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Previous: WHITTMAN HART INC, 8-K, 1999-12-15 |
Next: HEXAGON CONSOLIDATED COMPANIES OF AMERICA INC, 10-12G/A, 1999-12-15 |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the period ended October 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-22651
3DFX INTERACTIVE, INC. (Exact name of Registrant as specified in its Charter)
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4435 Fortran Drive
San Jose, CA 95134
(Address of Principal Executive Offices including Zip Code)
Telephone Number (408) 935-4400
(Registrant's Telephone Number, Including Area Code)
(Former name, former address and former fiscal year if changed
since last report)
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 reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
As of November 30, 1999 there were 24,573,309 shares of the Registrant's Common Stock outstanding.
3DFX INTERACTIVE, INC.
FORM 10-Q
INDEX
PART I. Financial Information
Item 1. Financial statements
Condensed Consolidated Balance Sheets -- October 31, 1999 and December 31, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
PART II. Other Information
Item 6: Exhibits and Reports on Form 8-K
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands)
October 31, December 31,
1999 1998
------------ ------------
(unaudited)
Assets:
Cash and cash equivalents ........................ $59,487 $92,922
Short-term investments ........................... 14,610 3,058
Accounts receivable, net ......................... 77,534 36,335
Inventory ........................................ 41,286 23,991
Other current assets ............................. 15,819 12,089
------------ ------------
Total current assets ..................... 208,736 168,395
Property and equipment, net....................... 40,901 15,629
Intangibles....................................... 14,818 --
Goodwill.......................................... 31,866 --
Other assets...................................... 10,720 97
------------ ------------
$307,041 $184,121
============ ============
Liabilities and Shareholders' Equity:
Short-term debt .................................. $27,000 $ --
Accounts payable ................................. 44,779 41,104
Accrued liabilities .............................. 19,666 16,031
Current portion of capitalized lease obligations . 655 389
------------ ------------
Total current liabilities ................ 92,100 57,524
------------ ------------
Other long term liabilities 2,001 284
------------ ------------
Shareholders' equity:
Common stock ..................................... 249,497 126,569
Warrants ......................................... 242 242
Deferred compensation ............................ (293) (697)
Unrealized loss on equity securities.............. (145) --
(Accumulated deficit) retained earnings .......... (36,361) 199
------------ ------------
Total shareholders' equity ............... 212,940 126,313
------------ ------------
$307,041 $184,121
============ ============
See accompanying notes to condensed consolidated financial statements.
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 31, September 30, October 31, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Revenues......................... $105,856 $33,206 $251,135 $141,858
Cost of revenues................. 88,624 24,971 191,122 81,144
------------ ------------ ------------ ------------
Gross profit................... 17,232 8,235 60,013 60,714
------------ ------------ ------------ ------------
Operating expenses:
Research and development....... 18,040 10,038 46,373 24,172
Selling, general and 18,329 6,971 43,954 24,650
Restructuring expense.......... 1,830 -- 1,830 --
In-process research and
development................... -- -- 4,302 --
Amortization of goodwill
and intangibles............... 3,627 -- 6,601 --
------------ ------------ ------------ ------------
Total operating expenses....... 41,826 17,009 103,060 48,822
------------ ------------ ------------ ------------
Income (loss) from operations.... (24,594) (8,774) (43,047) 11,892
Interest and other income, net... 393 13,045 1,988 14,610
------------ ------------ ------------ ------------
Income (loss) before income
taxes.......................... (24,201) 4,271 (41,059) 26,502
(Benefit) provision for income
taxes.......................... (6,583) 1,153 (9,658) 6,889
------------ ------------ ------------ ------------
Net income (loss)................ ($17,618) $3,118 ($31,401) $19,613
============ ============ ============ ============
Net income (loss) per share:
Basic.......................... ($0.73) $0.20 ($1.48) $1.34
============ ============ ============ ============
Diluted........................ ($0.73) $0.20 ($1.48) $1.22
============ ============ ============ ============
Shares used in net income (loss)
per share calculations:
Basic.......................... 24,131 15,437 21,163 14,674
------------ ------------ ------------ ------------
Diluted........................ 24,131 15,819 21,163 16,024
------------ ------------ ------------ ------------
See accompanying notes to condensed consolidated financial statements.
