998. This Statement establishes standards for reporting
and displaying comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements.
Comprehensive income as defined includes all changes in equity (net assets)
during a period from non-owner sources. Such items may include foreign currency
translation adjustments, unrealized gains/losses from investing and hedging
activities, and other transactions. This Statement requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. As the Company has no
components of other comprehensive income, there are no disclosure requirements
involved in the Company's adoption of this Statement.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" which
was adopted by the Company in the first quarter of fiscal 1998. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. As the Company operates and tracks its results in only one segment,
there are no additional disclosure requirements involved with the Company's
adoption of this Statement.
22
<PAGE> 24
YEAR 2000 COMPLIANCE
Like many other companies, the Year 2000 computer issue creates risks for
3Dfx. If internal systems do not correctly recognize and process date
information beyond the Year 1999, there could be an adverse impact on 3Dfx's
operations. There are two other related issues which could also lead to
incorrect calculations or failures: (1) some systems' programming assigns
special meaning to certain dates, such as 9/9/99, and (2) the Year 2000 is a
leap year. To address these Year 2000 issues with its internal systems, 3Dfx has
initiated a program, that is designed to deal with 3Dfx's internal management
information systems. Assessment and remediation are proceeding in parallel and
3Dfx currently plans to have changes to those management and critical systems
completed and tested by June 1999. These activities are intended to encompass
all major categories of systems used by 3Dfx, including sales and financial
systems. 3Dfx is also working with key suppliers of products and services to
determine either that their operations and products are Year 2000 capable, or to
monitor their progress toward Year 2000 capability. In addition, the Company has
begun internal discussions concerning contingency planning to address potential
problem areas with internal systems and with suppliers and other third parties.
It is expected that assessment, remediation and contingency planning activities
will be ongoing throughout 1999 with the goal of appropriately resolving all
material internal systems and third party issues.
3Dfx believes that all of its products are year 2000 compliant. However,
the Company is continuing to assess the capability of its products to handle the
year 2000, and expects to complete that assessment by early 1999. The Company
does not believe it is legally responsible for costs incurred by customers
related to ensuring their Year 2000 capability. Nevertheless, the Company is
incurring various costs to provide customer support and customer satisfaction
services regarding Year 2000 issues and it is anticipated that these
expenditures will continue through 1999 and thereafter. As used in this section,
"Year 2000 Compliant" means that when used properly and in conformity with the
product information provided by the company, and when used with Year 2000
Compliant computer systems, the product will accurately store, display, process,
provide, and/or receive data from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, provided that all
other technology used in combination with the 3Dfx product properly exchanges
date data with the 3Dfx product. The costs incurred to date related to these
programs have not been material. The cost which will be incurred by 3Dfx
regarding the implementation of Year 2000 compliant internal information
systems, answering and responding to customer requests related to Year 2000
issues, including both incremental spending and redeployed resources, is
currently not expected to exceed $300,000. The total cost estimate does not
include potential costs related to any customer or other claims or the cost of
internal software and hardware replaced in the normal course of business. In
some instances, the installation schedule of new software and hardware in the
normal course of business is being accelerated to also afford a solution to Year
2000 capability issues. The total cost estimate is based on the current
assessment of the projects and is subject to change as the project progress.
Based on currently available information, management does not believe that the
Year 2000 matters discussed above related to internal systems or products sold
to customers will have a material impact on 3Dfx's financial condition or
overall trends in results of operations. However, 3Dfx cannot guarantee that the
year 2000 situation will not negatively impact the Company. In addition, the
failure to ensure Year 2000 capability by a supplier or another third party
could have a material adverse effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities in fiscal 1998 was due primarily
to net income of $21.7 million, and increases of $28.5 million in accounts
payable and $13.3 million in accrued liabilities, partially offset by increases
of $20.1 million in inventory due to the increase in manufacturing to meet
customer demand and $24.9 million in accounts receivable associated with the
generation of revenues. Net cash used in operating activities in fiscal 1997 was
due primarily to the net loss of $1.7 million, a $12.2 million increase in
accounts receivable partially offset by a $10.3 million increase in accounts
payable.
Net cash used in investing activities was approximately $10.9 million in
1998 and $10.7 million in 1997 and was due in each period to the net maturities
and purchases of investments and to the purchase of property and equipment. 3Dfx
does not have any significant capital spending or purchase commitments other
than
23
<PAGE> 25
normal purchase commitments and commitments under leases. As of December 31,
1998, 3Dfx had capital equipment of $24.1 million less accumulated depreciation
of $8.5 million to support its research and development, operations and
administrative activities. 3Dfx has financed approximately $2.5 million of its
capital equipment from capital lease obligations through December 31, 1998. 3Dfx
has an equipment line of credit which provides for the purchase of up to $3.0
million of property and equipment. At December 31, 1998, there were no
borrowings outstanding under this line of credit. Borrowings under this line are
secured by all of 3Dfx's owned assets and bear interest at the bank's prime rate
plus 0.75% per annum (8.5% as of December 31, 1998). The agreement requires that
3Dfx maintain certain financial ratios and levels of tangible net worth
profitability and liquidity. 3Dfx was in compliance with its covenants as of
December 31, 1998. The lease line of credit expires in December 2001. 3Dfx
expects capital expenditures to increase over the next several years as it
expands facilities and acquires equipment to support the planned expansion of
its operations.
Net cash provided by financing activities was approximately $58.1 million
in 1998 and $34.6 million in 1997, due primarily to proceeds from the public
offering in March 1998 and proceeds from the initial public offering in June
1997.
3Dfx's future liquidity and capital requirements will depend upon numerous
factors, including the costs and timing of the expansion of research and product
development efforts and the success of these development efforts, the costs and
timing of expansion of sales and marketing activities, the extent to which
3Dfx's existing and new products gain market acceptance, competing technological
and market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, available borrowings under line
of credit arrangements and other factors. 3Dfx believes that the proceeds from
its March 1998 public offering, 3Dfx's current cash balances and cash generated
from operations and from available or future debt financing will be sufficient
to meet 3Dfx's operating and capital requirements through at least December
1999. However, there can be no assurance that 3Dfx will not require additional
financing within this time frame. 3Dfx's forecast of the period of time through
which its financial resources will be adequate to support its operations is a
forward-looking statement that involves risks and uncertainties, and actual
results could vary. The factors described earlier in this paragraph will impact
3Dfx's future capital requirements and the adequacy of its available funds. 3Dfx
may be required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to
3Dfx, or at all. Furthermore, any additional equity financing may be dilutive to
shareholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require 3Dfx to relinquish its rights to certain of its technologies or
products. The failure of 3Dfx to raise capital when needed could have a material
adverse effect on 3Dfx's business, financial condition and results of
operations.
FACTORS AFFECTING OPERATING RESULTS
Risks Related to the Merger with STB Systems, Inc.
The proposed merger of STB Systems, Inc. with and into a wholly-owned
subsidiary of 3Dfx, which will result in STB becoming a wholly-owned subsidiary
of 3Dfx, involves some specific risks, including the following:
- 3Dfx and STB may encounter substantial difficulties integrating the two
companies' products, technologies, research and development activities,
administration, sales and marketing and other aspects of operations in a
timely manner. The difficulties, costs and delays involved in this
integration may increase operating costs, cause lower than anticipated
financial performance or lead to the loss of customers and employees. The
failure to successfully integrate 3Dfx and STB in a timely manner could
result in a failure of the combined company to realize any of the
anticipated benefits of the Merger and could materially harm the business
of the combined company.
- 3Dfx and STB may lose customers or suppliers as a result of the Merger.
In particular, two of 3Dfx's largest customers, Creative and Diamond,
compete directly with STB. During 1998, sales to Diamond (and its
subsidiaries) and Creative (and its subsidiaries) represented 32% and 26%
of 3Dfx's total revenue, respectively. 3Dfx expects that as a result of
the Merger, sales to Diamond and Creative will
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be reduced significantly from prior levels and that such customers may no
longer continue to be significant customers of the combined company. In
addition, nVidia Corporation ("nVidia"), which is a major supplier of STB
and whose graphics chips were incorporated into STB products,
representing 63.9% of STB's net sales in fiscal 1998, competes directly
with 3Dfx. If nVidia reduces its supply of graphics chips, the combined
company may lose sales to those OEM customers that require the nVidia
graphics processor for their systems.
- The combined company will be dependent on a limited source of chips and
boards because both companies will be more restricted in their ability to
select products produced by either STB's or 3Dfx's competitors. If either
3Dfx's chips or STB's boards fail to meet the requirements of either
company's customers, the business of the combined company could be
materially harmed.
- A significant component of the near-term success of the combined company
will be continued success in the retail sales channels and there are
significant risks associated with the combined company's dependence on
near-term revenues in this channel.
- The Merger will result in substantial dilution to current 3Dfx
shareholders. After the Merger, the current shareholders of 3Dfx will own
approximately 65.7% of the outstanding shares of 3Dfx common stock.
- The combined company's success following the Merger will depend on the
retention and integration of key personnel.
- If the Merger is consummated, 3Dfx will issue to shareholders of STB an
aggregate of approximately 8,193,800 shares of 3Dfx Common Stock (based
on the number of shares of STB Common Stock outstanding as of December
31, 1998), almost all of which will be freely tradable upon consummation
of the Merger. As a result, immediately after the Merger, substantial
sales of 3Dfx Common Stock could occur, which could adversely affect or
cause substantial fluctuations in the market price of 3Dfx Common Stock.
- There will be substantial expenses resulting from the STB Merger of
approximately $4.5 million.
- The closing of the merger is subject to certain conditions that might not
be satisfied in a timely manner, which could prevent the merger from
being consummated.
In addition, in the event of the consummation of the Merger, there are a number
of risks related to the business and operations of STB that would affect the
operations of the combined company, including a number of the same or similar
risks faced by 3Dfx identified below, as well as a number of risks specific to
STB, including STB's dependence on a sole manufacturing facility, STB's
dependence on suppliers, its entry into new product markets, fluctuations in its
products or sales channel mix, and risks relating to environmental regulations.
In the event that the merger is not consummated, 3Dfx will face other risks,
including the opportunity costs associated with the pursuit of a business
combination with STB.
The Quarterly Operating Results of 3Dfx May Fluctuate
3Dfx's quarterly and annual results of operations have varied significantly
in the past and are likely to continue to vary in the future. These variations
are the result of a number of factors, many of which are beyond 3Dfx's control.
These factors include:
- The ability to successfully develop, introduce and market new or enhanced
products
- The ability to introduce and market products in accordance with customer
design requirements and design cycles
- Changes in the relative volume of sales of various products with
different margins
- Changes in demand for 3Dfx's products and its customers' products
- Gains or losses of significant customers or strategic relationships
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- The volume and timing of customer orders
- The availability, pricing and timeliness of delivery of components for
3Dfx's products
- The timing of new product announcements or introductions by competitors
- Product obsolescence, the management of product transitions
- Production delays
- Decreases in the average selling prices of products
Any one or more of the factors listed above or other factors could cause
3Dfx to fail to achieve its revenue and profitability expectations. Most of
3Dfx's operating expenses are relatively fixed in the short term. 3Dfx may be
unable to rapidly adjust spending to compensate for any unexpected sales
shortfall, which could materially harm quarterly operating results. As a result
of the above factors, 3Dfx believes that you should not rely on period-to-period
comparisons of results of operations as an indication of future performance. The
results of any one quarter are not indicative of results to be expected for a
full fiscal year.
3Dfx Has a Limited Operating History
3Dfx has been shipping products only since the third quarter of 1996. This
limited operating history makes the assessment of 3Dfx's future operating
results difficult. Additionally, 3Dfx incurred net losses of approximately $1.7
million in 1997 and $14.8 million in 1996. These net losses were attributable to
the lack of substantial sales and to continuing significant costs incurred in
product research, development and testing. Although 3Dfx had net income of $21.7
million in 1998, historical growth rates may not be sustained. Additionally,
significant revenues or profitability may not be sustained or increased on a
quarterly or annual basis in the future.
3Dfx Faces Intense Competition
The markets in which 3Dfx compete are intensely competitive and are likely
to become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than 3Dfx's products. 3Dfx does not compete on the basis
of price alone. 3Dfx believes that the principal competitive factors for 3D
graphics products are:
- Product performance and quality
- Conformity to industry standard application programming interfaces, or
APIs
- Access to customers and distribution channels
- Price
- Product support
- Ability to bring new products to the market in a timely way
Many of 3Dfx's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than 3Dfx. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than 3Dfx. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. In
addition, certain of 3Dfx's principal competitors offer a single vendor
solution, because they maintain their own semiconductor foundries and may
therefore benefit from certain capacity, cost and technical advantages.
3Dfx seeks to use strategic relationships to augment their capabilities.
However, the benefits of these relationships may not be realized or sufficient
to overcome the established positions of 3Dfx's largest competitors as suppliers
to the PC OEM and retail markets. Regardless of the relative qualities of 3Dfx's
products, the market power, product breadth and customer relationships of its
larger competitors can be expected to provide such competitors with substantial
competitive advantages.
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3Dfx competes primarily against companies that typically have operated in
the PC 2D graphics market and that now offer 3D capability as an enhancement to
their 2D solutions. These competitors include ATI Technologies, Inc., S3
Incorporated and Trident Microsystems, Inc. Many of these competitors have
introduced 3D functionality on new iterations or existing graphics chips. 3Dfx
also competes with companies that have recently entered the market with an
integrated 3D/2D solution but which have not traditionally manufactured 2D
solutions. These competitors include 3Dlabs, Inc., Ltd., nVidia Corporation and
Micron Technology, Inc. 3Dfx also competes with Videologic Group Plc which has
partnered with NEC to focus exclusively on developing a 3D solution for the
interactive electronic entertainment market. 3Dfx also faces potential
competition from companies that have focused on the high-end of the 3D market
and the production of 3D systems targeted for the professional engineering
market. These competitors include 3Dlabs, Integraph Corporation, Real 3D, an
operating unit of Lockheed Martin Corp., and Silicon Graphics, Inc. These
companies are developing lower cost versions of their 3D technology to bring
workstation-like 3D graphics to mainstream applications. Additionally, Intel has
recently entered the 3D graphics market, targeting its efforts at the mainstream
PC market. These companies may enter the interactive electronics entertainment
market and, if they do, 3Dfx may not be able to compete successfully against
them.
3Dfx Depends on the PC Market
For 1996, 1997 and 1998, 82%, 93% and 100% of 3Dfx's revenues were derived
from graphics chips sold for use in PCs. 3Dfx expects to continue to derive
almost all of their revenues from the sales of products for use in PCs. The PC
and graphics chips industries are cyclical and have been characterized by:
- Rapid technological change
- Evolving industry standards
- Cyclical market patterns
- Frequent new product introductions and short product life cycles
- Significant price competition and price erosion
- Fluctuating inventory levels
- Alternating periods of over-capacity and capacity constraints
- Variations in manufacturing costs and yields
- Significant expenditures for capital equipment and product development
The PC and graphics chips markets have also grown substantially in recent
years. However, such growth may not continue. A decline in PC or semiconductor
sales or in the growth rate of such sales would likely reduce demand for 3Dfx's
products. Moreover, such changes in demand could be large and sudden. Since
graphics board and PC manufacturers often build inventories during periods of
anticipated growth, they may be left with excess inventories if growth slows or
if they have incorrectly forecasted product transitions. In such cases, the
manufacturers may abruptly stop purchasing additional inventory from suppliers
such as 3Dfx until the excess inventory has been used. Such suspension of
purchases or any reduction in demand for PCs generally, or for particular
products that incorporate 3Dfx's products, would materially harm 3Dfx's
business.
In addition, the PC and graphics chips industries have in the past
experienced significant economic downturns at various times, characterized by
lower product demand and accelerated reduction of product prices. 3Dfx may
experience substantial period-to-period fluctuations in results of operations
due to general semiconductor industry conditions.
3Dfx Depends on the Retail Distribution Channel
3Dfx's products are distributed primarily in the retail distribution
channel. To access the retail channel, 3Dfx depends on graphics board
manufacturers whose products are sold to consumers. These graphics board
manufacturers generally are not contractually required to make future purchases
of 3Dfx's products and can
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stop including 3Dfx's products or their graphics boards for any reason. Heavy
reliance on these graphics board manufacturers makes it difficult for 3Dfx to
ascertain current demand for its existing products and anticipate demand for
newly introduced products. The manufacturers have, in the past, been subject to
product allocation by 3Dfx and as a result may overstate their needs for 3Dfx's
products in order to ensure an adequate supply. In addition, the manufacturers
may overestimate consumer demand for their graphics boards. Also, initial orders
for a new product may be the result of interest by the graphics board
manufacturers and not an indication of long-term consumer demand. 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 3Dfx's products, 3Dfx's business could be materially harmed.
3Dfx Faces the Challenge of Growth
3Dfx has experienced rapid growth and may continue to experience such
growth. Growth has placed, and is expected to continue to place, a significant
strain on 3Dfx's managerial, operational and financial resources, including
their sales, customer support, research and development, and finance and
administrative operations. Although some new controls, systems and procedures
have been implemented, 3Dfx'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 could inhibit growth and harm
the company.
3Dfx Depends on New Product Development
The markets for which 3Dfx's products are designed are intensely
competitive and are characterized by short product life cycles, rapidly changing
technology, evolving industry standards and declining average selling prices.
3Dfx's businesses will depend to a significant extent on their ability to
successfully develop new products. As a result, 3Dfx believes that significant
expenditures for research and development will continue to be required in the
future. To succeed in this environment 3Dfx must anticipate the features and
functionality that customers will demand. 3Dfx must then incorporate those
features and functionality into products that meet the design requirements of
the PC market and the timing requirements of retail selling seasons. The success
of 3Dfx's new product introductions will depend on several factors, including:
- Proper new product definition
- Timely completion and introduction of new product designs
- The ability of subcontractors and component manufacturers to effectively
design and implement the manufacture of new products
- Quality of new products
- Product performance as compared to competitors' products
- Market acceptance of 3Dfx's and their customers' products
- Competitive pricing of products
- Introduction of new products to the market within the limited time window
for OEM design cycles and retail selling seasons
As the markets for 3Dfx's products continue to develop and competition
increases, we anticipate that product life cycles will shorten and average
selling prices will decline. In particular, average selling prices and, in some
cases, gross margins for 3Dfx's products will decline as products mature. Thus,
3Dfx will need to introduce new products to maintain average selling prices and
gross margins. To do this, 3Dfx must successfully identify new product
opportunities and develop and bring new products to market in a timely manner.