3DFX INTERACTIVE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
-----------------------
October 31, September 30,
1999 1998
----------- -----------
Cash flows from operating activities:
Net (loss) income ................................. ($31,401) $19,613
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Amortization ................................... 6,601 --
Depreciation ................................... 9,537 3,538
Write-off of acquired in-process research 4,302 --
Stock compensation.............................. 363 363
Increase in allowance for doubtful
accounts...................................... 2,653 1,561
Changes in assets and liabilities:
Accounts receivable........................... (7,586) (14,735)
Inventory..................................... 9,118 (21,626)
Other assets.................................. 1,279 (657)
Accounts payable.............................. (14,335) 22,171
Accrued liabilities........................... (9,059) 5,506
----------- -----------
Net cash (used in) provided by operating
activities.................................. (28,528) 15,734
----------- -----------
Cash flows from investing activities:
Maturities (purchases)of short-term investments,
net.............................................. 6,665 (7,639)
Acquisition of STB Systems, Inc.................... (9,084) --
Purchases of property and equipment................ (20,972) (10,289)
----------- -----------
Net cash used in investing activities........... (23,391) (17,928)
----------- -----------
Cash flows from financing activities:
Proceeds from secondary public offering, net....... -- 54,752
Proceeds from issuance (repurchase) of
Common Stock, net............................... (3,082) 1,217
Principal payments of capitalized lease
obligations, net................................ (315) (787)
Proceeds (payments) on drawdown on line of
credit, net..................................... 11,209 (777)
----------- -----------
Net cash (used in) provided by financing
activities.................................. 7,812 54,405
----------- -----------
Net increase (decrease) in cash and
cash equivalents................................... (44,107) 52,211
Cash and cash equivalents at beginning
of period.......................................... 103,594 28,937
----------- -----------
Cash and cash equivalents at end of period........... $59,487 $81,148
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3DFX INTERACTIVE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - The Company and Its Significant Accounting Policies:
3Dfx Interactive Inc. (the "Company" or "3Dfx") was incorporated in California on August 24, 1994. The Company is engaged in the design, development, marketing and support of 3D and 2D media processors, subsystems and API software for the interactive electronic entertainment market.
The unaudited condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information or footnote disclosure normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information included therein. While the Company believes that the disclosures are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the audited financial statements and accompanying notes included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 1998 as filed with the Securities and Exchange Commission. On March 29, 1999, the Board of Directors determined that it would be in the best interests of the Company and its shareholders to change its fiscal year from a fiscal year ending December 31 to a year beginning on February 1 and ending on January 31 beginning on February 1, 1999. The results of operations for the quarter or nine months ended October 31, 1999 are not necessarily indicative of the results to be expected for the full year.
Three customers represented 13%, 12% and 11% and one customer represented 15% of the Company's revenues during the third quarter and first nine months of fiscal 2000, respectively. Three customers represented 25%, 20% and 10% and three customers represented 35%, 20% and 15% of the Company's revenue during the third quarter and first nine months of 1998, respectively.
Note 2 - Inventory:
October 31, December 31,
1999 1998
------------ ------------
Raw materials............................. $25,155 $6,207
Work in-process........................... 9,106 13,249
Finished goods............................ 7,025 4,535
------------ ------------
Total inventory...................... $41,286 $23,991
============ ============
Note 3 - Merger Agreement:
In December 1998, the Company entered into an Agreement and Plan of Reorganization (the "Merger Agreement") with STB Systems Inc., a Texas corporation ("STB"). The Merger Agreement provided for the merger of a newly formed, wholly owned subsidiary of 3Dfx with and into STB. STB is the surviving corporation of the Merger and became a wholly owned subsidiary of 3Dfx. The merger was accounted for under the purchase method of accounting. The merger was consummated on May 13, 1999.
The purchase price of $133.2 million includes $116.1 million of stock issued at fair value (fair value being determined as the average price of the 3Dfx stock for a period three days before and after the announcement of the merger), $9.9 million in STB stock option costs (being determined under both the Black Sholes formula and in accordance with the Merger Agreement) and $7.2 million in estimated expenses of the transaction. The purchase price was allocated as follows: $85.6 million to the estimated fair value of STB net tangible assets purchased (as of May 13, 1999), $(7.6) million to establish deferred tax liabilities associated with the certain intangibles acquired, $4.3 million to purchased in-process research and development, $11.4 million to purchased existing technology, $4.4 million to trademarks, $2.3 million to workforce-in-place, $1.0 million to executive covenants and $31.8 million to goodwill. The allocation of the purchase price to intangibles was based upon an independent, third party appraisal and management's estimates.