3Dfx has in the past experienced delays in completing development and
introduction of new products. The failure of 3Dfx to successfully develop and
introduce new products and achieve market acceptance for such products would
materially harm 3Dfx's business.
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3Dfx's Products Have Short Product Life Cycles; 3Dfx Must Successfully Manage
Product Transitions
3Dfx's products have short product life cycles. The life cycles of 3Dfx's
graphics chips typically range from six to nine months. A failure by 3Dfx to
successfully introduce new products within a given product cycle could
materially harm its business for that cycle and possibly for subsequent cycles.
Any such failure could also damage 3Dfx's brand name, reputation and
relationships with their customers and cause longer term harm to their business.
The PC market frequently undergoes transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
3Dfx's products must be able to support the new features and performance levels
being required by PC manufacturers at the beginning of such a transition.
Otherwise, 3Dfx would likely lose business as well as the opportunity to compete
for new design contracts until the next product transition. Failing to develop
products with required features and performance levels or a delay as short as a
few months in bringing a new product to market could significantly reduce 3Dfx's
revenues for a substantial period.
The success of 3Dfx depends upon continued market acceptance of its
existing products, and its ability to continually develop and introduce new
products and features and product enhancements to meet changing customer
requirements. Each new product cycle presents new opportunities for competitors
of 3Dfx to gain market share.
There are long lead times for certain components used in 3Dfx's products.
Therefore, 3Dfx may not be able to quickly reduce its production or inventory
levels in response to unexpected shortfalls in sales or, conversely, to increase
production in response to unexpected demand. 3Dfx's existing products may not
continue to be accepted by their markets and 3Dfx may not be successful in
enhancing its existing products or identifying, developing, manufacturing or
marketing new products. Delays in developing new products or product
enhancements or the failure of such products or product enhancements to gain
market acceptance would materially harm 3Dfx's businesses.
3Dfx Has Significant Customer Concentration
3Dfx's sales are highly concentrated among a limited number of customers.
Revenues derived from sales to Diamond, Creative and Elitetron accounted for
approximately 28%, 22% and 16% of revenues in 1998 and revenues derived from
sales to Diamond and Elitetron accounted for approximately 37% and 16% of
revenues for 1997. 3Dfx expects that a small number of customers will continue
to account for a substantial portion of their revenues for the foreseeable
future.
All of 3Dfx's sales were made pursuant to purchase orders. This lack of
long-term commitments, together with the customer concentration noted above,
pose a significant risk. If a single customer of 3Dfx cancels an order or ceases
to be a customer, 3Dfx's business and financial condition could be materially
harmed.
3Dfx Has Significant Product Concentration
3Dfx's revenues are dependent on the markets for 3D/2D and 3D media
processors for PCs and on 3Dfx's ability to compete in that market. Since 3Dfx
has no other products, 3Dfx's business would be materially harmed if it were
unsuccessful in selling these media processors.
3Dfx Depends on Independent Manufacturers and Other Third Parties; 3Dfx Has
No Manufacturing Capacity
3Dfx's products require wafers manufactured with state-of-the-art
fabrication equipment and techniques. 3Dfx does not manufacture the
semiconductor wafers used for its products and does not own or operate a wafer
fabrication facility. Taiwan Semiconductor Manufacturing Company, or TSMC,
currently manufactures all of 3Dfx's wafers in Taiwan. 3Dfx obtains
manufacturing services from TSMC on a purchase order basis. 3Dfx depends on TSMC
to:
- Produce wafers of acceptable quality and with acceptable manufacturing
yields
- Deliver those wafers to 3Dfx and its independent assembly and testing
subcontractors on a timely basis
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- Allocate to 3Dfx a portion of their manufacturing capacity sufficient to
meet 3Dfx's needs
3Dfx expects to continue to be dependent upon TSMC in the future.
3Dfx has no readily available alternative source of supply and it could
take several months to establish a strategic relationship with a new
manufacturing partner. Therefore, a manufacturing disruption experienced by TSMC
would impact the production of 3Dfx's products for a substantial period of time.
Additionally, TSMC fabricates wafers for other companies and could choose to
prioritize capacity for other uses or reduce or eliminate deliveries to 3Dfx on
short notice. Any disruption in 3Dfx's access to TSMC's production capacity
would materially harm 3Dfx's business.
There are many other risks associated with 3Dfx'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 3Dfx
- Potential misappropriation of 3Dfx's intellectual property
3Dfx's products are packaged and tested by two third party subcontractors
on a purchase order basis rather than under a long-term agreement. As a result
of its reliance on these subcontractors to assemble and test its products, 3Dfx
cannot directly control product delivery schedules. This could lead to product
shortages or quality assurance problems that could increase the costs of
manufacturing or assembly of 3Dfx's products. A significant amount of time is
required to qualify assembly and test subcontractors. Therefore, product
shipments could be delayed significantly if 3Dfx is required to find alternative
subcontractors. Any problems associated with the delivery, quality or cost of
the assembly and testing of 3Dfx's products could materially harm 3Dfx's
business.
Semiconductor Manufacturers Experience Manufacturing Yield Problems
The fabrication of semiconductors is a complex and precise process that
often experiences problems that are difficult to diagnose and time consuming or
expensive to solve. As a result, semiconductor companies often experience
problems in achieving acceptable wafer manufacturing yields. These yields
reflect the number of good die as a proportion of the total number of die on any
particular wafer. Once production yields for a product stabilize, 3Dfx pays an
agreed price for wafers meeting certain acceptance criteria pursuant to a "good
die" only pricing structure for that product. Until production yields for a
product stabilize, however, 3Dfx must pay an agreed price for wafers regardless
of yield. Accordingly, in this latter circumstance, 3Dfx bears the risk of final
yield of good die. Poor yields would materially harm 3Dfx's business.
Semiconductor manufacturing yields are a function of both product design,
which is developed largely by 3Dfx, and process technology, which is typically
proprietary to the manufacturer. Low yields may result from either design or
process technology failure. Thus, yield problems may not be 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. At that point, resolution of yield problems would require cooperation
by and communication between 3Dfx and the manufacturer. The offshore location of
3Dfx's manufacturer compounds this risk because it increases the effort and time
required to identify, communicate and resolve manufacturing yield problems. As
3Dfx's relationships with TSMC and any additional manufacturing partners
develop, yields could be harmed from difficulties in adapting 3Dfx's technology
and product design to the proprietary process technology and design rules of
each manufacturer.
3Dfx's manufacturers may not achieve or maintain acceptable manufacturing
yields in the future. Because of 3Dfx's potentially limited access to wafer
fabrication capacity from its manufacturers, any decrease in manufacturing
yields could result in an increase in 3Dfx's per unit costs and force 3Dfx to
allocate its available product supply among its customers. Such an allocation
could potentially adversely impact customer relationships as well as revenues
and gross profit. Any inability of 3Dfx to achieve planned yields from its
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manufacturers could materially harm 3Dfx's business, 3Dfx 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, 3Dfx's revenues
and gross profit could be materially harmed.
3Dfx Faces Risks Relating to Intellectual Property
3Dfx relies primarily on a combination of patent, mask work protection,
trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements to protect its intellectual
property. If these efforts are not sufficient to protect 3Dfx's intellectual
property, 3Dfx's business may be harmed. Many foreign jurisdictions offer less
protection of intellectual property rights than the United States. Therefore,
the protection provided to 3Dfx's proprietary technology by the laws of foreign
jurisdictions may not be sufficient to protect its technology.
The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights or positions and it is common in the PC
industry for companies to assert intellectual property infringement claims
against other companies. Therefore, 3Dfx's products may become the target of
infringement claims. If that were to occur, 3Dfx may be required to spend
significant time and money to defend its products, redesign its products or
develop or license a substitute technology. Any of these events could materially
harm 3Dfx's business. Litigation by or against 3Dfx could result in significant
expense to 3Dfx and could divert the efforts of 3Dfx's technical and management
personnel, regardless of the outcome of such litigation.
3Dfx's International Operations Are Subject to Certain Risks
3Dfx relies on foreign third-party manufacturing, assembly and testing
operations which are located in Asia. In addition, 3Dfx has significant export
sales. These international operations subject 3Dfx to a number of risks
associated with conducting business outside of the United States. These risks
include:
- Unexpected changes in legislative or regulatory requirements
- Delays resulting from difficulty in obtaining export licenses for certain
technology
- Tariffs, quotas and other trade barriers and restrictions
- Longer accounts receivable payment cycles
- Difficulties in collecting payment
- Potentially adverse tax consequences, including repatriation of earnings
- Burdens of complying with a variety of foreign laws
- Unfavorable intellectual property laws
- Political instability
- Foreign currency fluctuations
Any of these factors could materially harm the international operations and
sales of 3Dfx, and consequently, its business. Recently, the financial markets
in Asia have experienced significant turmoil, which could harm 3Dfx's
international sales or operations. Currently, all of 3Dfx's product sales and
its arrangements with its foundry and assembly and test vendors provide for
pricing and payment in U.S. dollars. To date, 3Dfx has not engaged in any
currency hedging activities, although 3Dfx may do so in the future. An increase
in the value of the U.S. dollar relative to foreign currencies could make 3Dfx's
products more expensive and potentially less competitive in foreign markets.
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3Dfx's Stock Prices May Be Volatile
The trading price of 3Dfx's Common Stock has in the past fluctuated and
could in the future fluctuate significantly. The fluctuations have been or could
be in response to numerous factors, including:
- Quarterly variations in results of operations
- Announcements of technological innovations or new products by 3Dfx, its
customers or competitors
- Changes in securities analysts' recommendations
- Earnings estimates for 3Dfx
- General fluctuations in the stock market
3Dfx's revenues and results of operations may be below the expectations of
public market securities analysts or investors. This could result in a sharp
decline in the market price of 3Dfx's Common Stock. In addition, stock markets
have from time to time experienced extreme price and volume fluctuations. The
market prices for high technology companies have been particularly affected by
these market fluctuations and such effects have often been unrelated to the
operating performance of such companies. These broad market fluctuations may
cause a decline in the market price of 3Dfx's common stock.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. It is possible that similar litigation could be brought against
3Dfx. Such litigation could result in substantial costs and would likely divert
management's attention and resources. Any adverse determination in such
litigation could also subject 3Dfx to significant liabilities.
Risks Associated with Year 2000 Compliance
3Dfx uses a significant number of computer software programs and operating
systems in its internal operations. These include applications used in financial
business systems and various administration functions, and also software
programs in their products. If these software applications are unable to
appropriately interpret dates occurring in the upcoming calendar year 2000, some
level of modification or replacement of such software may be necessary. 3Dfx
believes that all of its existing products are Year 2000 compliant and has
conducted or is conducting Year 2000 compliance testing. Despite such belief,
3Dfx's products may not be Year 2000 compliant. If 3Dfx's products fail to
perform, including failures due to the onset of calendar year 2000, its business
would likely be materially harmed.
3Dfx is currently evaluating its information technology for Year 2000
compliance. This evaluation includes reviewing what actions are required to make
all internally used software systems Year 2000 compliant as well as actions
necessary to make 3Dfx less vulnerable to Year 2000 compliance problems
associated with third parties' systems. Such measures may not solve all of
3Dfx's Year 2000 problems. Any Year 2000 problems could materially harm 3Dfx's
business. In addition, 3Dfx's customers and suppliers may not be year 2000
compliant, which could materially harm 3Dfx's business. See "Year 2000
Compliance" on page 23.
3Dfx Depends on Third Party Developers and Publishers
3Dfx believes that the availability of numerous high quality, commercially
successful software entertainment titles and applications significantly affects
sales of 3D and 3D/2D media processors. 3Dfx depends on third party software
developers and publishers to create, produce and market software titles that
will operate with 3Dfx's 3D and 3D/2D 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. Therefore, a sufficient number of high quality, commercially
successful software titles compatible with 3Dfx's products may not be developed.
In addition, the development and marketing of game titles that do not fully
demonstrate the technical capabilities of 3Dfx's products could create the
impression that 3Dfx's technology offers only marginal performance improvements,
if any, over competing products.
3Dfx's success will be substantially affected by the adoption by software
developers of Glide, its proprietary, low-level 3D API. Although 3Dfx's products
support game titles developed for most industry
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standard APIs, 3Dfx believes that Glide currently allows developers to fully
exploit the technical capabilities of 3Dfx's 3D and 3D/2D media processor
products. Glide competes with APIs developed or expected to be developed by
other companies having significantly greater financial resources, marketing
power, name recognition and experience than 3Dfx. For example, certain industry
standard APIs, such as Microsoft's D3D and SGI's OpenGL, 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 3Dfx's architecture. There can be no assurance
that Glide will be adopted by a sufficient number of software developers or that
developers who have used Glide in the past will continue to do so in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplemental data
required by this item and set forth at the pages indicated in item 14(a) of this
Report and, for selected quarterly data, to the subsection "Quarterly Results of
Operations" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of 3Dfx are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
L. Gregory Ballard............ 44 President, Chief Executive Officer and Director
David Zacarias................ 49 Vice President, Administration and Chief Financial Officer
Karl Chicca................... 41 Vice President, Operations
Michael Howse................. 36 Vice President, Corporate Marketing and Business Development
Darlene R. Kindler............ 46 Vice President, Third Party
Janet Leising................. 41 Vice President, Engineering
Scott D. Sellers.............. 30 Senior Vice President, Product Development and Director
Gary Tarolli.................. 42 Vice President and Chief Technology Officer
Jordan G. Watters............. 36 Vice President, Worldwide Sales
Gordon A. Campbell(1)......... 54 Chairman of the Board of Directors
Alex Leupp(2)................. 59 Director
Anthony Sun(1)................ 46 Director
James Whims(2)................ 44 Director
Philip M. Young(1)............ 68 Director
</TABLE>
- ---------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
L. GREGORY BALLARD has served as President, Chief Executive Officer and a
director of 3Dfx since December 1996. Prior to joining 3Dfx, Mr. Ballard was
President at Capcom Entertainment, Inc., a video game and multimedia
entertainment company, from June 1995 through November 1996. Prior to that, Mr.
Ballard served as Chief Operating Officer and Chief Financial Officer of Digital
Pictures, Inc., a video game company, from May 1994 to June 1995. Mr. Ballard
was President and Chief Executive Officer of Warner Custom Music Corporation, a
multimedia marketing division of Time Warner, Inc., from October 1992 to May
1994, and he was President and Chief Operating Officer of Personics Corporation,
a predecessor to Warner Music, from January 1991 to October 1992. Mr. Ballard
also worked for Boston Consulting Group and as a practicing attorney in
Washington, D.C.
33
<PAGE> 35
DAVID ZACARIAS has served as Vice President, Administration and Chief
Financial Officer of 3Dfx since February 1998. Prior to joining 3Dfx, Mr.
Zacarias served as Chief Financial Officer, from February 1993 to January 1998
and as Chief Operating Officer from July 1995 to January 1998 of OPTi Inc., a
fabless semiconductor company.
KARL CHICCA has served as Vice President, Operations of 3Dfx since June
1996. Prior to joining 3Dfx, Mr. Chicca was Vice President of Strategic
Commodity Management of Maxtor Corporation, a disk drive company, from May 1995
to May 1996. He was Vice President, Materials at MiniStor Peripherals Corp. from
March 1994 to April 1995. MiniStor filed a petition for relief under Chapter 11
of the Federal bankruptcy laws on April 14, 1995. From 1979 to March 1994, Mr.
Chicca held various materials and manufacturing positions with International
Business Machine Corporation ("IBM"), most recently as Manager of Worldwide
Procurement of IBM's Storage Systems Division. Mr. Chicca received a BS in
Business Administration from San Jose State University.
MICHAEL HOWSE has served as Vice President, Corporate Marketing and
Business Development since August 1998. From April 1998, when Mr. Howse first
joined 3Dfx, until August 1998, Mr. Howse was Director of Business Development.
Prior to joining 3Dfx, Mr. Howse was Director of Marketing at S3 Incorporated, a
semiconductor company, from October 1995 to April 1998. From December 1994 to
October 1995, Mr. Howse was a publisher at Creative Labs, Inc., a multimedia and
graphics company. Before that from August 1991 through December 1994, Mr. Howse
was co-founder and president of Total Vision, Inc., a multimedia software
development company.
DARLENE R. KINDLER has served as Vice President, Third Party since February
1998. From September 1996 to February 1998, Ms. Kindler was 3Dfx's Director of
Publisher and Developer Relations. Prior to joining 3Dfx, Ms. Kindler served,
from July 1996 to September 1996, as Vice President of Consumer Division, and
from April 1994 to July 1996, as Director of Sales and Marketing for Data East,
Inc., a licensee and publisher of Nintendo, Sony Playstation and Sega games, as
well as a manufacturer and distributor of arcade games. From 1990 to April 1994,
Ms. Kindler served as Director of Sales and Marketing for IREM America Corp., a
Japanese company specializing in arcade games and Nintendo consumer products.
Ms. Kindler was Manager of International Marketing at Nintendo of America, Inc.,
a manufacturer of home console video game machines, from 1984 to 1990.
JANET LEISING has served as Vice President, Engineering of 3Dfx since
August 1998 and before then as Vice President, Software Engineering since June
1997. Prior to that, Ms. Leising served as Director of Software Engineering
since August 1995. Before joining 3Dfx, Ms. Leising was the Director of Software
Engineering at Weitek Systems Inc., a multimedia semiconductor company, from
November 1993 to July 1995. She was PC Graphics Manager and the X/PEX Manager at
Kubota Graphics Computers, Inc., a workstation company, from November 1991 to
November 1993. Prior to that, Ms. Leising was the Section Manager at Data
General, R.T.P., a workstation company, from June 1988 to November 1991.
SCOTT D. SELLERS has served as Senior Vice President, Product Development
of 3Dfx since August 1998. He co-founded 3Dfx in August 1994 and served as Vice
President, Research and Development from January 1995 to August 1998, has also
served as a director of 3Dfx since March 1995. Mr. Sellers was Principal
Engineer at MediaVision Technology, Inc. ("MediaVision"), a multimedia computer
products company, from June 1993 to June 1994. Prior to that, Mr. Sellers was a
Microprocessor Engineer at Pellucid, Inc. ("Pellucid"), a developer of chip and
board products, from January 1993 to June 1993. Mr. Sellers was also a Member of
the Technical Staff at SGI from October 1990 to January 1993.
GARY TAROLLI has served as Vice President and Chief Technology Officer of
3Dfx since May 1998 and from January 1995 to May 1998 as Vice President and
Chief Scientist. Prior to co-founding 3Dfx in August 1994, Mr. Tarolli was an
Engineering Fellow at MediaVision from 1993 to 1994. Before joining MediaVision,
Mr. Tarolli was a self-employed consultant to the 3D graphics industry from 1992
to 1993. Mr. Tarolli was a Principal Scientist at SGI from 1983 to 1992. Prior
to joining SGI, he was a Principal Engineer at Digital Equipment Corp. for four
years.