The intangible assets and goodwill acquired have estimated useful lives and estimated first year amortization, as follows:
Calculated
Estimated First Year
Amount Useful Life Amortization
----------- ------------- ------------
Purchased existing technology:
1.5 year life................ $6,475,000 1.5 years $4,317,000
3 year life.................. 4,966,000 3 years 1,655,000
Trademarks......................... 4,406,000 5 years 881,000
Workforce-in-place................. 2,250,000 5 years 450,000
Executive covenants................ 1,000,000 5 years 200,000
Goodwill........................... 31,880,000 5 years 6,376,000
The value assigned to purchased in-process research and development ("IPR&D") was determined by identifying research projects in areas for which technological feasibility had not been established. These include projects for Voodoo3 as well as other specialized technologies totaling $4.3 million. The value was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value as defined below.
Net Cash Flows. The net cash flows from the identified projects are based on our estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, royalty costs and income taxes from those projects. These estimates are based on the assumptions mentioned below. The research and development costs included in the model reflect costs to sustain projects, but exclude costs to bring in-process projects to technological feasibility.
The estimated revenues are based on management projections of each in-process project and the business projections were compared and found to be in line with industry analysts' forecasts of growth in substantially all of the relevant markets. Estimated total revenues from the IPR&D product areas are expected to peak in the year ending December 31, 1999 and decline from 2000 into 2001 as other new products are expected to become available. These projections are based on our estimates of market size and growth, expected trends in technology and the nature and expected timing of new project introductions by our competitors and us.
Projected gross margins approximate STB's recent historical performance and are in line with comparable industry margins. The estimated selling, general and administrative costs are consistent with STB's historical cost structure, which is in line with industry averages at approximately 10% of revenues. Research and development costs are consistent with STB's historical cost structure.
Royalty rate. The Company applied a royalty charge of 25% of operating income for each in-process project to attribute value for dependency on predecessor core technologies.
Discount rate. Discounting the net cash flows back to their present value is based on the industry weighted average cost of capital ("WACC"). The industry WACC is approximately 14%. The discount rate used in discounting the net cash flows from IPR&D is 20%, a 600 basis point increase from the industry WACC. This discount rate is higher than the industry WACC due to inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of such technology and the uncertainty of technological advances which could potentially impact the estimates described above.
Percentage of completion. The percentage of completion for each project was determined using costs incurred to date on each project as compared to the remaining research and development to be completed to bring each project technological feasibility. The percentage of completion varied by individual project ranging from 50% to 91%. If the projects discussed above are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods.
Pro forma results of operations for the combined company as if the transaction had consummated at the beginning of the earliest period presented and carried forward into 1999 are as follows:
Nine Months Year
Ended Ended
October 31, December 31,
1999 1998
------------ ------------
Revenues ................................. $331,924 $467,441
------------ ------------
Net income (loss) ........................ ($49,175) $9,110
------------ ------------
Basic net income (loss) per share ........ ($2.32) $0.40
============ ============
Diluted net income (loss) per share ...... ($2.32) $0.37
============ ============
On a combined basis, there were no material transactions between the Company and STB during the periods presented except for sales of product by the Company to STB which have been eliminated.
Note 4 - Restructuring expense:
In August 1999, the Company recorded a restructuring charge of $1,830,000 representing a one-time reduction in workforce related to the merger with STB.
Note 5 - Public Offering:
In March 1998, the Company completed a public offering of 2,900,000 shares of common stock at a price of $23.75 per share. Of the 2,900,000 shares offered, 2,028,140 were sold by the Company and 871,860 were sold by selling shareholders. The Company received cash of approximately $45.5 million, net of underwriting discounts and commissions and other offering costs. The Company did not receive any of the proceeds from the sale of shares by the selling shareholders. On March 23, 1998, the Company's underwriters exercised an option to purchase an additional 435,000 shares of common stock at a price of $23.75 per share to cover over-allotments. In connection with the exercise of such option, the Company received cash of approximately $9.3 million, net of underwriting discounts and commissions and other offering costs.
Note 5 - 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. A reconciliation of the numerators and denominators of the basic and diluted per share computations as follows (in thousands, except per share data):
Three Months Ended Nine Months Ended
------------------------- -------------------------
October 31, September 30, October 31, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net income (loss) available to
common shareholders
(numerator).................... ($17,618) $3,118 ($31,401) $19,613
Weighted average common shares
outstanding (denominator for
basic computation)............. 24,131 15,437 21,163 14,674
Effect of dilutive securities --
common stock equivalents....... -- 382 -- 1,350
------------ ------------ ------------ ------------
Weighted average shares
outstanding (denominator for
diluted computation)........... 24,131 15,819 21,163 16,024
============ ============ ============ ============
Basic net income (loss)
per share....................... ($0.73) $0.20 ($1.48) $1.34
============ ============ ============ ============
Diluted net income (loss)
per share....................... ($0.73) $0.20 ($1.48) $1.22
============ ============ ============ ============
During the three and nine months ended October 31, 1999, weighted average options under the treasury stock method to purchase approximately 4,156,000 and 3,368,000 shares, respectively, were outstanding but not included in the computation because they were antidilutive.
Note 6 - Income Taxes:
The Company recorded an income tax benefit of $6.6 million for the three months ended October 31, 1999, at an effective tax rate equal to 27% of pretax income. The Company recorded a provision for income taxes of $1.2 million for the three months ended September 30, 1998, an effective tax rate of 27%. The Company recorded an income tax benefit of $9.7 million for the nine months ended October 31, 1999, an effective tax rate of 24%. The Company recorded a provision for income taxes of $6.9 million for the nine months ended September 30, 1998, an effective tax rate of 26%. The Company's effective tax rate in fiscal 2000 differed from the statutory rate due to the impact of non-deductible expenses including intangible amortization and in-process research and development. The effective tax rate in fiscal 1998 is different from the statutory rate due to the utilization of federal and state net operating loss carryforwards and tax credits.
Note 7 - Comprehensive Income:
In January 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) which establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Such items may include foreign currency translation adjustments, unrealized gains/losses from investing and hedging activities, and other transactions. Comprehensive income for the three months and the nine months ended October 31, 1999 differed by $145,000, respectively, for each period. Comprehensive income for the three months and the nine months ended September 30, 1998 was not materially different from net income.
Note 8 - Short-term Debt:
As a result of the merger with STB, the Company has a $40 million
revolving credit facility ("Revolving Credit Facility") with a bank.
The Revolving Credit Facility bears interest at LIBOR plus 175 basis
points (7.1588% at October 31, 1999). At October 31, 1999, the Company
had $27.0 million outstanding under the Revolving Credit Facility.
Availability under the Revolving Credit Facility is subject to
limitation determined by the Company's borrowing base, which is
calculated based on eligible accounts receivable, as defined in the
Revolving Credit Facility Agreement. Subsequent to October 31, 1999, the
Company renegotiated the existing Revolving Credit Facility to a $25
million level which bears interest at LIBOR plus 100 basis points.
Coincident with the extension, the Company pledged $25 million in
marketable securities to secure the new Revolving Credit Facility.
3DFX INTERACTIVE, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include the sentence in the second paragraph under "Overview" regarding expected customer concentration; the sentence in the fourth paragraph under "Overview" regarding availability of raw materials; the sentences in the third and tenth paragraph under "Results of Operations" regarding factors affecting gross profit; the sentences in the fourth and fifth and eleventh and twelfth paragraphs under "Results of Operations" regarding future research and development and selling, general and administrative costs, respectively; 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
The Company was founded in August 1994 to design, develop, market and support 3D media processors, subsystems and API software for the interactive electronic entertainment market. The Company derives revenue from the sale of 3D and 3D/2D media processors and graphics boards designed for use in PCs and coin-op arcade systems. The Company began commercial shipments of its first 3D graphics product, the Voodoo Graphics chipset, in September 1996 and introduced subsequent media processors in 1997 and 1998. In March 1999, the Company began shipment of its Voodoo3 product family of enhanced and more fully-featured, single chip 3D/2D media processors. The Voodoo3 product family broadens the Company's products to include board-level products.
The Company's sales have historically been concentrated among a limited number of customers. Revenues derived from sales to Dell Computer Corporation, Ingram Micro and Gateway, Inc. accounted for approximately 13%, 12% and 11% of revenues for the quarter ended October 31, 1999. Revenues derived from sales to Ingram Micro accounted for 15% of revenues for the nine monthes ended October 31, 1999. STB prior to the May 13, 1999 effective date of the merger accounted for 8% of revenues for the nine months ended October 31, 1999. Revenues derived from sales to Creative Technology, Ltd. ("Creative"), Elitetron Electronic Co., Ltd. ("Elitetron"), and Guillemot International ("Guillemot") accounted for approximately 25%, 20% and 10%, respectively, of revenues for the quarter ended September 30, 1998. Revenues derived from Diamond Multimedia Systems, Inc. ("Diamond"), Creative and Elitetron accounted for approximately 35%, 20% and 15%, respectively, of revenues for the first nine months of fiscal 1998. The Company expects that a small number of customers will continue to account for a substantial portion of its total revenues for the foreseeable future. The loss of any one of these customers could have a material impact on the Company's results of operations, cash flows, or financial position. In addition, sales to these customers can fluctuate and could have a material impact on the Company's revenues and profitability on a quarterly basis.