34
<PAGE> 36
JORDAN G. WATTERS has served as Vice President, Worldwide Sales of 3Dfx
since January 1998. From May 1997 until January 1998, Mr. Watters was 3Dfx's
Director of Worldwide Sales. Prior to joining 3Dfx, Mr. Watters served, from
January 1996 to May 1997, as Vice President of Sales and Marketing and, from
April 1995 to January 1996, as Director of Sales at VideoLogic, Inc., a
manufacturer and distributor of PC Multimedia products. From 1989 to April 1995,
Mr. Watters served in a variety of sales and managerial positions, most recently
as Business Unit Manager, at Conner Peripherals, Inc., a manufacturer of
computer storage products.
GORDON A. CAMPBELL has served as the Chairman of the Board of Directors of
3Dfx Interactive, Inc. since August 1994 when he co-founded 3Dfx. Mr. Campbell
also served as President and Chief Executive Officer of 3Dfx from January 1995
to December 1996. Prior to joining 3Dfx, Mr. Campbell founded Techfarm, Inc., a
venture capital investment firm, and has served as President since September
1993. In 1985, Mr. Campbell founded Chips and Technologies, Inc. ("CHIPS"), a
semiconductor and related device company, and served as Chairman, Chief
Executive Officer and President of CHIPS until July 1993. Mr. Campbell founded
SEEQ Technology, Inc. ("SEEQ"), a semiconductor and related device company, in
1981. He served as President and Chief Executive Officer of SEEQ from 1981 to
1985. Mr. Campbell currently serves as a director of 3Com Corporation and Bell
Microproducts, Inc. Mr. Campbell is also a director of several private
companies.
ALEX LEUPP has served as a director of 3Dfx since October 1998. Since
December 1998, Mr. Leupp has been President and Chief Executive Officer of Chip
Express Corporation, a semiconductor company. Mr. Leupp spent 12 years with
Siemens Microelectronics, Inc, a semiconductor company, where his most recent
position was President and Chief Executive Officer.
ANTHONY SUN has served as a director of 3Dfx Interactive, Inc. since March
1995. Mr. Sun has been a General Partner at Venrock Associates, a venture
capital investment firm, since 1979. He is currently director of Cognex
Corporation, Komag, Inc., Phoenix Technologies Ltd. and Worldtalk Communications
Corporation. Mr. Sun is also a director of several private companies.
JAMES WHIMS has served as a director of 3Dfx Interactive, Inc. since
November 1996. Mr. Whims has been a Partner at Techfarm since November 1996.
From November 1994 until July 1996, Mr. Whims was the Executive Vice President
of Sony Computer Entertainment, a video game hardware and software company. From
1990 until July 1994, Mr. Whims was Executive Vice President of the Consumer
Division of The Software Toolworks, Inc., a diversified software company. From
1985 to 1988, Mr. Whims served as Vice President of Sales of Worlds of Wonder,
Inc., a toy products company, which he co-founded.
PHILIP M. YOUNG has served as a director of 3Dfx Interactive, Inc. since
March 1995. Mr. Young has been a general partner at U.S. Venture Partners, a
venture capital firm, since April 1990. He was a managing director of Dillon,
Read and Co., Inc., and general partner of Dillon Read's Concord Partners
venture capital activity in Palo Alto from January 1986 to April 1990. He
currently serves on the Boards of Directors of Vical, Inc., CardioThoracic
Systems, Inc., Immune Response Corporation and Zoran Corporation. Mr. Young is
also a director of several private companies.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 (a) of the Exchange Act ("Section 16 (a)") requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the
Securities and Exchange Commission (the "SEC") and the National Association of
Securities Dealers, Inc. Such officers, directors and ten-percent shareholders
are also required by SEC rules to furnish the Company with copies of all such
forms that they file. Based solely on its review of the copies of such forms
received by the Company, or written representations from certain reporting
persons that no Forms 5 were required for such persons, the Company believes
that during fiscal 1998 all Section 16(a) filing requirements applicable to its
officers, directors and ten-percent shareholders were complied with, except that
Alex Leupp filed a Form 3 late and Gary Martin and James Whims each filed a Form
4 late.
35
<PAGE> 37
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
The members of the Compensation Committee during fiscal 1998 were George J.
Still, Jr. (until October 1998), James Whims and Alex Leupp (from October 1998).
None of Mssrs. Still, Whims or Leupp was at any time during the Company's 1998
fiscal year or at any other time an officer or employee of the Company. No
executive officer of the Company serves as a member of the Board of Directors or
Compensation Committee of any entity which has one or more executive officers
serving as a member of the Company's Board of Directors or Compensation
Committee.
Mr. Whims provides consulting services to the Company for which the Company
pays a fee of $5,000 per month. The Company made total payments to Mr. Whims in
fiscal 1998 of $60,000.
COMPENSATION OF DIRECTORS
Members of the Company's Board of Directors do not receive compensation for
their services as directors. The Company's 1997 Director Option Plan provides
that options shall be granted to non-employee directors of the Company pursuant
to an automatic nondiscretionary grant mechanism. The exercise price of the
options is 100% of the fair market value of the Common Stock on the grant date.
The Director Plan provides for an initial grant of options to purchase 12,500
shares of Common Stock to each new non-employee director of the Company who is
neither affiliated with nor nominated by a shareholder that owns one percent or
more of the outstanding capital stock of the Company on the later of the
effective date of the Director Plan or the date he or she first becomes a
director. In addition, each non-employee director will automatically be granted
an additional option to purchase 5,000 shares of Common Stock at the next
meeting of the Board of Directors following the annual meeting of shareholders
if on such date, such director has served on the Board of Directors for at least
six months; provided, however, if such director is elected as Chairman of the
Board of Directors, such option grant shall be 10,000 shares. In addition to
these grants, each director shall automatically be granted an option to purchase
1,000 shares at the next meeting of the Board of Directors following the annual
meeting of shareholders if such director serves on either the Audit Committee or
Compensation Committee of the Board of Directors. If such Director serves on
both such Committees, this grant shall be 2,000 shares. 12,500 share options
granted to a director vest at a rate of 1/48th of the shares subject to the
option per month following the date of grant. 5,000 or 10,000 share options
granted to a director vest at a rate of 1/12th of the shares subject to the
option per month following the date of grant. 1,000 share options granted to a
director vest at a rate of 1/12th of the shares subject to the option per month
following the date of grant.
Pursuant to such automatic grant mechanism, in fiscal 1998, directors
received the following grants:
<TABLE>
<CAPTION>
NAME SHARES EXERCISE PRICE
---- ------------- --------------
<S> <C> <C>
Gordon A. Campbell................................ 11,000 shares $23.25
Alex Leupp........................................ 12,500 shares 12.19
Anthony Sun....................................... 6,000 shares 23.25
Philip M. Young................................... 6,000 shares 23.25
James Whims....................................... 6,000 shares 23.25
</TABLE>
As of December 31, 1998, no shares of Common Stock had been issued upon the
exercise of options granted under the Director Plan, options to purchase 75,000
shares of Common Stock were outstanding and 75,000 shares remain available for
future option grants under the Director Plan.
36
<PAGE> 38
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to 3Dfx in all capacities
during the years ended December 31, 1996, 1997 and 1998, for 3Dfx's Chief
Executive Officer and 3Dfx's next four most highly compensated executive
officers whose salary and bonus for the 1998 fiscal year exceeded $100,000 (the
"Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION -------------
------------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION OPTIONS(#)(1)
--------------------------- ----------- --------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
L. Gregory Ballard(2).................... 1998 $251,923 $52,000 $ -- --
President, Chief Executive Officer and 1997 210,167 6,200 -- 18,750
Director 1996 11,538 -- -- 350,000
Scott D. Sellers......................... 1998 177,121 39,250 -- 100,000(3)
Senior Vice President, Product 1997 149,079 4,665 -- 68,750
Development and Director 1996 116,667 1,400 -- 25,000
Gary Tarolli............................. 1998 177,121 44,250 -- 100,000(3)
Vice President and Chief Technology 1997 155,000 5,000 -- 68,750
Officer 1996 130,000 1,400 -- 25,000
Jordan G. Watters(4)..................... 1998 145,962 76,150 4,800(5) 70,000(6)
Vice President, Worldwide Sales 1997 79,748 56,500 3,045(5) 35,000
1996 -- -- --
David Zacarias(7)........................ 1998 190,192 26,545 -- 200,000(8)
Vice President, Administration and Chief 1997 -- -- -- --
Financial Officer 1996 -- -- -- --
</TABLE>
- ---------------
(1) These shares are subject to exercise under stock options granted under
3Dfx's 1995 Employee Stock Plan.
(2) Mr. Ballard joined 3Dfx in December 1996.
(3) Includes options to purchase an aggregate of 50,000 shares of Common Stock
granted to each of Mr. Sellers and Mr. Tarolli in connection with 3Dfx's
option repricing program in exchange for options that had a higher exercise
price.
(4) Mr. Watters joined 3Dfx in May 1997 as Director of Worldwide Sales and
became Vice President, Worldwide Sales in February 1998.
(5) Consists of car allowances.
(6) Includes options to purchase an aggregate of 35,000 shares of Common Stock
granted to Mr. Watters in connection with 3Dfx's option repricing program in
exchange for options that had a higher exercise price.
(7) Mr. Zacarias joined 3Dfx in February 1998.
(8) These shares are subject to exercise under stock options granted under
3Dfx's 1997 Supplementary Stock Option Plan. Includes an option to purchase
100,000 shares of 3Dfx Common Stock granted to Mr. Zacarias in connection
with 3Dfx's option repricing program in exchange for an option that had a
higher exercise price.
37
<PAGE> 39
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information relating to stock options awarded
to each of the Named Executive Officers during the year ended December 31, 1998.
Except as otherwise noted, all such options were awarded under 3Dfx's 1995
Employee Stock Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO PRICE OPTION TERM(1)
OPTIONS EMPLOYEES IN PER EXPIRATION ---------------------
NAME GRANTED(2)(3) FISCAL 1998 SHARE(4) DATE 5% 10%
---- ------------- ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard............ -- --% $ -- $ -- $ --
Scott D. Sellers.............. 50,000 3 13.125 12/3/08 412,712 1,045,893
Gary Tarolli.................. 50,000 3 13.125 12/3/08 412,712 1,045,893
Jordan G. Watters............. 35,000 2 13.125 12/3/08 288,898 732,125
David Zacarias(5)............. 100,000 5 13.125 12/3/08 825,424 2,091,787
</TABLE>
- ---------------
(1) Potential gains are net of the exercise price but before taxes associated
with the exercise. The 5% and 10% assumed annual rates of compounded stock
appreciation based upon the exercise price per share are mandated by the
rules of the SEC and do not represent 3Dfx's estimate or projection of the
future common stock price. Actual gains, if any, on stock option exercises
are dependent on the future financial gains, if any, on stock option
exercises are dependent on the future financial performance of 3Dfx, overall
market conditions and the option holders' continued employment through the
vesting period. This table does not take into account any appreciation in
the fair market value of 3Dfx Common Stock from the date of grant to the
date of this Joint Proxy Statement/ Prospectus, other than the columns
reflecting assumed rates of appreciation of 5% and 10%.
(2) Options become exercisable as to 25% of the option shares on the first
anniversary of the date of grant and as to 1/48 of the option shares each
month thereafter, with full vesting occurring on the fourth anniversary of
the date of grant.
(3) In connection with 3Dfx's option repricing program, such options were
granted in exchanged for options having a higher exercise price. The new
options have the same vesting schedule as the options for which they were
exchanged, except that the options would not be exercisable for a period of
one year from the date of repricing.
(4) Options were granted at an exercise price equal to the fair market value of
3Dfx's Common Stock on the date of grant, as determined by the 3Dfx Board.
Exercise price may be paid in cash, check, promissory note, delivery of
already-owned shares of 3Dfx's Common Stock subject to certain conditions,
authorization to 3Dfx to retain from the total number of shares for which
the option is exercised that number of shares having a fair market value on
the date of exercise equal to the exercise price for the total number of
shares as to which the option is exercised, delivery of a properly executed
exercise notice together with irrevocable instructions to a broker to
promptly deliver to 3Dfx the amount of sale or loan proceeds required to pay
the exercise price, or any combination of the foregoing methods of payment
or such other consideration or method of payment to the extent permitted
under applicable law.
(5) These shares are subject to exercise under stock options granted under
3Dfx's 1997 Supplementary Stock Option Plan.
38
<PAGE> 40
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth certain information regarding exercises of
stock options by the Named Executive Officers during the year ended December 31,
1998 and the stock options held as of December 31, 1998 by the Named Executive
Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED
SHARES DECEMBER 31, 1998 IN-THE-MONTH OPTIONS AT
ACQUIRED (#)(1) DECEMBER 31, 1998($)(2)
ON VALUE --------------------------- ---------------------------
NAMES EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard..... 140,000 $3,039,375 43,275 184,625 $507,399 $2,057,891
Scott D. Sellers....... -- -- 21,745 72,005 188,193 103,150
Gary Tarolli........... -- -- 21,745 72,005 188,193 103,150
Jordan G. Watters...... -- -- 13,750 56,250 13,344 2,031
David Zacarias......... -- -- -- 100,000 -- --
</TABLE>
- ---------------
(1) Options granted under 3Dfx's 1995 Employee Stock Plan may be exercised by
the holder thereof prior to vesting with the shares purchased thereby
subject to repurchase by 3Dfx until fully vested. The table presents options
as exercisable according to the vesting schedule of the option.
(2) Based upon the last sale price of 3Dfx's Common Stock on December 31, 1998,
$12.63 per share, minus the exercise price.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Pursuant to letter agreements entered into with each of L. Gregory Ballard,
Karl Chicca, Scott Sellers and Gary Tarolli, in the event there is a change of
control of 3Dfx and such executive is terminated other than for cause within one
year following the effective date of such change of control, (i) in the case of
Messrs. Ballard and Chicca, 25% (or, in the event that less than 25% of such
executive's options remain unvested, all) of such executive's options will be
accelerated and become fully vested and (ii) in the cases of Messrs. Sellers and
Tarolli, 25% of the executive's stock subject to 3Dfx's repurchase option under
a restricted stock purchase agreement shall be released from such repurchase
option (or all of such stock if less than 25% of the executive's stock remains
subject to 3Dfx's repurchase option). For purposes of these letter agreements a
"change of control" means the (i) the sale of all or substantially all of 3Dfx's
assets, or (ii) a consolidation or merger of 3Dfx with or in any other
corporation (other than a wholly-owned subsidiary of 3Dfx) or engagement in a
transaction or series of transactions in which more than 50% of the voting power
of 3Dfx is disposed. Termination other than for cause includes constructive
termination resulting from (i) the reduction of such employee's rate of
compensation, (ii) the reduction of such employee's scope of engagement or (iii)
the requirement that such employee provide services at a location more than 50
miles from the employee's office location as of the date of the letter
agreement.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
3Dfx has adopted provisions in its Articles of Incorporation that eliminate
to the fullest extent permissible under California law the liability of its
directors to 3Dfx for monetary damages. Such limitation of liability does not
affect the availability of equitable remedies such as injunctive relief or
rescission. 3Dfx's Bylaws provide that 3Dfx shall indemnify its directors and
officers to the fullest extent permitted by California law, including in
circumstances in which indemnification is otherwise discretionary under
California law. 3Dfx has entered into indemnification agreements with its
officers and directors containing provisions which may require 3Dfx, among other
things, to indemnify the officers and directors against certain liabilities that
may arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
39
<PAGE> 41
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of 3Dfx in which indemnification
would be required or permitted. 3Dfx is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
OPTION REPRICINGS
In October 1998, the 3Dfx Board determined that the purposes of the 1995
Employee Stock Plan and the 1997 Supplemental Plan were not being adequately
achieved with respect to those employees holding options with exercise prices
greater than the then-current market value of 3Dfx's Common Stock and that it
was in the best interests of 3Dfx and 3Dfx's shareholders that 3Dfx retain and
motivate such employees. The 3Dfx Board decided therefore to provide such option
holders, excluding executive officers, the opportunity to exchange their options
for new ones with exercise prices equal to the then-current market value of
3Dfx's Common Stock. On October 27, 1998, upon approval of the 3Dfx Board, 3Dfx
offered certain employees who were holders of outstanding options under the 1995
Employee Stock Plan and 1997 Supplemental Plan with exercise prices in excess of
$10.88 per share the opportunity to exchange such options for new stock options
with an exercise price of $10.88 per share, the fair market value of 3Dfx's
Common Stock at the close of business on that date. Executive officers were not
entitled to participate in the October repricing. Subsequently, however, the
3Dfx Board determined that it was necessary, in order to retain and motivate its
executive officers, to offer them the opportunity to exchange their options with
exercise prices equal to the then-current market value of 3Dfx's Common Stock.
The repricing for executive officers occurred on December 3, 1998 and such
options were repriced at an exercise price of $13.13. The named executive
officers named below participated in the December repricing. In both the October
and December Repricings, any option holder accepting such offer was not
permitted to exercise the repriced option (including both vested and unvested
shares) in the first twelve months following the date of the applicable
repricing. A total of 221 employees of 3Dfx were eligible to participate in the
October repricing. Those eligible employees' existing options had an average
exercise price of $18.07 per share prior to the repricing. Of such eligible
employees, 195 participated in the October repricing. All eight executive
officers who were eligible to participate in the December repricing did so and
those officers' existing options had an average exercise price of $21.31 per
share prior to the repricing.