The announcement and consummation of the merger between 3Dfx and STB has caused some of 3Dfx's customers to end or curtail their relationships with the combined company. For example, two of 3Dfx's largest customers, Creative Labs and Diamond, compete directly with STB. In dollars, these customers together accounted for approximately $117.5 million of 3Dfx's total revenue in 1998. Sales to Diamond and Creative Labs following the merger have been reduced significantly from prior levels and these customers are no longer customers of the combined company. To date, the loss of business from former 3Dfx customers has not been fully replaced through the sale of the combined company's own add-in- board level products. If other major customers of 3Dfx terminate their relationship with the combined company or sales of the combined company's add-in boards continue to be less than sales to former 3Dfx customers, the Company's business could be materially harmed.
As part of its manufacturing strategy, the Company leverages the expertise of third party suppliers in the areas of wafer fabrication, assembly, quality control and assurance, reliability and testing. This strategy allows the Company to devote its resources to research and development and sales and marketing activities while avoiding the significant costs and risks associated with owning and operating a wafer fabrication facility and related operations. The Company does not manufacture the semiconductor wafers used for its products and does not own or operate a wafer fabrication facility. All of the Company's wafers are currently manufactured by Taiwan Semiconductor Manufacturing Corporation ("TSMC") in Taiwan. The Company obtains manufacturing services from TSMC on a purchase order basis. The Company provides TSMC with a rolling six month forecast of its supply needs and TSMC builds to the Company's orders. The Company purchases wafers and die from TSMC. Once production yield for a particular product stabilizes, the Company pays an agreed price for wafers meeting certain acceptance criteria pursuant to a "good die" only pricing structure for that particular product. Until production yield for a particular product stabilizes, however, the Company must pay an agreed price for wafers regardless of yield. Such wafer and die purchases constitute a substantial portion of cost of products revenues once products are sold. TSMC is responsible for procurement of raw materials used in the production of the Company's products. The Company believes that raw materials required are readily available. The Company's products are packaged by two third party subcontractors, Advanced Semiconductor Engineering Group ("ASE") and Caesar Technology, Inc. All of the Company's 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. The Company depends on these suppliers to allocate a portion of their manufacturing capacity sufficient to meet the Company's needs, to produce products of acceptable quality and at acceptable manufacturing yields, and to deliver those products to us on a timely basis. These manufacturers may not always be able to meet the Company's near-term or long-term manufacturing requirements.
In connection with the grant of stock options to employees since inception (August 1994) through the effective date of the Company's IPO, the Company recorded aggregate deferred compensation of approximately $1.9 million, representing the difference between the deemed fair value of the Common Stock for accounting purposes and the option exercise price at the date of grant. This amount is presented as a reduction of shareholders' equity and is amortized ratably over the vesting period of the applicable options. 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 quarterly through the second quarter of fiscal 2001 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 and administrative expenses, respectively).
In December 1998, the Company entered into an Agreement and Plan of Reorganization (the"Merger Agreement") with STB Systems Inc., a Texas corporation ("STB"). The Merger Agreement provided for the merger of a newly formed, wholly owned subsidiary of 3Dfx with and into STB. STB is the surviving corporation of the Merger and became a wholly owned subsidiary of 3Dfx. The merger is accounted for under the purchase method of accounting. The merger was consummated on May 13, 1999.
The purchase price of $133.2 million includes $116.1 million of stock issued at fair value (fair value being determined as the average price of the 3Dfx stock for a period three days before and after the announcement of the merger), $9.9 million in STB stock option costs (being determined under both the Black Sholes formula and in accordance with the Merger Agreement) and $7.2 million in estimated expenses of the transaction. The purchase price was allocated as follows: $85.6 million to the estimated fair value of STB net tangible assets purchased (as of May 13, 1999), $(7.6) million to establish deferred tax liabilities associated with the certain intangibles acquired, $4.3 million to purchased in-process research and development, $11.4 million to purchased existing technology, $4.4 million to trademarks, $2.3 million to workforce-in-place, $1.0 million to executive covenants and $31.8 million to goodwill. The allocation of the purchase price to intangibles was based upon an independent, third party appraisal and management's estimates.
The intangible assets and goodwill acquired have estimated useful lives and estimated first year amortization, as follows:
Calculated
Estimated First Year
Amount Useful Life Amortization
----------- ------------- ------------
Purchased existing technology:
1.5 year life................ $6,475,000 1.5 years $4,317,000
3 year life.................. 4,966,000 3 years 1,655,000
Trademarks......................... 4,406,000 5 years 881,000
Workforce-in-place................. 2,250,000 5 years 450,000
Executive covenants................ 1,000,000 5 years 200,000
Goodwill........................... 31,880,000 5 years 6,376,000
The value assigned to purchased in-process research and development ("IPR&D") was determined by identifying research projects in areas for which technological feasibility had not been established. These include projects for Voodoo3 as well as other specialized technologies totaling $4.3 million. The value was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value as defined below.