10-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
NUMBER OF MARKET OPTION
SECURITIES PRICE OF EXERCISE TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING
OPTIONS TIME OF TIME OF EXERCISE AT DATE OF
NAME AND REPRICED REPRICING REPRICING PRICE REPRICING
PRINCIPAL POSITION DATE (#) ($) ($) ($) (# OF YRS)
------------------ ---------------- ----------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
L. Gregory Ballard......... -- -- -- -- -- --
President, Chief
Executive Officer and
Director
Karl Chicca................ December 3, 1998 10,000 13.13 24.50 13.13 9.2
Vice President,
Operations
Michael Howse.............. December 3, 1998 25,000 13.13 26.75 13.13 9.4
Vice President, Corporate
Marketing and Business
Development
Darlene R. Kindler......... December 3, 1998 40,000 13.13 24.50 13.13 9.2
Vice President, Third
Party
Janet Leising.............. December 3, 1998 10,000 13.13 24.50 13.13 9.2
Vice President,
Engineering December 3, 1998 10,000 13.13 17.13 13.13 9.6
</TABLE>
40
<PAGE> 42
<TABLE>
<CAPTION>
LENGTH OF
ORIGINAL
NUMBER OF MARKET OPTION
SECURITIES PRICE OF EXERCISE TERM
UNDERLYING STOCK AT PRICE AT NEW REMAINING
OPTIONS TIME OF TIME OF EXERCISE AT DATE OF
NAME AND REPRICED REPRICING REPRICING PRICE REPRICING
PRINCIPAL POSITION DATE (#) ($) ($) ($) (# OF YRS)
------------------ ---------------- ----------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott D. Sellers........... December 3, 1998 50,000 13.13 15.75 13.13 8.9
Sr. Vice President,
Product Development and
Director
Gary Tarolli............... December 3, 1998 50,000 13.13 15.75 13.13 8.9
Vice President and Chief
Technology Officer
Jordan G. Watters.......... December 3, 1998 15,000 13.13 17.06 13.13 8.8
Vice President,
Worldwide Sales December 3, 1998 20,000 13.13 22.13 13.13 9.2
David Zacarias............. December 3, 1998 100,000 13.13 24.50 13.13 9.2
Vice President,
Administration and Chief
Financial Officer
</TABLE>
The 3Dfx Board intends that its compensation program shall be fair and
motivating and shall be successful in attracting and retaining qualified
employees and in linking compensation directly to 3Dfx's success. The 3Dfx Board
and the Compensation Committee intend to review this program on an ongoing basis
to evaluate its continued effectiveness.
THE COMPENSATION COMMITTEE
Alex Leupp
James Whims
41
<PAGE> 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership of 3Dfx Common Stock as
of December 31, 1998 by each of the 3Dfx directors and executive officers, all
directors and executive officers of 3Dfx as a group, and each person known to
3Dfx to beneficially own more than 5% of the outstanding shares of 3Dfx Common
Stock. Except as otherwise noted, the shareholders named in the table have sole
voting and investment power with respect to all shares of 3Dfx Common Stock
shown as beneficially owned by them, subject to applicable community property
laws.
<TABLE>
<CAPTION>
3DFX COMMON STOCK
BENEFICIALLY OWNED
---------------------------------
BENEFICIAL OWNER(1) NUMBER OF SHARES(2) PERCENT(3)
------------------- ------------------- ----------
<S> <C> <C>
Entities Affiliated with Venrock Associates
Suite 200
2494 Sand Hill Road
Menlo Park, California 94025.............................. 908,238 5.8%
L. Gregory Ballard.......................................... 101,982 *
Gordon A. Campbell(4)....................................... 651,631 4.1%
Alex Leupp.................................................. 1,375 *
Scott D. Sellers............................................ 278,959 1.8%
Anthony Sun(5).............................................. 951,388 6.0%
James Whims................................................. 47,251 *
Philip M. Young............................................. 44,406 *
Karl Chicca................................................. 37,501 *
Michael Howse............................................... 753 *
Darlene R. Kindler.......................................... 3,916 *
Janet Leising............................................... 44,022 *
Gary Tarolli(6)............................................. 287,493 1.8%
Jordan G. Watters........................................... 16,870 *
David Zacarias.............................................. 716 *
All executive officers and directors as a group............. 2,468,263 15.4%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted, address is c/o 3Dfx Interactive, Inc., 4435
Fortran Drive, San Jose, CA 95134.
(2) Includes the following shares subject to options to purchase shares of 3Dfx
Common Stock that are currently exercisable or will be exercisable within 60
days of December 31, 1998: L. Gregory Ballard 58,640; Gordon A. Campbell
70,166; Alex Leupp 1,375; Scott D. Sellers 23,959; Anthony Sun 11,000; James
Whims 39,126; Philip Young 11,000; Karl Chicca 17,438; Darlene Kindler
3,916; Janet Leising 12,022; Gary Tarolli 23,959; Jordon Watters 15,209;
David Zacarias 0; and all executive officers and directors as a group
287,810.
(3) Applicable percentage ownership is based on 15,730,220 shares of 3Dfx Common
Stock outstanding as of December 31, 1998 in each case together with
applicable options for such shareholder.
(4) Includes 77,084 shares held by Techfarm, L.P., and 3,854 held by Techfarm
Management Inc. (dba Techfarm, Inc.), 500,527 shares held by Gordon A.
Campbell and 70,166 shares issuable upon exercise of stock options
exercisable within 60 days of December 31, 1998 held by Gordon A. Campbell.
Mr. Campbell is President of Techfarm, Inc., the general partner of
Techfarm, L.P. and Mr. Campbell disclaims beneficial ownership of the shares
held by Techfarm, L.P. and Techfarm Management Inc.
(5) Includes 607,194 shares held by Venrock Associates, L.P., 301,044 shares
held by Venrock Associates II, L.P., 22,150 shares held by the Anthony Sun
Family Trust and 11,000 shares issuable upon exercise of stock options
exercisable within 60 days of December 31, 1998 held by Mr. Sun. Mr. Sun, a
director of 3Dfx, is a general partner of each of these limited
partnerships. Mr. Sun disclaims beneficial ownership of the shares held by
the limited partnerships except to the extent of his proportionate
partnership interest
42
<PAGE> 44
therein. In addition to Mr. Sun, the general partners of each of Venrock
Associates, L.P. and Venrock Associates II, L.P. are Patrick F. Latterell,
Ted H. McCourtney, Anthony B. Evnin, Ph.D., Kimberley A. Rummelsburg, David
R. Hathaway and Ray A. Rothrock.
(6) Includes 45,569 shares held by family trusts to which Mr. Tarolli claims
voting and investment control, 23,959 shares issuable upon exercise of stock
options exercisable within 60 days of December 31, 1998 held by Mr. Tarolli
and 30,000 shares held by Mr. Tarolli's wife. Mr. Tarolli disclaims
beneficial ownership of the shares held by his wife.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Techfarm provides management services to 3Dfx for which 3Dfx pays a fee of
$5,000 per month. Gordon Campbell, the Chairman of the Board of Directors of
3Dfx, and James Whims, a director of 3Dfx, are each officers of Techfarm. 3Dfx
made total payments to Techfarm for such management services during 1998 of
$60,000. In addition, Mr. Whims provides consulting services to 3Dfx for which
3Dfx pays a fee of $5,000 per month. 3Dfx made total payments to Mr. Whims in
fiscal 1998 of $60,000.
3Dfx has an agreement with Quantum3D, a supplier of advanced graphics
subsystems based on 3Dfx's technology, pursuant to which 3Dfx will supply
graphic boards and components to Quantum3D. Gordon Campbell, Chairman of the
Board of Directors of 3Dfx, is a Director, significant investor in and
shareholder of Quantum3D. Sales to Quantum3D, in 1998, totaled $670,000. As of
December 31, 1998, 3Dfx had an outstanding trade receivable from Quantum3D of
approximately $3,000.
In connection with the termination of Gary Martin's employment with 3Dfx,
3Dfx and Mr. Martin, who was Chief Financial Officer and Vice President,
Administration until January 31, 1998, entered into a Separation Agreement
pursuant to which Mr. Martin (i) will remain a temporary employee through August
1, 2000 and (ii) continued to receive medical insurance through December 31,
1998. In addition, all options granted to Mr. Martin pursuant to 3Dfx's stock
plans will continue to vest through August 1, 2000. As of December 31, 1998, Mr.
Martin held an unvested option to purchase 21,978 shares of Common Stock. In the
event of a Change of Control, 3Dfx will (i) waive its right to repurchase any
unvested shares of Common Stock owned by Mr. Martin and (ii) accelerate the
vesting of all unvested stock options granted to Mr. Martin pursuant to 3Dfx's
stock plans. For purposes of the separation agreement, a "Change of Control"
occurs, subject to certain conditions and exceptions, upon (i) the acquisition,
directly or indirectly, by any person (other than existing beneficial owners) of
securities of 3Dfx representing 50% or more of the total voting power
represented by 3Dfx's then outstanding voting securities; (ii) the merger or
consolidation of 3Dfx with another corporation in which the voting securities of
3Dfx outstanding immediately prior to such merger or consolidation ceases to
represent at least 50% of the voting power represented by the voting securities
of 3Dfx thereafter, or (iii) the liquidation of 3Dfx or the sale or disposition
of all or substantially all of 3Dfx's assets.
3Dfx believes that all of the transactions set forth above were made on
terms no less favorable to 3Dfx than could have been obtained from unaffiliated
third parties. All future transactions, including loans, between 3Dfx and its
officers, directors, principal shareholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors, and will continue to be on
terms no less favorable to 3Dfx than could be obtained from unaffiliated third
parties.
43
<PAGE> 45
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following financial statements are filed as part of this Report.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996.......................... F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996...... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.......................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
(a)(2) Financial Statement Schedule
The following Financial Statement Schedule of 3Dfx is submitted herewith
and should be read in conjunction with the Consolidated Financial
Statements:
<TABLE>
<S> <C>
Report of Independent Accountants on Financial
Statement Schedule.................................... S-2
Schedule II Valuation and Qualifying Accounts for the
years ended December 31, 1998, 1997 and 1996.......... S-2
</TABLE>
(a)(3) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization by and between the
Registrant and STB Systems, Inc. dated as of December 13,
1998 and the related Stock Option Agreement and form of
Voting Agreement.
3.1(2) Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant (as amended October 1998).
3.3(5) Certificate of Designation of Rights Preferences and
Privileges of Series A Participating Preferred Stock of
Registrant.
4.1(2) Specimen Common Stock Certificate.
4.2(5) Preferred Shares Rights Agreement dated October 30, 1998,
between Registrant and BankBoston, N.A., Rights Agent.
10.1(2) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2(6) 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder.
10.3(2) 1997 Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.4(2) 1997 Employee Stock Purchase Plan and forms of agreement
thereunder.
10.5(2) Lease Agreement dated August 7, 1996 between Registrant and
South Bay/Fortran, and Tenant Estoppel Certificate dated
March 25, 1997 between Registrant and CarrAmerica Realty
Corporation for San Jose, California office.
10.6(2) Investors' Rights Agreement dated September 12, 1996,
Amendment No. 1 to Investors' Rights Agreement dated
November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to
Investors' Rights Agreement dated March 27, 1997 by and
among the Registrant and holders of the Registrant's Series
A, Series B and Series Preferred Stock.
10.7.1(3) Warrant to purchase shares of Common Stock issued to
Creative Labs, Inc.
10.7.2(2) Warrant to purchase shares of Series B Preferred Stock
issued to MMC/GATX Partnership No. 1.
</TABLE>
44
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8(2) Form of Restricted Stock Purchase Agreement between the
Registrant and certain shareholders.
10.9(2) Master Equipment Lease Agreement dated January 1, 1996 by
and between the Registrant and MMC/GATX Partnership No. 1.
10.10(2) Master Equipment Lease dated March 31, 1995 by and between
the Registrant and Lighthouse Capital Partners, L.P.
10.11.1(3) Loan and Security Agreement dated August 19, 1996 by and
between the Registrant and Silicon Valley Bank.
10.11.2(3) Loan Modification Agreement dated as of August 18, 1997 by
and between the Registrant and Silicon Valley Bank.
10.11.3(3) Second Amendment and Limited Waiver to Loan and Security
Agreement dated as of December 9, 1997 by and between the
Registrant and Silicon Valley Bank.
10.12.1(2) Change of Control Letter Agreement between the Registrant
and L. Gregory Ballard.
10.12.2(2) Change of Control Letter Agreement between the Registrant
and Karl Chicca.
10.12.3(2) Change of Control Letter Agreement between the Registrant
and Scott D. Sellers.
10.12.4(2) Change of Control Letter Agreement between the Registrant
and Gary Tarolli.
10.13.+(4) Software License and Co-marketing Agreement made as of June,
1997 by and between Electronic Arts, Inc. and the
Registrant.
10.14(4) Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.15(3) Lease Agreement dated as of January 6, 1998 by and between
the Registrant and GEOMAX.
10.16(3) Separation Agreement dated as of October 12, 1997 by and
between the Registrant and Gary P. Martin.
10.17(3) 1997 Supplementary Stock Option Plan and Form of Stock
Option Agreement thereunder.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of this agreement.
Omitted portions have been filed separately with the Commission.
(1) Incorporated by reference to Schedule 13D filed by STB Systems, Inc. dated
December 23, 1998 with respect to the Registrant.
(2) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-25365) which was declared
effective on June 25, 1997.
(3) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-46119) which was declared
effective March 5, 1998.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A which was filed with the Commission on
November 9, 1998.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
Date: February 4, 1999 3DFX INTERACTIVE, INC.
By: /s/ L. GREGORY BALLARD
------------------------------------
L. Gregory Ballard, President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints L. Gregory Ballard and David Zacarias,
and each of them, his true and lawful attorneys-in-fact and agents, each with
full power of substitution and resubstitution, to sign any and all amendments to
this Annual Report on Form 10-K and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, and hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitute or
substitutes, or any of them, shall do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ L. GREGORY BALLARD President, Chief Executive February 4, 1999
- ----------------------------------------------------- Officer and Director
(L. Gregory Ballard) (Principal Executive Officer)
/s/ DAVID ZACARIAS Vice President, February 4, 1999
- ----------------------------------------------------- Administration and Chief
(David Zacarias) Financial Officer (Principal
Financial and Accounting
Officer)
/s/ GORDON A. CAMPBELL Chairman of the Board February 4, 1999
- -----------------------------------------------------
(Gordon A. Campbell)
/s/ ALEX LEUPP Director February 4, 1999
- -----------------------------------------------------
(Alex Leupp)
/s/ SCOTT D. SELLERS Director February 4, 1999
- -----------------------------------------------------
(Scott D. Sellers)
/s/ ANTHONY SUN Director February 4, 1999
- -----------------------------------------------------
(Anthony Sun)
/s/ JAMES WHIMS Director February 4, 1999
- -----------------------------------------------------
(James Whims)
/s/ PHILIP M. YOUNG Director February 4, 1999
- -----------------------------------------------------
(Philip M. Young)
</TABLE>
46
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of 3Dfx Interactive, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of 3Dfx
Interactive, Inc., at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
January 22, 1999
F-1
<PAGE> 49
3DFX INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 92,922 $ 28,937
Short-term investments.................................... 3,058 5,984
Accounts receivable less allowance for doubtful accounts
of $2,280 and $308..................................... 36,335 13,387
Inventory, net............................................ 23,991 3,845
Other current assets...................................... 12,089 2,400
-------- --------
Total current assets.............................. 168,395 54,553
Property and equipment, net................................. 15,629 6,816
Other assets................................................ 97 548
-------- --------
$184,121 $ 61,917
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit............................................ $ -- $ 777
Accounts payable.......................................... 41,104 12,573
Accrued liabilities....................................... 16,031 2,969
Current portion of capitalized lease obligations.......... 389 778
-------- --------
Total current liabilities......................... 57,524 17,097
-------- --------
Other long-term liabilities................................. 284 546
-------- --------
Commitments (Note 8)
Shareholders' Equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common Stock, no par value, 50,000,000 shares authorized;
15,671,067 and 12,566,630 shares issued and
outstanding............................................ 126,569 66,717
Warrants.................................................. 242 242
Deferred compensation..................................... (697) (1,181)
Retained earnings (accumulated deficit)................... 199 (21,504)
-------- --------
Total shareholders' equity........................ 126,313 44,274
-------- --------
$184,121 $ 61,917
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 50
3DFX INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Revenues.................................................... $202,601 $44,069 $ 6,390
Cost of revenues............................................ 119,618 22,611 5,123
-------- ------- --------
Gross profit.............................................. 82,983 21,458 1,267
-------- ------- --------
Operating expenses:
Research and development.................................. 34,045 12,412 9,435
Selling, general and administrative....................... 35,441 11,390 6,642
-------- ------- --------
Total operating expenses.......................... 69,486 23,802 16,077
-------- ------- --------
Income (loss) from operations............................... 13,497 (2,344) (14,810)
Interest and other income, net.............................. 15,869 630 59
-------- ------- --------
Income (loss) before income taxes........................... 29,366 (1,714) (14,751)
Provision for income taxes.................................. 7,663 -- --
-------- ------- --------
Net income (loss)........................................... $ 21,703 $(1,714) $(14,751)
======== ======= ========
Net income (loss) per share:
Basic..................................................... $ 1.45 $ (0.16) $ (1.74)
======== ======= ========
Diluted................................................... $ 1.33 $ (0.16) $ (1.74)
======== ======= ========
Shares used in net income (loss) per share calculations
(Note 1):
Basic..................................................... 14,917 10,767 8,467
-------- ------- --------
Diluted................................................... 16,353 10,767 8,467
-------- ------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 51
3DFX INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- --------------------- NOTES DEFERRED
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION
---------- ------- ---------- -------- -------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995........ 2,750,992 $ 5,474 1,771,250 $ 310 $ -- $(25) $ (168)
Issuance of Series B Convertible
Preferred Stock in March 1996 at
$4.40 per share, less issuance
costs............................. 2,650,003 11,634 -- -- -- -- --
Issuance of Series C Convertible
Preferred Stock in November 1996
at $7.50 per share, less issuance
costs............................. 1,550,697 11,593 -- -- -- -- --
Common Stock options exercised...... -- -- 185,209 42 -- -- --
Forgiveness of notes receivable from
shareholders...................... -- -- -- -- -- 6 --
Repurchased Common Stock............ -- -- (66,446) (4) -- -- --
Issuance of Series B and C
Convertible Preferred Stock
warrants.......................... -- -- -- -- 353 -- --
Deferred compensation............... -- -- -- 1,278 -- -- (1,278)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 196
Net loss............................ -- -- -- -- -- -- --
---------- ------- ---------- -------- ----- ---- -------
Balance at December 31, 1996........ 6,951,692 28,701 1,890,013 1,626 353 (19) (1,250)
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, less issuance
costs............................. 70,167 521 -- -- -- -- --
Conversion of Preferred Stock to
Common Stock...................... (7,021,859) (29,222) 7,021,859 29,222 -- -- --
Issuance of Common Stock in
connection with initial public
offering, less issuance costs..... -- -- 3,450,000 34,336 -- -- --
Issuance of Common Stock under stock
option and purchase plans......... -- -- 214,757 413 -- -- --
Common Stock repurchased............ -- -- (104,246) (9) -- -- --
Exercise of warrants to purchase
Common
Stock............................. -- -- 94,247 714 (329) -- --
Issuance of warrant to purchase
Common
Stock............................. -- -- -- -- 218 -- --
Repayment of notes receivable from
shareholders...................... -- -- -- -- -- 19 --
Deferred compensation............... -- -- -- 415 -- -- (415)
Amortization of deferred
compensation...................... -- -- -- -- -- -- 484
Net loss............................ -- -- -- -- -- -- --
---------- ------- ---------- -------- ----- ---- -------
Balance at December 31, 1997........ -- -- 12,566,630 66,717 242 -- (1,181)
Issuance of Common Stock in
connection with public offering,
less issuance costs............... -- -- 2,463,140 54,752 -- -- --
Issuance of Common Stock under stock
option and purchase plans......... -- -- 643,451 2,301 -- -- --
Common Stock repurchased............ -- -- (2,154) (1) -- -- --
Tax benefit related to exercise of
stock options..................... -- -- -- 2,800 -- -- --
Amortization of deferred
compensation...................... -- -- -- -- -- -- 484
Net income.......................... -- -- -- -- -- -- --
---------- ------- ---------- -------- ----- ---- -------
Balance at December 31, 1998........ -- $ -- 15,671,067 $126,569 $ 242 $ -- $ (697)
========== ======= ========== ======== ===== ==== =======
<CAPTION>
RETAINED
EARNINGS/
(ACCUMULATED
DEFICIT) TOTAL
------------ --------
<S> <C> <C>
Balance at December 31, 1995........ $ (5,039) $ 552
Issuance of Series B Convertible
Preferred Stock in March 1996 at
$4.40 per share, less issuance
costs............................. -- 11,634
Issuance of Series C Convertible
Preferred Stock in November 1996
at $7.50 per share, less issuance
costs............................. -- 11,593
Common Stock options exercised...... -- 42
Forgiveness of notes receivable from
shareholders...................... -- 6
Repurchased Common Stock............ -- (4)
Issuance of Series B and C
Convertible Preferred Stock
warrants.......................... -- 353
Deferred compensation............... -- --
Amortization of deferred
compensation...................... -- 196
Net loss............................ (14,751) (14,751)
-------- --------
Balance at December 31, 1996........ (19,790) 9,621
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, less issuance
costs............................. -- 521
Conversion of Preferred Stock to
Common Stock...................... -- --
Issuance of Common Stock in
connection with initial public
offering, less issuance costs..... -- 34,336
Issuance of Common Stock under stock
option and purchase plans......... -- 413
Common Stock repurchased............ -- (9)
Exercise of warrants to purchase
Common
Stock............................. -- 385
Issuance of warrant to purchase
Common
Stock............................. -- 218
Repayment of notes receivable from
shareholders...................... -- 19
Deferred compensation............... -- --
Amortization of deferred
compensation...................... -- 484
Net loss............................ (1,714) (1,714)
-------- --------
Balance at December 31, 1997........ (21,504) 44,274
Issuance of Common Stock in
connection with public offering,
less issuance costs............... -- 54,752
Issuance of Common Stock under stock
option and purchase plans......... -- 2,301
Common Stock repurchased............ -- (1)
Tax benefit related to exercise of
stock options..................... -- 2,800
Amortization of deferred
compensation...................... -- 484
Net income.......................... 21,703 21,703
-------- --------
Balance at December 31, 1998........ $ 199 $126,313
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 52
3DFX INTERACTIVE INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 21,703 $ (1,714) $(14,751)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 5,249 2,238 1,017
Warrant valuation...................................... -- -- 353
Stock compensation..................................... 484 484 196
Increase in allowance for doubtful accounts............ 1,972 230 78
Changes in assets and liabilities:
Accounts receivable.................................. (24,920) (12,224) (1,471)
Inventory............................................ (20,146) 1,115 (4,923)
Other assets......................................... (9,456) (2,275) (286)
Accounts payable..................................... 28,531 10,337 1,765
Accrued and other long-term liabilities.............. 13,346 1,554 851
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... 16,763 (255) (17,171)
-------- -------- --------
Cash flows from investing activities:
Proceeds (purchases) of short-term investments, net....... 2,926 (5,984) --
Purchases of property and equipment....................... (13,844) (4,730) (2,210)
-------- -------- --------
Net cash used in investing activities............. (10,918) (10,714) (2,210)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of Convertible Preferred Stock,
net.................................................... -- 521 23,227
Proceeds from public offerings, net....................... 54,752 34,336 --
Proceeds from issuance of Common Stock, net............... 2,300 423 44
Tax benefit related to exercise of stock options.......... 2,800 -- --
Proceeds from exercise of warrants........................ -- 385 --
Principal payments of capitalized lease obligations,
net.................................................... (935) (751) (540)
Proceeds (payments) on drawdown on line of credit, net.... (777) (299) 1,076
-------- -------- --------
Net cash provided by financing activities......... 58,140 34,615 23,807
-------- -------- --------
Net increase in cash and cash equivalents................... 63,985 23,646 4,426
Cash and cash equivalents at beginning of period............ 28,937 5,291 865
-------- -------- --------
Cash and cash equivalents at end of period.................. $ 92,922 $ 28,937 $ 5,291
======== ======== ========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest.................. $ 141 $ 263 $ 96
Cash paid during the period for income taxes.............. 6,200 -- --
Acquisition of property and equipment under capitalized
lease obligations...................................... -- 842 920
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 53
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in
California on August 24, 1994. The Company is engaged in the single business
segment of the design, development and marketing of 3D and 3D/2D media
processors specifically designed for interactive electronic entertainment
applications in the PC, coin-op arcade and home game console markets.
In March 1998, the Company completed its secondary public offering of
2,900,000 shares of Common Stock at a price of $23.75 per share. Of the
2,900,000 shares offered, 2,028,140 were sold by the Company and 871,860 were
sold by selling shareholders. The Company received cash of approximately
$45,500,000, net of underwriting discounts and commissions and other offering
costs. The Company did not receive any of the proceeds from the sale of shares
by the selling shareholders. On March 23, 1998, the Company's underwriters
exercised an option to purchase an additional 435,000 shares of Common Stock at
a price of $23.75 per share to cover over-allotments. The Company received cash
of approximately $9,300,000, 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 $30,400,000, net of
underwriting discounts and commissions. Upon the closing of initial public
offering, all outstanding shares of the Company's then outstanding Convertible
Preferred Stock were automatically converted into shares of Common Stock. On
July 25, 1997, the Company's underwriters exercised an option to purchase an
additional 450,000 shares of Common Stock at a price of $11.00 per share to
cover over-allotments. The Company received cash of approximately $3,900,000,
net of underwriting discounts and commissions.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is generally recognized upon product shipment.
Revenue resulting from development contracts is recognized under the percentage
of completion method based upon costs incurred relative to total contract costs
or when the related contractual obligations have been fulfilled and fees are
billable. Costs associated with development contracts are included in research
and development.
Cash, cash equivalents and investments
The Company considers all highly liquid debt instruments purchased with
original maturities of three months or less to be cash equivalents. At December
31, 1998 and December 31, 1997, approximately $85,299,000 and $24,218,000,
respectively, of money market accounts and commercial paper instruments, the
fair value of which approximate cost, are included in cash, cash equivalents and
investments.
Investments in debt securities are classified as "available for sale" and
have original maturities greater than three months. Investments classified as
"available for sale" are reported at fair value with unrealized gains and
losses, net of related tax, if any, reported as a separate component of
shareholders' equity. Unrealized gains and losses were not material during the
years ended December 31, 1998 or 1997.
F-6
<PAGE> 54
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Concentration of credit risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
short-term investments and accounts receivable.
The Company invests primarily in money market accounts, commercial paper
instruments and term notes. Cash, cash equivalents and short-term investments
are maintained with high quality institutions and their composition and
maturities are regularly monitored by management.
The Company performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable. Three customers
accounted for 38%, 24% and 11% of accounts receivable at December 31, 1998. Two
customers accounted for 29% and 26% of accounts receivable at December 31, 1997.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Customers comprising 10% or more of the Company's
revenues for the periods indicated:
A.................................................... 32% 37% 33%
B.................................................... 26% -- --
C.................................................... 16% 16% --
D.................................................... -- 7% 44%
E.................................................... -- 2% 11%
</TABLE>
Inventory
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years or less. Assets held under
capital leases are amortized using the straight-line method over the term of the
lease or estimated useful lives, whichever is shorter.
Research and software development costs
Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all software
development costs incurred subsequent to the establishment of technological
feasibility have been expensed as incurred due to their immateriality.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, ("APB 25") "Accounting for Stock
Issued to Employees" and complies with the disclosure provisions of Statement of
Financial Accounting Standards No. 123, ("SFAS 123") "Accounting for Stock Based
Compensation." Under APB 25, compensation cost is recognized over the vesting
period based on the
F-7
<PAGE> 55
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
Prior to the Company completing its initial public offering ("IPO"), the
Company granted options for the purchase of 2,460,307 shares of Common Stock to
employees at exercise prices ranging from $0.20 to $12.00 per share. Management
calculated deferred compensation of approximately $1,900,000 related to options
granted prior to the completion of the Company's IPO. Such deferred compensation
will be amortized over the vesting period relating to these options, of which
$484,000, $484,000 and $196,000 has been amortized during the years ended
December 31, 1998, 1997 and 1996, respectively.
Benefit Plan
Effective January 1, 1995, the Company adopted a 401(k) Savings Plan which
allows all employees to participate by making salary deferral contributions to
the 401(k) Savings Plan ranging from 1% to 20% of their eligible earnings. The
Company may make discretionary contributions to the 401(k) Savings Plan upon
approval by the Board of Directors. The Company has not contributed to the
401(k) Savings Plan to date.
Net income (loss) per share
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted net income
(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. All prior years' data in this Report have been restated to reflect
the requirements of Statement of Financial Accounting Standards No. 128 ("SFAS
128"), "Earnings per Share". 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>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net income (loss) available to common shareholders
(numerator)............................................... $21,703 $(1,714) $(14,751)
======= ======= ========
Weighted average shares outstanding (denominator for basic
computation).............................................. 14,917 10,767 8,467
Effect of dilutive securities -- Common Stock equivalents... 1,436 -- --
------- ------- --------
Weighted average shares outstanding (denominator for diluted
computation).............................................. 16,353 10,767 8,467
======= ======= ========
Basic net income (loss) per share........................... $ 1.45 $ (0.16) $ (1.74)
======= ======= ========
Diluted net income (loss) per share......................... $ 1.33 $ (0.16) $ (1.74)
======= ======= ========
</TABLE>
During the years ended December 31, 1998, 1997 and 1996, options to
purchase approximately 560,392, 2,505,984 and 1,538,509 shares, respectively,
were outstanding but are not included in the computation because they are
antidilutive.
Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" which was adopted by the Company in the
first quarter of fiscal 1998. This Statement establishes standards for reporting
and displaying comprehensive income and its components (revenues, expenses,
gains and losses). Comprehensive income as defined includes all changes in
equity (net assets) during a period from non-owner sources. Such items may
include foreign currency translation adjustments, unrealized gains/losses from
investing and hedging activities, and other transactions. As the
F-8
<PAGE> 56
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company has no components of other comprehensive income, there are no disclosure
requirements involved in the Company's adoption of this Statement.
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, "Disclosures about Segments of an Enterprise and Related Information" which
was adopted by the Company in the first quarter of fiscal 1998. This Statement
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to stockholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. As the Company operates and tracks its results in only one operating
segment, there are no additional disclosure requirements involved with the
Company's adoption of this Statement.
NOTE 2 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1997
------- ------
<S> <C> <C>
Inventory, net:
Raw material.............................................. $ 2,891 $ 531
Work-in-progress.......................................... 16,565 2,246
Finished goods............................................ 4,535 1,068
------- ------
$23,991 $3,845
======= ======
Property and equipment:
Computer equipment........................................ $15,539 $6,179
Purchased computer software............................... 5,253 3,011
Furniture and equipment................................... 3,350 1,108
------- ------
24,142 10,298
Less: Accumulated depreciation and amortization........... (8,513) (3,482)
------- ------
$15,629 $6,816
======= ======
</TABLE>
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $2,529,000 and $2,769,000 with related
accumulated amortization of $2,146,000 and $1,514,000 at December 31, 1998 and
1997, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Accrued liabilities:
Income taxes payable...................................... $ 5,788 $ --
Sales return reserve...................................... 2,938 64
Accrued salaries, wages and benefits...................... 2,839 1,014
Accrued prototype costs................................... -- 1,070
Other accrued liabilities................................. 4,466 821
------- -------
$16,031 $ 2,969
======= =======
</TABLE>
NOTE 3 -- DEBT:
During 1997 and 1998, the Company had a line of credit agreement with a
bank, which provides for maximum borrowings in an amount up to the lesser of 80%
of eligible accounts receivable plus 100% of cash and cash equivalents or
$7,000,000. Borrowings under the line are secured by all of the Company's owned
assets and bear interest at the bank's prime rate plus 0.25% per annum (8.0%) as
of December 31, 1998. The
F-9
<PAGE> 57
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement requires that the Company maintain certain financial ratios and levels
of tangible net worth, profitability and liquidity. As of December 31, 1998, the
Company was in compliance with its covenants. The line of credit expired in
December 1998. At December 31, 1998, there were no borrowings outstanding under
this line of credit.
During 1997 and 1998, the Company had two lease lines of credit with a
bank, which provide for the purchase of up to $5,000,000 of property and
equipment. Borrowings under these lines are secured by all of the Company's
owned assets and bear interest at the bank's prime rate plus 1.50% and 0.75% per
annum, respectively. The agreement requires that the Company maintain certain
financial ratios and levels of tangible net worth, profitability and liquidity.
As of December 31, 1998, the Company was in compliance with its covenants. One
of the equipment lines of credit expired in August 1998. The other equipment
line of credit expires in December 2001. At December 31, 1998, there were no
borrowings outstanding under these equipment lines of credit.
NOTE 4 -- DEVELOPMENT CONTRACT:
In February 1997, the Company entered into a development and license
agreement with Sega Enterprises, Ltd. ("Sega"), under which the Company is
entitled to receive development contract revenues and royalties based upon a
cumulative volume of units sold by Sega which include the Company's product. The
Company recognized development contract revenues of $1,817,000 in the year ended
December 31, 1997, representing a non-refundable amount due for the delivery of
certain engineering designs and revenue recognized under the percentage of
completion method of accounting. The Company has no further obligations to Sega
with regard to the $1,817,000 of development contract revenue recognized. The
Company did not earn any royalty revenue in the years ended December 31, 1998 or
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 other income for the Company.
NOTE 5 -- SHAREHOLDERS' EQUITY:
Common stock
The Company has issued 1,646,250 shares of its Common Stock to founders and
investors. The shares either vested immediately or will vest on various dates
through 1999. The Company can buy back unvested shares at the original price
paid by the purchasers in the event the purchasers' employment with the Company
is terminated for any reason. There were no such repurchases during fiscal 1998.
During the year ended December 31, 1997, 83,855 shares of Common Stock were
repurchased.
In addition, during the period ended December 31, 1998, certain employees
exercised options to purchase 44,640 shares of Common Stock which are subject to
a right of repurchase by the Company at the original share issuance price. The
repurchase right lapses over a period generally ranging from two to four years.
During the years ended December 31, 1998 and 1997, 2,154 and 20,391 shares,
respectively, of Common Stock were repurchased.
Convertible preferred stock
At December 31, 1996, the aggregate authorized number of convertible
preferred shares was 7,269,018, of which 2,794,742, 2,818,412 and 1,655,864 were
designated as Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, and Series C Convertible Preferred Stock, respectively.
F-10
<PAGE> 58
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Each share of Series A, B and C Convertible Preferred Stock outstanding was
converted into one share of Common Stock upon the completion of the initial
public offering of Common Stock in June 1997. The holders of Series A, B and C
Convertible Preferred Stock had voting rights equal to Common Stock on an
if-converted basis.
Warrants
In March 1995, the Company issued a warrant to a vendor to purchase 43,750
shares of Series A Convertible Preferred Stock at $2.00 per share. The warrant
expires on March 31, 2002. The warrant was deemed by management to have a
nominal value at the date of grant. Upon completion of the Company's IPO, this
warrant was exchanged for a warrant to purchase Common Stock. The Company has
reserved 43,750 shares of Common Stock for the exercise of this warrant.
In January 1996, the Company entered into a line of credit. To secure the
line, the Company issued to the lessor a warrant to purchase 19,886 shares of
Series B Convertible Preferred Stock at an exercise price of $4.40. The warrant
expires on January 1, 2003. The warrant was deemed by management to have a
nominal value at the date of grant. Upon completion of the Company's IPO, this
warrant was exchanged for a warrant to purchase Common Stock. The Company has
reserved 19,886 shares of Common Stock for the exercise of this warrant.
In February 1996, the Company issued to a financial institution in
accordance with a bridge loan agreement a warrant to purchase 8,523 shares of
Series B Convertible Preferred Stock at $4.40 per share. The warrant expires on
December 31, 2001. The warrant was deemed by management to have a nominal value
at the date of grant. In December 1997, the financial institution exercised the
warrant for 6,737 shares of Common Stock in a cashless exercise.
In February 1996, the Company entered into an agreement to issue warrants
to TSMC to purchase 140,000 shares of Series B Convertible Preferred Stock at an
exercise price of $4.40 per share. The purchase right of 50,000 warrants is
exercisable, in whole or in part, at any time on or before December 31, 2001;
however, the purchase right would have expired, if not previously exercised,
immediately upon the closing of the underwritten IPO in June 1997. The purchase
right of 90,000 warrants became exercisable at the rate of 10 shares of Series B
Convertible Preferred Stock for each wafer above 2,000 wafers purchased from
TSMC by the Company during fiscal 1996 and became exercisable for 37,510 shares
of Series B Convertible Preferred Stock in conjunction with wafer purchases in
1996. These warrants would have expired on December 31, 2001. The warrant was
deemed to have a value of approximately $211,000 and was recognized as a cost of
revenues and research and development expense during 1996. In conjunction with
the Company's IPO in June 1997, TSMC exercised its warrant to purchase 87,510
shares of Series B Convertible Preferred Stock. The aggregate proceeds to the
Company were approximately $385,000. The Series B Convertible Preferred Stock
converted into Common Stock upon completion of the Company's IPO included the
shares issued in exchange for this warrant. No further warrant rights exist with
respect to this agreement.