Net Cash Flows. The net cash flows from the identified projects are based on our estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, royalty costs and income taxes from those projects. These estimates are based on the assumptions mentioned below. The research and development costs included in the model reflect costs to sustain projects, but exclude costs to bring in-process projects to technological feasibility. The estimated revenues are based on management projections of each in-process project and the business projections were compared and found to be in line with industry analysts' forecasts of growth in substantially all of the relevant markets. Estimated total revenues from the IPR&D product areas are expected to peak in the year ending December 31, 1999 and decline from 2000 into 2001 as other new products are expected to become available. These projections are based on our estimates of market size and growth, expected trends in technology and the nature and expected timing of new project introductions by our competitors and us.
Projected gross margins approximate STB's recent historical performance and are in line with comparable industry margins. The estimated selling, general and administrative costs are consistent with STB's historical cost structure, which is in line with industry averages at approximately 10% of revenues. Research and development costs are consistent with STB's historical cost structure.
Royalty rate. The Company applied a royalty charge of 25% of operating income for each in-process project to attribute value for dependency on predecessor core technologies.
Discount rate. Discounting the net cash flows back to their present value is based on the industry weighted average cost of capital ("WACC"). The industry WACC is approximately 14%. The discount rate used in discounting the net cash flows from IPR&D is 20%, a 600 basis point increase from the industry WACC. This discount rate is higher than the industry WACC due to inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of such technology and the uncertainty of technological advances which could potentially impact the estimates described above.
Percentage of completion. The percentage of completion for each project was determined using costs incurred to date on each project as compared to the remaining research and development to be completed to bring each project technological feasibility. The percentage of completion varied by individual project ranging from 50% to 91%. If the projects discussed above are not successfully developed, the sales and profitability of the combined company may be adversely affected in future periods.
Results of Operations
The results of operations for the three and nine month periods presented include the effect of the merger with STB from the date of consummation, May 13, 1999 which is discussed in Note 2 to the Unaudited Consolidated Condensed Financial Statements contained herein and above in "Overview".
Three Months Ended October 31, 1999 and September 30, 1998
Revenues. Revenues are recognized upon product shipment. The Company's total revenues were $105.8 million in the three months ended October 31, 1999, and $33.2 million in the three months ended September 30, 1998. The increase was primarily attributable to revenues generated from board-level sales incorporating Voodoo3 technology. Substantially all of the revenues in the three months ended September 30, 1998 were derived from sale of the Company's Voodoo Banshee chip and Voodoo2 chipsets. As a result of the merger, some of the Company's former significant customers do not do business with the combined company because these customers were competitors of STB and are therefore competitors of the combined company. See "Overview".
Gross Profit. Gross profit consists of total revenues less cost of revenues. Cost of revenues consists primarily of costs associated with the purchase of board-level components, such as memory chips and the procurement of semiconductors from the Company's contract manufacturers, labor and overhead associated with such procurement, board-level assembly cost, warehousing, shipping and warranty costs. Gross profit as a percentage of revenues was 16% and 25% in the three months ended October 31, 1999 and September 30, 1998, respectively. The decrease can primarily be attributed to the gross profit generated from sales of board-level products which have lower margins as compared with the margins on chip-only products. The decrease can also be attributed to higher than expected memory prices, expedite charges for products resulting from the recent Taiwan earthquake, and a greater percentage of revenues generated from PC systems manufacturers, which carry a lower gross margin than revenues generated from the Company's traditional market channels. In addition, the decrease in gross profit as a percentage of revenues resulted from lower margins associated with the Voodoo3 products sold in the three months ended October 31, 1999 as compared with the margins of the Voodoo Banshee chip and Voodoo2 chipsets sold in the three months ended September 30, 1998. The Company's future gross profit will be affected by the overall level of sales; the mix of products sold in a period; manufacturing yields; and the Company's ability to reduce product procurement and production costs.