In 1996, the Company issued to consultants and to a university warrants to
purchase 30,000 and 5,000 shares, respectively, of Series C Convertible
Preferred Stock at an exercise price of $7.50 per share. These warrants were
deemed to have a value of approximately $142,000 at the date of grant and the
related cost was recognized as research and development expense and other
expense, respectively, during 1996. The warrant for 30,000 shares of Series C
Convertible Preferred Stock expired upon the closing of the Company's IPO as it
was not exercised. The warrant for 5,000 shares of Series C Convertible
Preferred Stock expires on December 31, 2001. Upon completion of the Company's
IPO, the warrant for 5,000 shares was exchanged for a warrant to purchase Common
Stock. The Company has reserved 5,000 shares of Common Stock for the exercise of
this warrant.
F-11
<PAGE> 59
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On December 3, 1997, the Company issued a warrant to purchase 25,000 shares
of Common Stock at an exercise price of $13.875 per share in conjunction with
developing a relationship with another company. The warrant is fully exercisable
and expires December 3, 2002. The Company valued the warrant under the
"Black-Scholes" formula at approximately $218,000. The warrant value was
amortized in 1998 as a cost of revenue. The Company has reserved 25,000 shares
of Common Stock for the exercise of this warrant.
As of December 31, 1998, the Company had reserved 93,636 shares of Common
Stock for the exercise of warrants.
NOTE 6 -- STOCK OPTION AND OTHER PLANS:
The 1995 Plan
In May 1995, the Company adopted a Stock Plan, (the "1995 Plan") which
provides for granting of incentive and nonqualified stock options to employees,
consultants and directors of the Company. In May 1998, the Company's
shareholders approved an increase of 1,700,000 shares of Common Stock to be
reserved for issuance under the 1995 Plan. As of December 31, 1998, 4,375,000
shares of Common Stock have been reserved for issuance under the 1995 Plan.
Options granted under the 1995 Plan are generally for periods not to exceed
ten years, and are granted at prices not less than 100% and 85%, for incentive
and nonqualified stock options, respectively, of the fair market value on the
date of grant. Incentive stock options granted to shareholders who own greater
than 10% of the outstanding stock are for periods not to exceed five years, and
must be issued at prices not less than 110% of the fair market value of the
stock on the date of grant. Options granted under the 1995 Plan generally vest
25% on the first anniversary of the grant date and 1/48th of the option shares
each month thereafter, with full vesting occurring on the fourth anniversary of
the grant date.
The 1997 Plan
In October 1997, the Company adopted the 1997 Supplementary Stock Plan (the
"1997 Plan"), which provides for granting of nonqualified stock options to
employees (excluding officers, consultants and directors) of the Company. In
February and April 1998, the Company's Board of Directors approved an increase
of 500,000 and 200,000 shares, respectively, of Common Stock to be reserved for
issuance under the 1997 Plan. At December 31, 1998, 1,200,000 shares of Common
Stock have been reserved for issuance under the 1997 Plan.
Options granted under the 1997 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1997 Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.
Directors' Option Plan
In March 1997, the Company adopted a 1997 Directors' Option Plan (the
"Directors' Plan"). Under this plan options to purchase 150,000 shares of Common
Stock may be granted. The plan provides that options may be granted at a price
not less than fair value of a share at the date of grant. The Directors' Plan
provides for an initial option grant to purchase 12,500 shares of Common Stock
to each new non-employee director of the Company at the date he or she becomes a
director. Each non-employee director and Chairman of the Board of Directors will
annually be granted an option to purchase 5,000 and 10,000 shares of Common
Stock, respectively, beginning with the 1998 annual meeting of shareholders. If
a director serves on either the Audit Committee or Compensation Committee, he or
she will annually be granted an option to purchase 1,000 shares of Common Stock,
respectively, beginning with the 1997 annual meeting of shareholders. Options
granted under the Directors' Plan are generally for ten years and are granted at
the fair market value of the stock on the date of grant. The initial 12,500
option grant vests at a rate of 1/48th per month following the date
F-12
<PAGE> 60
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of grant. The annual option grant of 5,000, 10,000 or 1,000 vests at a rate of
1/12th per month following the date of grant.
On October 27, 1998, substantially all outstanding options held by
employees and consultants with an exercise price in excess of $10.875 per share
were canceled and replaced with new options having an exercise price of $10.875,
the fair market value on the date that the employees and consultants accepted
the repricing. A total of 1,409,165 options were repriced. This repricing
excluded executive officers and directors. On December 3, 1998, a repricing for
executive officers occurred where substantially all outstanding options with an
exercise price in excess of $13.125 per share were canceled and replaced with
new options having an exercise price of $13.125, the fair market value on the
date that the executive officers accepted the repricing. A total of 330,000
options were repriced. Such options have been included in the table below as
both canceled and granted in fiscal 1998. In both the October and December
repricings, any option holder accepting such offer is not permitted to exercise
the repriced option (both vested and unvested shares) in the first twelve months
following the date of the applicable repricing.
The following is a summary of activity under the 1995 Plan, the 1997 Plan
and the Directors' Plan during the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
AVAILABLE FOR OPTIONS AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995.......................... 215,500 513,250 $ 0.20
Additional shares authorized.......................... 1,196,250 -- --
Granted............................................. (1,369,138) 1,369,138 $ 0.58
Exercised........................................... -- (185,209) $ 0.23
Canceled............................................ 158,670 (158,670) $ 0.41
Repurchased......................................... 16,875 -- $ 0.20
---------- ----------
Balance at December 31, 1996.......................... 218,157 1,538,509 $ 0.54
Additional shares authorized.......................... 1,274,992 -- --
Granted............................................. (1,306,244) 1,306,244 $12.15
Exercised........................................... -- (180,015) $ 0.49
Canceled............................................ 158,754 (158,754) $ 3.86
Repurchased......................................... 20,391 -- $ 0.08
---------- ----------
Balance at December 31, 1997.......................... 366,050 2,505,984 $ 6.38
Additional shares authorized.......................... 2,400,000 -- --
Granted............................................. (3,617,765) 3,617,765 $15.72
Exercised........................................... -- (478,104) $ 1.34
Canceled............................................ 2,098,488 (2,098,488) $19.16
Repurchased......................................... 2,154 -- $ 0.27
---------- ----------
Balance at December 31, 1998.......................... 1,248,927 3,547,157 $ 9.02
========== ==========
</TABLE>
F-13
<PAGE> 61
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information relating to stock options outstanding and exercisable under the
1995 Plan, the 1997 Plan and the Directors' Plan at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
--------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 0.30............. 112,022 6.5 years $ 0.20 112,022 $ 0.20
$ 0.44 - $ 0.75............. 412,972 7.5 years $ 0.46 412,972 $ 0.46
$ 0.90...................... 293,613 7.9 years $ 0.90 293,613 $ 0.90
$ 2.00 - $10.88............. 1,691,500 9.2 years $10.72 301,627 $10.00
$11.00 - $12.00............. 463,158 8.3 years $11.87 463,158 $11.87
$12.19 - $13.88............. 519,850 9.1 years $13.14 189,850 $13.16
$15.75 - $23.25............. 54,042 9.2 years $19.49 54,042 $19.49
--------- ---------
3,547,157 8.7 years $ 9.02 1,837,284 $ 6.87
========= =========
</TABLE>
Shares which are not exercisable as a result of the repricing have been
excluded from options exercisable.
Options to purchase 768,183 and 471,937 shares were vested at December 31, 1998
and 1997, respectively. The weighted average exercise prices per share for
options vested at December 31, 1998 and 1997 were $6.49 and $0.88, respectively.
Employee Stock Purchase Plan
In March 1997, the Company's Board of Directors approved the Employee Stock
Purchase Plan. Under this plan, employees of the Company can purchase Common
Stock through payroll deductions. In May 1998, the Company's shareholders
approved an annual increase, commencing in 1999, to the number of shares of
Common Stock available under this plan equal to the lesser of 200,000 or 1% of
the Company's outstanding capitalization on the date of each annual meeting of
shareholders. A maximum of 2,150,000 shares are authorized for issuance under
this plan. As of December 31, 1998, 200,081 shares have been purchased under the
Employee Stock Purchase Plan.
Shareholder Rights Plan
In October 1998, the Board of Directors approved a Shareholder Rights Plan
under which shareholders of record on November 16, 1998, received a right to
purchase (a "Right") one one-thousandth of a share of Series A Participating
Preferred Stock ("Series A Preferred"), no par value, at an exercise price of
$65 subject to adjustment. The Rights will separate from the Common Stock and
Rights certificates will be issued and will become exercisable upon the earlier
of (i) 10 business days following a public announcement that a person or group
of affiliated or associated persons has acquired, or obtained the right to
acquire, beneficial ownership of 12% or more of the Company's outstanding Common
Stock or (ii) 10 business days or such later date as may be determined by a
majority of the Board of Directors following the commencement of, or
announcement of a tender offer or exchange offer, the consummation of which
would result in the beneficial ownership by a person or group of 12% or more of
the outstanding Common Stock of the Company. The Rights expire at the close of
business on October 30, 2008. The Company has designated 60,000 shares of its
Preferred Stock as Series A Participating Preferred Stock in connection with
this plan.
F-14
<PAGE> 62
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain Pro Forma Disclosures
The Company accounts for its stock option plans and the Employee Stock
Purchase Plan in accordance with the provisions of APB 25. Had the Company
recorded compensation costs based on the estimated grant date fair value, as
defined by SFAS 123, for awards granted under its stock option plans and the
Employee Stock Purchase Plan, the Company's net income (loss) and net income
(loss) per share would have been:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Pro forma net income (loss).............................. $16,067 $(3,705) $(14,801)
Pro forma basic net income (loss) per share.............. $ 1.08 $ (0.32) $ (1.53)
Pro forma diluted net income (loss) per share............ $ 0.98 $ (0.32) $ (1.53)
</TABLE>
The pro forma effect on net income (loss) and net income (loss) per share
for 1998, 1997 and 1996 is not representative of the pro forma effect on net
income (loss) and net income (loss) per share in future years because it does
not take into consideration pro forma compensation expense related to grants
made prior to 1995.
For the years ended December 31, 1998 and 1997, the fair value of each
option on the date of grant was determined utilizing the Black-Scholes model.
For the year ended December 31, 1996, the value of each option on the date of
grant was determined utilizing the minimum value method as the Company was
non-public.
To determine the value of each option on the date of grant the following
assumptions were used for the year ended December 31, 1996: dividend yield of
0.0%; a risk-free interest rate of 6%; a weighted average expected option term
of four years. The following assumptions were used for the stock option plans
and the Employee Stock Purchase Plan for the years ended December 31, 1998 and
1997:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
Stock option plans:
Expected dividend yield..................................... 0% 0%
Expected stock price volatility............................. 70% 70%
Risk free interest rate..................................... 5.1% 5.7%
Expected life (years)....................................... 5.9 4.0
Employee Stock Purchase Plan:
Expected dividend yield..................................... 0% 0%
Expected stock price volatility............................. 70% 70%
Risk free interest rate..................................... 4.8% 5.4%
Expected life (years)....................................... 0.5 0.5
</TABLE>
The weighted average fair value of stock options granted in the three years
ended December 31, 1998, 1997 and 1996 was $13.12, $12.15 and $0.60 per share,
respectively.
F-15
<PAGE> 63
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- INCOME TAXES:
The provision for income taxes is attributable to (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Current:
Federal................................................... $12,309
State..................................................... 2,525
-------
14,834
-------
Deferred
Federal................................................... (6,252)
State..................................................... (919)
-------
(7,171)
-------
Total Provision............................................. $ 7,663
=======
</TABLE>
No provision for federal or state income taxes has been recorded for the
years ended December 31, 1997 and 1996 as the Company incurred net operating
losses.
The provision for income taxes differs from the provision (benefit)
computed by applying the statutory federal income tax rate to income (loss)
before income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ----- -------
<S> <C> <C> <C>
Tax provision (benefit) at statutory federal tax
rate of 35%................................... $10,278 $(600) $(5,163)
State income tax, net of federal benefit........ 1,687 (98) (848)
Research tax credits............................ (692) 0 0
Change in valuation allowance................... (4,299) 698 6,011
Other........................................... 689 0 0
------- ----- -------
$ 7,663 $ -- $ --
======= ===== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the net
deferred income tax assets are (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Deferred income tax assets:
Net operating losses...................................... $ 4,337 7,358
Nondeductible reserves and expenses....................... 7,171 644
Tax credit carryforwards.................................. 187 821
------- -------
Gross deferred tax assets................................... 11,695 8,823
Valuation allowance......................................... (4,524) (8,823)
------- -------
Net deferred income tax assets.............................. 7,171 --
======= =======
</TABLE>
For the year ended December 31, 1998, the Company recorded a valuation
allowance against its net operating losses and tax credit carryforwards due to
the uncertainty as to whether the assets are realizable. For the year ended
December 31, 1997, the Company recorded a full valuation allowance against its
deferred tax assets due to the uncertainty as to whether the assets are
realizable. At December 31, 1998, the Company had
F-16
<PAGE> 64
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
net operating loss carryforwards for federal and state income tax purposes of
approximately $10,700,000 and $9,700,000, respectively, which expire beginning
in 2011 and 2001, respectively.
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in 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 IPO 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 $5,400,000.
NOTE 8 -- COMMITMENTS:
The Company leases under noncancelable operating leases for certain of its
facilities and equipment in addition to equipment capital leases. Rent expense
on the operating leases for the years ended December 31, 1998, 1997 and 1996 was
approximately $1,657,000, $568,000 and $305,000, respectively.
Future minimum lease payments under the operating and capitalized leases
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
1999..................................................... $ 2,315 $427
2000..................................................... 2,292 --
2001..................................................... 2,274 --
2002..................................................... 2,247 --
2003..................................................... 2,165 --
Thereafter............................................... 6,671 --
------- ----
Total minimum lease payments................... $17,964 $427
======= ====
Less: amount representing interest....................... 38
----
Present value of minimum lease payments.................. 389
Less: current portion.................................... 389
----
Noncurrent portion of capitalized lease obligations...... $ --
====
</TABLE>
Purchase Commitments
The Company's manufacturing relationship with TSMC allows the Company to
cancel all outstanding purchase orders, but requires the repayment of all
expenses incurred to date. As of December 31, 1998, TSMC had incurred
approximately $6,200,000 of manufacturing expenses on the Company's outstanding
purchase orders. The Company does not expect to cancel any of its outstanding
purchase orders.
NOTE 9 -- RELATED PARTY TRANSACTIONS:
Since April 1995, a consulting company has been providing management
services to the Company for which the Company pays a monthly fee of $5,000 for
consulting services. The Chairman and a director on the Board of Directors of
the Company are also officers of the consulting company. Total payments for such
management services during 1998, 1997 and 1996 were $60,000 each year.
During 1998 and 1997, a member of the Board of Directors provided
consulting services to the Company. Total payments for such consulting services
in 1998 and 1997 were $60,000 and $45,000, respectively.
In April 1997, an officer of the Company resigned and subsequently founded
Quantum3D, Inc., a supplier of advanced graphic subsystems based on 3Dfx
technology. Sales to Quantum3D, Inc. during 1998 totaled $670,000. As of
December 31, 1998, the Company has an outstanding trade receivable from
Quantum3D, Inc. of approximately $3,000.
F-17
<PAGE> 65
3DFX INTERACTIVE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- PROPOSED STB MERGER
In December 1998, the Company entered into a Merger Agreement (the "Merger
Agreement") with STB Systems, Inc.; a Texas corporation ("STB"). The Merger
Agreement provides for the Merger of a newly formed, wholly owned subsidiary of
the Company with and into STB (the "Merger"). STB will be the surviving
corporation of the Merger and, upon consummation of the Merger, will become a
wholly owned subsidiary of the Company. The Company intends to account for this
merger under the purchase method of accounting. The Merger is contingent upon
approval of both the Company's and STB's shareholders, among other conditions.
F-18
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of 3Dfx Interactive, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 22, 1999 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the Financial Statement Schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this Financial Statement Schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
January 22, 1999
S-1
<PAGE> 67
SCHEDULE II
3DFX INTERACTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
-------------------
CHARGED
TO COSTS CHARGED
BEGINNING AND TO OTHER ENDING
BALANCE EXPENSES ACCOUNTS DEDUCTIONS BALANCE
--------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
For the year ended December 31, 1998....... $308 $ 2,561 $-- $ 589 $2,280
For the year ended December 31, 1997....... $ 78 $ 250 $-- $ 20 $ 308
For the year ended December 31, 1996....... $ -- $ 78 $-- $ -- $ 78
Inventory Reserve:
For the year ended December 31, 1998....... $661 $10,817 $-- $3,650 $7,828
For the year ended December 31, 1997....... $632 $ 40 $-- $ 11 $ 661
For the year ended December 31, 1996....... $ -- $ 1,172 $-- $ 540 $ 632
</TABLE>
S-2
<PAGE> 68
3DFX INTERACTIVE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
2.1(1) Agreement and Plan of Reorganization by and between the
Registrant and STB Systems, Inc. dated as of December 13,
1998 and the related Stock Option Agreement and form of
Voting Agreement.
3.1(2) Restated Articles of Incorporation of the Registrant.
3.2 Bylaws of the Registrant (as amended October 1998).
3.3(5) Certificate of Designation of Rights Preferences and
Privileges of Series A Participating Preferred Stock of
Registrant.
4.1(2) Specimen Common Stock Certificate.
4.2(5) Preferred Shares Rights Agreement dated October 30, 1998,
between Registrant and BankBoston, N.A., Rights Agent.
10.1(2) Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2(6) 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder.
10.3(2) 1997 Director Option Plan and form of Director Stock Option
Agreement thereunder.
10.4(2) 1997 Employee Stock Purchase Plan and forms of agreement
thereunder.
10.5(2) Lease Agreement dated August 7, 1996 between Registrant and
South Bay/Fortran, and Tenant Estoppel Certificate dated
March 25, 1997 between Registrant and CarrAmerica Realty
Corporation for San Jose, California office.
10.6(2) Investors' Rights Agreement dated September 12, 1996,
Amendment No. 1 to Investors' Rights Agreement dated
November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to
Investors' Rights Agreement dated March 27, 1997 by and
among the Registrant and holders of the Registrant's Series
A, Series B and Series Preferred Stock.
10.7.1(3) Warrant to purchase shares of Common Stock issued to
Creative Labs, Inc.
10.7.2(2) Warrant to purchase shares of Series B Preferred Stock
issued to MMC/GATX Partnership No. 1.
10.8(2) Form of Restricted Stock Purchase Agreement between the
Registrant and certain shareholders.
10.9(2) Master Equipment Lease Agreement dated January 1, 1996 by
and between the Registrant and MMC/GATX Partnership No. 1.
10.10(2) Master Equipment Lease dated March 31, 1995 by and between
the Registrant and Lighthouse Capital Partners, L.P.