Research and Development. Research and development expenses consist primarily of compensation and other expenses related to research and development personnel, occupancy costs of research and development facilities, depreciation of capital equipment used in product development and engineering costs paid to the Company's foundries in connection with manufacturing start-up of new products. Research and development expenses increased 80% from $10.0 million in the three months ended September 30, 1998 to $18.0 million in the three months ended October 31, 1999. Included in the quarter ended October 31, 1999 is $2.6 million in research and development expenses attributable to the operations of STB. Excluding the effect of STB, research and development expenses increased 54% in the three months ended October 31, 1999 as compared to three months ended September 30,1998. This increase reflects an increase in personnel costs, common cost allocations and engineering costs resulting from the development of Voodoo3 and other future products. The Company expects to continue to make substantial investments in research and development and anticipates that research and development expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative expenses include compensation and benefits for sales, marketing, finance and administration personnel, commissions paid to independent sales representatives, tradeshow, advertising and other promotional expenses and facilities expenses. Selling, general and administrative expenses increased 163% from $7.0 million in the three months ended September 30, 1998 to $18.3 million in the three months ended October 31, 1999. The increase is primarily attributable to the inclusion of $11.0 million in expenses relating to the operations of STB. Excluding the effect of STB, selling, general and administrative expenses increased 5% in the quarter ended October 31, 1999 compared to the quarter ended September 30, 1998. The Company expects that selling, general and administrative expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate.
Restructuring expense. In August 1999, the Company recorded a restructuring charge of $1,830,000 representing a one-time reduction in workforce related to the merger with STB.
Goodwill and Other Intangibles Amortization. In connection with the STB merger, the Company recorded assets representing goodwill of approximately $31.8 million and intangibles of approximately $19.1 million. These amounts will be amortized ratably over the amortization periods of the applicable assets. For the three months ended October 31, 1999, the Company recorded $3.6 million in related amortization.
Interest and Other Income (Expense), Net. Interest and other income (expense) net decreased from $13.0 million in the three months ended September 30, 1998 to $393,000 in the three months ended October 31, 1999. The decrease is primarily related to a one-time recognition of income in the three months ended September 30, 1998 as a result of the settlement of litigation with Sega Enterprises, Ltd. as well as decreased earnings from lower invested cash balances and interest expense on the outstanding equipment line of credit and capital lease balances.
Provision (Benefit)For Income Taxes. The Company recorded an income tax benefit of $6.6 million for the three months ended October 31, 1999, at an effective tax rate equal to 27% of pretax income. The Company recorded a provision for income taxes of $1.2 million for the three months ended September 30, 1998, an effective tax rate of 27%. The Company's effective tax rate in fiscal 2000 differed from the statutory rate due to the impact of non-deductible expenses including intangible amortization and in-process research and development. The Company's effective tax rate in fiscal 1998 differs from the federal statutory rate due to utilization of net operating loss carryforwards and other tax credits. Provision for income taxes was $7.7 million in 1998. 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 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.
Nine Months Ended October 31, 1999 and September 30, 1998
Revenues. The Company's total revenues were $251.1 million in the nine months ended October 31, 1999, and $141.9 million in the nine months ended September 30, 1998. The increase is primarily due to board-level sales incorporating Voodoo3 technology following the May 13, 1999, effective date of the merger. Revenues in the nine months ended October 31, 1999 were principally attributable to sales of the Company's Voodoo3 and Voodoo Banshee products. Substantially all of the revenues in the nine months ended September 30, 1998 were derived from sale of the Company's Voodoo Banshee chip and its Voodoo2 and Voodoo Graphics chipsets.
Gross Profit. Gross profit as a percentage of revenues was 24% and 43% in the nine months ended October 31, 1999 and September 30, 1998, respectively. The decrease can be primarily attributed to the gross profit generated from the sales of board-level products, which have lower margins as compared with the margins on chip only products. The decrease can also be attributed to higher than expected memory prices, expedite charges for products resulting from the recent Taiwan earthquake, and a greater percentage of revenues generated from PC systems manufacturers, which carry a lower gross margin than revenues generated from the Company's traditional market channels. In addition, the decrease in gross profit as a percentage of revenues resulted from lower margins associated with the Voodoo3 and Voodoo Banshee products sold in the nine months ended October 31, 1999 as compared with the margins of Voodoo2 and Voodoo Graphics products sold in the nine months ended June 30, 1998. The Company's future gross profit will be affected by the overall level of sales; the mix of products sold in a period; manufacturing yields; and the Company's ability to reduce product procurement costs.