10.11.1(3) Loan and Security Agreement dated August 19, 1996 by and
between the Registrant and Silicon Valley Bank.
10.11.2(3) Loan Modification Agreement dated as of August 18, 1997 by
and between the Registrant and Silicon Valley Bank.
10.11.3(3) Second Amendment and Limited Waiver to Loan and Security
Agreement dated as of December 9, 1997 by and between the
Registrant and Silicon Valley Bank.
10.12.1(2) Change of Control Letter Agreement between the Registrant
and L. Gregory Ballard.
10.12.2(2) Change of Control Letter Agreement between the Registrant
and Karl Chicca.
10.12.3(2) Change of Control Letter Agreement between the Registrant
and Scott D. Sellers.
10.12.4(2) Change of Control Letter Agreement between the Registrant
and Gary Tarolli.
10.13.+(4) Software License and Co-marketing Agreement made as of June,
1997 by and between Electronic Arts, Inc. and the
Registrant.
10.14(4) Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.15(3) Lease Agreement dated as of January 6, 1998 by and between
the Registrant and GEOMAX.
10.16(3) Separation Agreement dated as of October 12, 1997 by and
between the Registrant and Gary P. Martin.
</TABLE>
<PAGE> 69
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.17(3) 1997 Supplementary Stock Option Plan and Form of Stock
Option Agreement thereunder.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
24.1 Power of Attorney (see page 46).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
+ Confidential treatment has been granted for portions of this agreement.
Omitted portions have been filed separately with the Commission.
(1) Incorporated by reference to Schedule 13D filed by STB Systems, Inc. dated
December 23, 1998 with respect to the Registrant.
(2) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-25365) which was declared
effective on June 25, 1997.
(3) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-46119) which was declared
effective March 5, 1998.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A which was filed with the Commission on
November 9, 1998.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
<PAGE> 1
EXHIBIT 3.2
BYLAWS OF 3DFX INTERACTIVE, INC.
(AS AMENDED OCTOBER 1998)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. -- Principal Office.............................. 1
Section 1. Location of Principal Office................... 1
Section 2. Other Business Offices......................... 1
ARTICLE II. -- Meetings of Shareholders..................... 1
Section 1. Location of Meetings........................... 1
Section 2. Annual Meetings................................ 1
Section 3. Special Meetings............................... 2
Section 4. Quorum......................................... 3
Section 5. Adjournment.................................... 3
Section 6. Record Date; Cumulative Voting................. 3
Section 7. Waiver of Notice............................... 4
Section 8. Action by Written Consent...................... 4
Section 9. Proxies........................................ 6
Section 10. Inspectors of Election........................ 6
Section 11. Nominations and Proposals..................... 7
ARTICLE III. -- Board of Directors.......................... 8
Section 1. Powers of the Board............................ 8
Section 2. Number of Directors............................ 9
Section 3. Election of Directors.......................... 9
Section 4. Vacancies; Resignation......................... 9
ARTICLE IV. -- Meetings of Directors........................ 10
Section 1. Location of Meetings........................... 10
Section 2. Regular Meetings............................... 10
Section 3. Special Meetings; Notice....................... 11
Section 4. Quorum......................................... 11
Section 5. Waiver of Notice............................... 11
Section 6. Action by Written Consent...................... 11
Section 7. Committees..................................... 12
Section 8. Compensation of Directors...................... 12
Section 9. Indemnification................................ 12
ARTICLE V. -- Officers...................................... 12
Section 1. Designation of Officers........................ 12
Section 2. Chairman of the Board.......................... 12
Section 3. President...................................... 12
Section 4. Vice Presidents................................ 13
Section 5. Secretary...................................... 13
Section 6. Assistant Secretary............................ 13
Section 7. Treasurer...................................... 13
Section 8. Assistant Treasurer............................ 13
ARTICLE VI. -- Miscellaneous................................ 14
Section 1. Record Date.................................... 14
Section 2. Inspection of Corporate Records................ 14
Section 3. Certificates for Shares........................ 14
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 4. Representation of Shares of Other
Corporations........................................... 15
Section 5. Inspection of Bylaws........................... 15
Section 6. Construction and Definitions................... 15
ARTICLE VII. -- Amendments.................................. 15
Section 1. Amendment by Shareholders...................... 15
Section 2. Amendment by Board of Directors................ 15
ARTICLE VIII. -- Annual and Other Reports................... 16
Section 1. Annual Report to Shareholders.................. 16
Section 2. Request for Financial Statements............... 16
</TABLE>
ii
<PAGE> 4
BYLAWS
OF
3DFX INTERACTIVE, INC.
ARTICLE I.
PRINCIPAL OFFICE
SECTION 1. Location of Principal Office. The principal executive office for
the transaction of the business of the corporation shall be established and
maintained by the board of directors at any place within or without the State of
California. The board of directors may change said principal executive office
from one location to another.
SECTION 2. Other Business Offices. The board of directors may at any time
establish other business offices within or without the State of California.
ARTICLE II.
MEETINGS OF SHAREHOLDERS
SECTION 1. Location of Meetings. All meetings of the shareholders shall be
held at any place within or without the State of California which may be
designated either by the board of directors or by the written consent of all
shareholders entitled to vote thereat and not present at the meeting given
either before or after the meeting and filed with the secretary of the
corporation. In the absence of any such designation, shareholders' meetings
shall be held at the principal executive office of the corporation.
SECTION 2. Annual Meetings. The annual meeting of the shareholders of the
corporation shall be held on such date and at such time as shall be determined
by the board of directors, not more than fifteen (15) months after the date of
the preceding annual meeting or, in the case of the first annual meeting, not
more than fifteen (15) months after the organization of the corporation. At such
meeting, directors shall be elected and any other proper business may be
transacted which is within the powers of the shareholders. Written notice of
each annual meeting shall be given to each shareholder entitled to vote either
personally or by first-class mail or other means of written communications
(which includes, without limitation and wherever used in these bylaws,
telegraphic and facsimile communication), charges prepaid, addressed to each
shareholder at the address appearing on the books of the corporation, or given
by the shareholder to the corporation for the purpose of notice. If any notice
or report addressed to the shareholder at the address of such shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice or report to the shareholder at such
address, all future notices or reports shall be deemed to have been duly given
without further mailing if the same shall be available for the shareholder upon
written demand of the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice
or report to all other shareholders. If no address of a shareholder appears on
the books of the corporation or is given by the shareholder to the corporation,
notice is duly given to him if sent by mail or other means of written
communication addressed to the place where the principal executive office of the
corporation is located or if published at least once in a newspaper of general
circulation in the county in which said principal executive office is located.
<PAGE> 5
All such notices shall be given to each shareholder entitled thereto not
less than ten (10) days nor more than sixty (60) days before each annual
meeting. Any such notice shall be deemed to have been given at the time when
delivered personally or deposited in the United States mail or delivered to a
common carrier for transmission to the recipient or actually transmitted by the
person giving the notice by electronic means to the recipient or sent by other
means of written communication. An affidavit of mailing of any such notice in
accordance with the foregoing provisions, executed by the secretary, assistant
secretary or transfer agent of the corporation shall be prima facie evidence of
the giving of the notice.
Such notices shall state:
(a) The place, date and hour of the meeting;
(b) Those matters which the board, at the time of the mailing of the
notice, intends to present for action by the shareholders;
(c) If directors are to be elected, the names of nominees intended at
the time of the notice to be presented by management for election;
(d) The general nature of a proposal, if any, to take action with
respect to the approval of (i) a contract or other transaction with an
interested director, (ii) an amendment of the articles of incorporation,
(iii) a reorganization of the corporation as defined in section 181 of the
California General Corporation Law (the "General Corporation Law"), (iv) a
voluntary dissolution of the corporation, or (v) a distribution in
dissolution other than in accordance with the rights of outstanding
preferred shares, if any; and
(e) Such other matters, if any, as may properly come before the
meeting or may be expressly required by statute.
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
2
<PAGE> 6
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.
SECTION 4. Quorum. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting shall constitute a quorum
for the transaction of business. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to transact business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
SECTION 5. Adjournment. Any shareholders' meeting, annual or special,
whether or not a quorum is present, may be adjourned from time to time by the
vote of a majority of the shares, the holders of which are either present in
person or represented by proxy thereat, but in the absence of a quorum no other
business may be transacted at such meeting, except as provided in Section 4
above.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken, except that notice of the adjourned meeting shall be given to each
shareholder of record entitled to vote at an adjourned meeting in accordance
with Section 2 of this Article II if a new record date for the adjourned meeting
is fixed by the board of directors, or if the adjournment is for more than
forty-five (45) days from the date set for the original meeting. At any
adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
SECTION 6. Record Date; Cumulative Voting. Unless a record date for voting
purposes be fixed as provided in Section 1 of Article VI of these bylaws, then,
subject to the provisions of sections 702 to 704, inclusive, of the General
Corporation Law, only persons in whose names shares entitled to vote stand on
the stock records of the corporation at the close of business on the business
day next preceding the day on which notice of the meeting is given or if such
notice is waived, at the close of business on the business day next preceding
the day on which the meeting of shareholders is held (except that the record
date for shareholders entitled to give consent to corporate action without a
meeting shall be determined in accordance with Section 8 of this Article II)
shall be entitled to receive notice of and to vote at such meeting, and such day
shall be the record date for such meeting. Any shareholder entitled to vote on
any matter may vote part of the shares in favor of the proposal and refrain from
voting the remaining shares or vote them against the proposal (other than
elections of directors), but if the shareholder fails to
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specify the number of shares such shareholder is voting affirmatively, it will
be conclusively presumed that the shareholder's approving vote is with respect
to all shares such shareholder is entitled to vote. Such vote may be via voice
or by ballot; provided, however, that all elections for directors must be by
ballot upon demand made by a shareholder at any election and before the voting
begins. The affirmative vote of a majority of the shares represented and voting
at a duly held meeting at which a quorum is present (which shares voting
affirmatively shall constitute at least a majority of the required quorum) shall
be the act of the shareholders except as may otherwise be provided by (i)
Section 4 of this Article II, (ii) the cumulative voting provisions for the
election of directors as stated in this section below, and (iii) the General
Corporation Law or the articles of incorporation of this corporation (including
without limitation the provision that, upon the vote of the holder or holders of
shares representing fifty percent or more of the voting power of this
corporation, this corporation may elect voluntarily to wind up and dissolve).
Subject to the requirements of the next sentence, every shareholder entitled to
vote at any election for directors may cumulate his votes and give one candidate
a number of votes equal to the number of directors to be elected multiplied by
the number of votes to which his shares are normally entitled, or distribute his
votes on the same principle among as many candidates as he shall think fit. No
shareholder shall be entitled to cumulate votes unless such candidate or
candidates' names have been placed in nomination prior to the voting and the
shareholder has given notice at the meeting prior to the voting of the
shareholder's intention to cumulate his votes. If any one shareholder has given
such notice, all shareholders may cumulate their votes for candidates in
nomination. The candidates receiving the highest number of votes of shares
entitled to be voted for them, up to the number of directors to be elected,
shall be elected.
SECTION 7. Waiver of Notice. The transactions of any meeting of
shareholders, either annual or special, however called and noticed, and wherever
held, shall be as valid as though they had been determined at a meeting duly
held after regular call and notice, if a quorum be present either in person or
by proxy, and if, either before or after the meeting, each person entitled to
vote, not present in person or by proxy, signs a written waiver of notice or a
consent to a holding of the meeting, or an approval of the minutes thereof. The
waiver of notice, consent or approval need not specify either the business to be
transacted or the purpose of any regular or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in subparagraph (d) of the third paragraph of Section 2
of this Article II, the waiver of notice, consent or approval shall state the
general nature of such proposal. All such waivers, consents or approvals shall
be filed with the corporate records or made a part of the minutes of the
meeting.
Attendance of a person at a meeting shall also constitute a waiver of
notice of such meeting, except when the person objects, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters required to be included in
the notice but not so included if such objection is expressly made at the
meeting.
SECTION 8. Action by Written Consent. Directors may be elected without a
meeting by a consent in writing, setting forth the action so taken, signed by
all of the persons who would be entitled to vote for the election of directors;
in addition a director may be elected at any time to fill a vacancy (other than
a vacancy created by removal) not filled by the directors by the written consent
of persons holding a majority of the outstanding shares
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entitled to vote for the election of directors. Notice of such election shall be
given to nonconsenting shareholders if required by this Section 8.
Any other action which, under any provision of the General Corporation Law,
may be taken at a meeting of the shareholders, may be taken without a meeting,
and without notice except as hereinafter set forth, if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding
shares having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. All such consents shall be filed with the
secretary of the corporation and shall be maintained in the corporate records.
Unless the consents of all shareholders entitled to vote have been
solicited in writing:
(a) Notice of any proposed shareholder approval of (i) a contract or
other transaction with an interested director; (ii) indemnification of an
agent of the corporation as authorized by Section 9 of Article IV of these
bylaws; (iii) a reorganization of the corporation as defined in section 181
of the General Corporation Law; or (iv) a distribution in dissolution other
than in accordance with the rights of outstanding preferred shares, if any,
without a meeting by less than unanimous written consent, shall be given at
least ten (10) days before the consummation of the action authorized by
such approval; and
(b) Prompt notice shall be given 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 Article II 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
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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.
SECTION 9. Proxies. Every person entitled to vote shares or execute
consents shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or his duly authorized
agent and delivered to the secretary of the corporation. A proxy shall be deemed
executed if the shareholder's name is placed on the proxy (whether by manual
signature, typewriting, telegraphic transmission or otherwise) by the
shareholder or the shareholder's attorney in fact. Any proxy duly executed which
does not state that it is irrevocable shall continue in full force and effect
until (i) a writing stating that the proxy is revoked is delivered to the
secretary of the corporation, (ii) a proxy bearing a later date is executed by
the person who executed the prior proxy and is presented to the meeting, (iii)
as to any meeting, by attendance at such meeting and voting in person by the
person executing the proxy or (iv) written notice of the death or incapacity of
the maker of such proxy is received by the corporation before the vote pursuant
thereto is counted; provided that no such proxy shall be valid after the
expiration of eleven (11) months from the date of its execution, unless
otherwise provided in the proxy. The revocability of a proxy which states on its
face that it is irrevocable shall be governed by the provisions of sections
705(e) and (f) of the General Corporation Law.
SECTION 10. Inspectors of Election. In advance of any meeting of
shareholders, the board of directors may appoint any persons other than nominees
for office as inspectors of election to act at such meeting and any adjournment
thereof. If inspectors of election be not so appointed, the chairman of any such
meeting may, and on the request of any shareholder or his proxy shall, make such
appointment at the meeting. The number of inspectors shall be either one or
three. If appointed at a meeting on the request of one or more shareholders or
proxies, the majority of shares represented in person or by proxy shall
determine whether one or three inspectors are to be appointed. In case any
person appointed as inspector fails to appear or fails or refuses to act, the
vacancy may and on the request of any shareholder or a shareholder's proxy
shall, be filled by appointment by the
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board of directors in advance of the meeting, or at the meeting by the chairman
of the meeting.
The duties of such inspectors shall be as prescribed by section 707 of the
General Corporation Law and shall include: determining the number of shares
outstanding and the voting power of each, the shares represented at the meeting,
the existence of a quorum, the authenticity, validity and effect of proxies;
receiving votes, ballots or consents; hearing and determining all challenges and
questions in any way arising in connection with the right to vote; counting and
tabulating all votes or consents; determining when the polls shall close;
determining the result; and such acts as may be proper to conduct the election
or vote with fairness to all shareholders. In the determination of the validity
and effect of proxies the dates contained on the forms of proxy shall
presumptively determine the order of execution of the proxies, regardless of the
postmark dates on the envelopes in which they are mailed.
The inspectors of election shall perform their duties impartially, in good
faith, to the best of their ability and as expeditiously as is practical. If
there are three inspectors of election, the decision, act or certificate of a
majority is effective in all respects as the decision, act or certificate of
all. Any report or certificate made by the inspectors of election is prima facie
evidence of the facts stated therein.
SECTION 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
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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.
ARTICLE III.
BOARD OF DIRECTORS
SECTION 1. Powers of the Board. Subject to the provisions of the General
Corporation Law and any limitations in the articles of incorporation and these
bylaws as to action to be authorized or approved by the shareholders, the
business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
Without prejudice to such general powers, but subject to the same limitations,
it is hereby expressly declared that the board of directors shall have the
following powers:
First: To conduct, manage and control the affairs and business of the
corporation and to make such rules and regulations therefor, not
inconsistent with law or with the articles of incorporation or with these
bylaws, as they may deem best;
Second: To elect and remove at pleasure the officers, agents and
employees of the corporation, prescribe their duties and fix their
compensation;
Third: To authorize the issue of shares of stock of the corporation
from time to time upon such terms as may be lawful, in consideration of
money paid, labor done, services actually rendered to the corporation or
for its benefit or in its formation or reorganization, debts or securities
canceled, and tangible or intangible property actually received, but
neither promissory notes of the purchaser (unless adequately secured by
collateral other than the shares acquired or unless permitted by section
408 of the General Corporation Law) nor future services shall constitute
payment or part payment for the shares of the corporation;
Fourth: To borrow money and incur indebtedness for the purposes of the
corporation and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust,
mortgages, pledges, hypothecations or other evidences of debt and
securities therefor;
Fifth: To alter, repeal or amend, from time to time, and at any time,
these bylaws and any and all amendments of the same, and from time to time,
and at any time, to make and adopt such new and additional bylaws as may be
necessary and proper, subject to the power of the shareholders to adopt,
amend or repeal such bylaws, or to revoke the delegation of authority of
the directors, as provided by law or by Article VIII of these bylaws; and
Sixth: By resolution adopted by a majority of the authorized number of
directors, to designate an executive and/or other committees, each
consisting of two or more directors, to serve at the pleasure of the board,
and to prescribe the manner in which proceedings of such committee shall be
conducted. The appointment of members or
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alternate members (who may replace any absent member at any meeting of the
committee) of a committee requires the vote of a majority of the authorized
number of directors. Any such committee, to the extent provided in a
resolution of the board, shall have all of the authority of the board,
except with respect to:
(i) The approval of any action for which the General Corporation
Law or the articles of incorporation also require shareholder approval;
(ii) The filling of vacancies on the board or in any committee;
(iii) The fixing of compensation of the directors for serving on
the board or on any committee;
(iv) The adoption, amendment or repeal of bylaws;
(v) The amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repealable;
(vi) Any distribution to the shareholders, except at a rate or in a
periodic amount or within a price range determined by the board; and
(vii) The appointment of other committees of the board or the
members thereof.
SECTION 2. Number of Directors. The number of directors of the corporation
shall be not less than five (5) nor more than seven (7). The exact number of
directors shall be seven (7) until changed, within the limits specified above,
by a bylaw amending this Section 3.2, duly adopted by the board of directors or
by the shareholders. The indefinite number of directors may be changed, or a
definite number may be fixed without provision for an indefinite number, by a
duly adopted amendment to the articles of incorporation or by an amendment to
this bylaw duly adopted by the vote or written consent of holders of a majority
of the outstanding shares entitled to vote; provided, however, that an amendment
reducing the fixed number of or the minimum number of directors to a number less
than five (5) cannot be adopted if the votes cast against its adoption at a
meeting, or the shares not consenting in the case of an action by written
consent, are equal to more than sixteen and two-thirds percent (16 2/3%) of the
outstanding shares entitled to vote thereon. No amendment may change the stated
maximum number of authorized directors to a number greater than two (2) times
the stated minimum number of directors minus one (1). No reduction of the
authorized number of directors shall have the effect of removing any director
before the director's term of office expires.
SECTION 3. Election of Directors. The directors shall be elected at each
annual meeting of shareholders, but if any such annual meeting is not held or
the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders held for that purpose. Each director, including
a director elected to fill a vacancy, shall hold office until his successor is
elected, except as otherwise provided by statute.
SECTION 4. Vacancies; Resignation. A vacancy in the board of directors
shall be deemed to exist in case of the death, resignation or removal of any
director, if the authorized number of directors be increased, or if the
shareholders fail, at any annual or special meeting of shareholders at which any
director or directors are elected, to elect the full authorized number of
directors to be voted for at that meeting. The board of directors may declare
vacant the office of a director who has been declared of unsound mind by an
order of court or has been convicted of a felony.
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Vacancies in the board of directors, except for a vacancy created by the
removal of a director, may be filled by a majority of the directors then in
office, whether or not less than a quorum, or by a sole remaining director, and
each director so elected shall hold office until his successor is elected at an
annual or a special meeting of the shareholders. A vacancy in the board of
directors created by the removal of a director may only be filled by the vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute at least
a majority of the required quorum), or by the written consent of the holders of
all of the outstanding shares.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. Any such election by written
consent other than to fill a vacancy created by removal shall require the
consent of holders of a majority of the outstanding shares entitled to vote.
Any director may resign effective upon giving written notice to the
chairman of the board, the president, the secretary or the board of directors of
the corporation, unless the notice specifies a later time for the effectiveness
of such resignation. If the board of directors accepts the resignation of a
director tendered to take effect at a future time, the board or the shareholders
shall have power to elect a successor to take office when the resignation is to
become effective.
No reduction of the authorized number of the directors shall have the
effect of removing any director prior to the expiration of his term of office.
ARTICLE IV.
MEETINGS OF DIRECTORS
SECTION 1. Location of Meetings. Regular meetings of the board of directors
shall be held at any place within or without the State of California that has
been designated from time to time by the board of directors. In the absence of
such designation, regular meetings shall be held at the principal executive
office of the corporation, except as provided in Section 2. Special meetings of
the board of directors may be held at any place within or without the State of
California which has been designated in the notice of the meeting, or, if not
designated in the notice or if there is no notice, at the principal executive
office of the corporation.
SECTION 2. Regular Meetings. Immediately following each annual meeting of
the shareholders there shall be a regular meeting of the board of directors of
the corporation at the place of said annual meeting or at such other place as
shall have been designated by the board of directors for the purpose of
organization, election of officers and the transaction of other business. Other
regular meetings of the board of directors shall be held without call on such
date and time as may be fixed by the board of directors; provided, however, that
should any such day fall on a legal holiday, then said meeting shall be held at
the same time on the next business day thereafter ensuing which is not a legal
holiday. Notice of regular meetings of the directors is hereby dispensed with
and no notice whatever of any such meeting need be given, provided that notice
of any change in the time or place of regular meetings shall be given to all of
the directors in the same manner as notice for special meetings of the board of
directors.
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SECTION 3. Special Meetings; Notice. Special meetings of the board of
directors for any purpose or purposes may be called at any time by the chairman
of the board or president or, if both the chairman of the board and the
president are absent or are unable or refuse to act, by any vice president or by
any two directors. Notice of the time and place of special meetings shall be
delivered personally or by telephone to each director, or sent by first-class
mail or telegram or facsimile transmission, charges prepaid, addressed to him at
his address as it appears upon the records of the corporation or, if it is not
so shown on the records and is not readily ascertainable, at the place at which
the meetings of the directors are regularly held. In case such notice is mailed,
it shall be deposited in the United States mail at least four (4) days prior to
the time of the holding of the meeting. In case such notice is delivered
personally, telephoned, telegraphed or sent by facsimile transmission, it shall
be delivered to the director or transmitted to the director at least forty-eight
(48) hours prior to the time of the holding of the meeting. Any notice given
personally or by telephone, telegraph or facsimile may be communicated to either
the director or to a person at the office of the director whom the person giving
the notice has reason to believe will promptly communicate it to the director.
Such deposit in the mail, delivery to a common carrier, transmission by
electronic means or delivery, personally or by telephone, as above provided,
shall be due, legal and personal notice to such directors. The notice need not
specify the place of the meeting if the meeting is to be held at the principal
executive office of the corporation, and need not specify the purpose of the
meeting.
SECTION 4. Quorum. Presence of a majority of the authorized number of
directors at a meeting of the board of directors constitutes a quorum for the
transaction of business, except as hereinafter provided. Members of the board
may participate in a meeting through use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another. Every act or decision done or made by a majority of the
directors present at a meeting duly held at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
sections 310, 311 and 317 of the General Corporation Law. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of directors, provided that any action taken is approved by at
least a majority of the required quorum for such meeting. A majority of the
directors present, whether or not a quorum is present, may adjourn any meeting
to another time and place. If the meeting is adjourned for more than twenty-four
(24) hours, notice of any adjournment to another time or place (other than
adjournments until the time fixed for the next regular meeting of the board of
directors, as to which no notice is required) shall be given prior to the time
of the adjourned meeting to the directors who were not present at the time of
the adjournment.
SECTION 5. Waiver of Notice. Notice of a meeting need not be given to any
director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.
SECTION 6. Action by Written Consent. Any action required or permitted to
be taken by the board of directors, may be taken without a meeting if all
members of the board shall individually or collectively consent in writing to
such action. Such written consent or consents shall be filed with the minutes of
the proceedings of the board. Such
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action by written consent shall have the same force and effect as a unanimous
vote of such directors.
SECTION 7. Committees. The provisions of this Article IV shall also apply,
with necessary changes in points of detail, to committees of the board of
directors, if any, and to actions by such committees (except for the first
sentence of Section 2 of Article IV, which shall not apply, and except that
special meetings of a committee may also be called at any time by any two
members of the committee), unless otherwise provided by these bylaws or by the
resolution of the board of directors designating such committees. For such
purpose, references to "the board" or "the board of directors" shall be deemed
to refer to each such committee and references to "directors" and "members of
the board" shall be deemed to refer to members of the committee.
SECTION 8. Compensation of Directors. Directors and members of committees
may receive such compensation, if any, for their services, and such
reimbursement for expenses, as may be fixed or determined by resolution of the
board.
SECTION 9. Indemnification. The corporation shall, to the maximum extent
permitted by the General Corporation Law, indemnify each of its agents against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of the corporation. For purposes of
this Section, an "agent" of the corporation includes any person who is or was a
director, officer, employee or other agent of the corporation, or who is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or who was a director, officer, employee or agent of a corporation
which was a predecessor of the corporation or of another enterprise at the
request of such predecessor corporation.
ARTICLE V.
OFFICERS
SECTION 1. Designation of Officers. The officers of the corporation shall
be a chairman of the board or a president, or both, a secretary, and a
treasurer, who shall also be the chief financial officer of the corporation. The
corporation may also have, at the discretion of the board of directors, one or
more vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be designated from time to time by
the board of directors. Any number of offices may be held by the same person.
The officers shall be elected by the board of directors and shall hold office at
the pleasure of such board.
SECTION 2. Chairman of the Board. The chairman of the board, if there be
such officer, shall, if present, preside at all meetings of the board of
directors and exercise and perform such other powers and duties as may be from
time to time assigned to him by the board of directors or prescribed by the
bylaws. If there is not a president, the chairman of the board shall, in
addition, be the general manager and chief executive officer of the corporation
and shall have the powers and duties prescribed in Section 3 of Article V of
these bylaws.
SECTION 3. President. Subject to such powers and duties, if any, as may be
prescribed by these bylaws or the board of directors for the chairman of the
board, if there
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be such officer, the president shall be the general manager and chief executive
officer of the corporation and shall, subject to the control of the board of
directors, have general supervision, direction and control of the business and
officers of the corporation. He shall preside at all meetings of the
shareholders and, in the absence of the chairman of the board, or if there be
none, at all meetings of the board of directors. He shall have all of the powers
and shall perform all of the duties which are ordinarily inherent in the office
of the president, and he shall have such further powers and shall perform such
further duties as may be prescribed for him by the board of directors.
SECTION 4. Vice Presidents. In the absence or disability or refusal to act
of the president, the vice presidents in order of their rank as fixed by the
board of directors, or, if not ranked, the vice president designated by the
president or the board of directors, shall perform all of the duties of the
president and when so acting shall have all the powers of and be subject to all
the restrictions upon the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them, respectively, by the board of directors or the bylaws.
SECTION 5. Secretary. The secretary shall keep or cause to be kept at the
principal executive office of the corporation or such other place as the board
of directors may order, a book of minutes of all proceedings of the
shareholders, the board of directors and committees of the board, with the time
and place of holding, whether regular or special, and if special how authorized,
the notice thereof given, the names of those present at directors' and committee
meetings, and the number of shares present or represented at shareholders'
meetings. The secretary shall keep or cause to be kept at the principal
executive office or at the office of the corporation's transfer agent a record
of shareholders or a duplicate record of shareholders showing the names of the
shareholders and their addresses, the number of shares and classes of shares
held by each, the number and date of certificates issued for the same and the
number and date of cancellation of every certificate surrendered for
cancellation. The secretary or an assistant secretary, or, if they are absent or
unable or refuse to act, any other officer of the corporation, shall give or
cause to be given notice of all the meetings of the shareholders, the board of
directors and committees of the board required by the bylaws or by law to be
given, and he shall keep the seal of the corporation, if any, in safe custody
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or by the bylaws.
SECTION 6. Assistant Secretary. It shall be the duty of the assistant
secretaries to assist the secretary in the performance of his duties and
generally to perform such other duties as may be delegated to them by the board
of directors.
SECTION 7. Treasurer. The treasurer shall be the chief financial officer of
the corporation and shall keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account of the corporation. He shall
receive and deposit all moneys and other valuables belonging to the corporation
in the name and to the credit of the corporation and shall disburse the same
only in such manner as the board of directors or the appropriate officers of the
corporation may from time to time determine, shall render to the president and
the board of directors, whenever they request it, an account of all his
transactions as treasurer and of the financial condition of the corporation, and
shall perform such further duties as the board of directors may require.
SECTION 8. Assistant Treasurer. It shall be the duty of the assistant
treasurers to assist the treasurer in the performance of his duties and
generally to perform such other duties as may be delegated to them by the board
of directors.
13
<PAGE> 17
ARTICLE VI.
MISCELLANEOUS
SECTION 1. Record Date. The board of directors may fix a time in the future
as a record date for the determination of the shareholders entitled to notice of
and to vote at any meeting of shareholders or entitled to give consent to
corporate action in writing without a meeting, to receive any report, to receive
any dividend or distribution, or any allotment of rights, or to exercise rights
in respect to any change, conversion, or exchange of shares. The record date so
fixed shall be not more than sixty (60) days nor less than ten (10) days prior
to the date of any meeting, nor more than sixty (60) days prior to any other
event for the purposes of which it is fixed. When a record date is so fixed,
only shareholders of record at the close of business on that date are entitled
to notice of and to vote at any such meeting, to give consent without a meeting,
to receive any report, to receive a dividend, distribution, or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date,
except as otherwise provided by statute or in the articles of incorporation or
bylaws.
If the board of directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business
on the business day next preceding the day on which notice is given or, if
notice is waived, at the close of business on the business day next
preceding the day on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, when no prior
action by the board has been taken, shall be the day on which the first
written consent is given.
(c) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the board adopts the
resolution relating thereto, or the sixtieth (60th) day prior to the date
of such other action, whichever is later.
SECTION 2. Inspection of Corporate Records. The accounting books and
records, the record of shareholders, and minutes of proceedings of the
shareholders and the board and committees of the board of this corporation and
any subsidiary of this corporation shall be open to inspection upon the written
demand on the corporation of any shareholder or holder of a voting trust
certificate at any reasonable time during usual business hours, for a purpose
reasonably related to such holder's interests as a shareholder or as the holder
of such voting trust certificate. Such inspection by a shareholder or holder of
a voting trust certificate may be made in person or by agent or attorney, and
the right of inspection includes the right to copy and make extracts.
Every director shall have the absolute right at any reasonable time to
inspect and copy all books, records and documents of every kind and to inspect
the physical properties of the corporation and its subsidiary corporations. Such
inspection by a director may be made in person or by agent or attorney and the
right of inspection includes the right to copy and make extracts.
SECTION 3. Certificates for Shares. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the chairman or vice chairman of the board or the president or a
vice president and by the treasurer or an
14
<PAGE> 18
assistant treasurer or the secretary or any assistant secretary, certifying the
number of shares and the class or series of shares owned by the shareholder. Any
or all of the signatures on the certificate may be facsimile.
Any such certificate shall contain such legend or other statement as may be
required by the California Corporate Securities Law of 1968, the Federal
securities laws, and any agreement between the corporation and the issuee
thereof.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or the bylaws may
provide; provided, however, that any such certificate so issued prior to full
payment shall state on the face thereof the amount remaining unpaid and the
terms of payment thereof.
SECTION 4. Representation of Shares of Other Corporations. The president or
any vice president or the secretary or any assistant secretary of this
corporation is authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted to said officers to vote or represent on behalf of this corporation any
and all shares held by this corporation in any other corporation or corporations
may be exercised either by such officers in person or by any other person
authorized so to do by proxy or power of attorney duly executed by said
officers.
SECTION 5. Inspection of Bylaws. The corporation shall keep in its
principal executive office in California, or if its principal executive office
is not in California, then at its principal business office in California (or
otherwise provide upon written request of any shareholder), the original or a
copy of the bylaws as amended to date, certified by the secretary, which shall
be open to inspection by the shareholders at all reasonable times during office
hours.
SECTION 6. Construction and Definitions. Unless the context otherwise
requires, the general provisions, rules of construction and definitions
contained in the General Corporation Law shall govern the construction of these
bylaws. Without limiting the generality of the foregoing, the masculine gender
includes the feminine and neuter, the singular number includes the plural and
the plural number includes the singular, and the term "person" includes a
corporation as well as a natural person.
ARTICLE VII.
AMENDMENTS
SECTION 1. Amendment by Shareholders. New bylaws may be adopted or these
bylaws may be amended or repealed by the affirmative vote or written consent of
a majority of the outstanding shares entitled to vote, except as otherwise
provided by law or by the articles of incorporation or these bylaws.
SECTION 2. Amendment by Board of Directors. Subject to the right of
shareholders as provided in Section 1 of this Article to adopt, amend or repeal
bylaws, and except as otherwise provided by law or by the articles of
incorporation, bylaws (other than a bylaw or amendment thereof changing the
authorized maximum or minimum number of directors) may be adopted, amended or
repealed by the board of directors.
15
<PAGE> 19
ARTICLE VIII.
ANNUAL AND OTHER REPORTS
SECTION 1. Annual Report to Shareholders.
(a) So long as the corporation shall have fewer than one hundred
shareholders of record (determined as provided in section 605 of the
General Corporation Law), the requirement of section 1501(a) of said law
that an annual report be sent to the shareholders is expressly waived.
(b) Notwithstanding subdivision (a) of this Section, the corporation
shall, upon the written request of any shareholder made more than one
hundred twenty (120) days after the close of a fiscal year, deliver or mail
to the person making the request, within thirty (30) days thereafter, the
financial statements required by section 1501(a) of the General Corporation
Law.
SECTION 2. Request for Financial Statements. A shareholder or shareholders
holding at least five percent (5%) of the outstanding shares of any class of the
corporation may make a written request to the corporation for an income
statement of the corporation for the three-month, six-month or nine-month period
of the current fiscal year ended more than thirty (30) days prior to the date of
the request and a balance sheet of the corporation as of the end of such period
and, in addition, if no annual report for the last fiscal year has been sent to
shareholders, the statements referred to in section 1501(a) of the General
Corporation Law for the last fiscal year. The corporation shall deliver or mail
the statements to the person making the request within thirty (30) days
thereafter. A copy of any such statements shall be kept on file in the principal
executive office of the corporation for twelve (12) months and they shall be
exhibited at all reasonable times to any shareholder demanding an examination of
them or a copy shall be mailed to such shareholder. The quarterly income
statements and balance sheets referred to in this Section shall be accompanied
by the report thereon, if any, of any independent accountants engaged by the
corporation or the certificate of an authorized officer of the corporation that
such financial statements were prepared without audit from the books and records
of the corporation.
16
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation Ownership
- ---- ----------------------------- ---------
<S> <C> <C>
1. Voodoo Merger Sub, Inc. Texas 100%
2. 3Dfx International, Ltd. Cayman Islands 100%
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (Nos. 333-39109 and 333-58207) of 3Dfx Interactive, Inc.
of our report dated January 22, 1999 appearing in this Annual Report on Form
10-K. We also consent to the incorporation by reference of our report on the
Financial Statement Schedule, which appears in this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
February 5, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 92,922
<SECURITIES> 3,058
<RECEIVABLES> 36,335
<ALLOWANCES> 2,280
<INVENTORY> 23,991
<CURRENT-ASSETS> 168,395
<PP&E> 15,629
<DEPRECIATION> 8,513
<TOTAL-ASSETS> 184,121
<CURRENT-LIABILITIES> 57,524
<BONDS> 0
0
0
<COMMON> 126,569
<OTHER-SE> (256)
<TOTAL-LIABILITY-AND-EQUITY> 184,121
<SALES> 202,601
<TOTAL-REVENUES> 202,601
<CGS> 119,618
<TOTAL-COSTS> 119,618
<OTHER-EXPENSES> 69,486
<LOSS-PROVISION> 2,280
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 29,366
<INCOME-TAX> 7,663
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,703
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.33
</TABLE>