Research and Development. Research and development expenses increased 110% from $24.2 million in the nine months ended September 30, 1998 to $50.7 million in the nine months ended October 31, 1999. Included in the nine months ended October 31, 1999 is $5.9 million in research and development expenses attributable to the operations of STB following the May 13, 1999 effective date of the merger. Excluding the effect of STB, research and development expenses increased 85% in the nine months ended October 31, 1999 as compared to the nine months ended September 30, 1998. This increase reflects the in-process research and development write-off related to the STB merger of $4.3 million, an increase in personnel costs, common cost allocations and engineering costs resulting from the development of Voodoo3 and other future products. The Company expects to continue to make substantial investments in research and development and anticipates that research and development expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative expenses increased 78% from $24.7 million in the nine months ended September 30, 1998 to $44.0 million in the nine months ended October 31, 1999. The increase is primarily attributable to the inclusion of $21.3 million in expenses relating to the operations of STB following the May 13, 1999 effective date of the merger. Excluding the effect of STB, selling, general and administrative expenses remained relatively flat for the nine months ending October 31, 1999 as compared to the nine months ending September 30,1998. The Company expects that selling, general and administrative expenses will increase in absolute dollars in future periods, although such expenses as a percentage of total revenues will fluctuate.
Restructuring expense. In August 1999, the Company recorded a restructuring charge of $1,830,000 representing a one-time reduction in workforce related to the merger with STB.
Goodwill and Other Intangibles Amortization. In connection with the STB merger, the Company recorded assets representing goodwill of approximately $31.8 million and intangibles of approximately $19.1 million. These amounts will be amortized ratably over the amortization periods of the applicable assets. For the nine months ended October 31, 1999, the Company recorded $6.6 million in related amortization.
Interest and Other Income (Expense), Net. Interest and other income (expense), net decreased from $14.6 million in the nine months ended September 30, 1998 to $2.0 million in the nine months ended October 31, 1999. The decrease is primarily related to a one-time recognition of income in the nine months ended September 30, 1998 as a result of the settlement of litigation with Sega Enterprises, Ltd. as well as decreased earnings from lower invested cash balances and interest expense on the outstanding equipment line of credit and capital lease balances.
Provision (Benefit) For Income Taxes. The Company recorded an income tax benefit of $9.7 million for the nine months ended October 31, 1999, an effective tax rate of 24%. The Company's effective tax rate in fiscal 2000 differed from the statutory rate due to the impact of non- deductible expenses including intangible amortization and in-process research and development. The Company recorded a provision for income taxes of $6.9 million for the nine months ended September 30, 1998, an effective tax rate of 26%. The Company's effective tax rate in fiscal 1998 differs from the federal statutory rate due to utilization of net operating loss carryforwards and other tax credits.
Year 2000 Compliance
Like many other companies, the Year 2000 computer issue creates risks for the Company. If internal systems do not correctly recognize and process date information beyond the Year 1999, there could be an adverse impact on the Company'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. As used in this section, "Year 2000 capable" means that when used properly and in conformity with the product information provided by the Company, and when used with Year 2000 capable 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 Company's product properly exchanges date data with the Company's product.
Internal Systems. To address these Year 2000 issues with its internal systems, the Company has initiated a program that is designed to deal with the Company's internal management information systems and its embedded systems (e.g. phones, and security systems). The program included both assessment and remediation proceeding in parallel and the Company has completed and tested changes to those management and critical systems. These activities are intended to encompass all major categories of systems used by the Company, including sales and financial systems and embedded systems. 95% of the date dependencies have already been remediated and those that have not are not mission critical systems. In almost all cases the fixes involved updating software or firmware. The unremediated date dependencies involve desktop workstations, and are expected to be fully remediated by the fourth quarter of calendar 1999.
Products. The Company has examined all versions of its products and has determined that its products do not have any date dependencies that could give rise to Year 2000 capability problems. The Company plans to evaluate new products as they are developed. Because its products have no date dependencies, the Company does not believe it is legally responsible for costs incurred by customers related to ensuring their Year 2000 capability.
Suppliers. The Company is also working with key suppliers of products and services to determine whether their operations and products are Year 2000 capable and to monitor their progress toward Year 2000 capability. The Company identified three vendors that could materially impact the Company's business if they experienced significant Year 2000 problems. These include the Company's supplier of wafer foundry services and the Company's two suppliers of chip packages. The Company has obtained verbal assurances from each of these suppliers of services that they comply with industry standards for Year 2000 readiness. The Company has also received assurances from its three providers of telecommunications services that their services are Year 2000 compliant.
Costs. 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. The costs incurred to date related to the Company's Year 2000 assessment and remediation programs have not been material. The cost which will be incurred by the Company 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 information technology or embedded systems of key suppliers' systems or products sold to customers will have a material impact on the Company's financial condition or overall trends in results of operations. However, the Company 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. The Company's Year 2000 compliance programs have been conducted internally, without the use independent verification or validation processes. These assessment and compliance programs have not caused the deferral by the Company of other information technology projects.
The Company's most reasonably likely worst case Year 2000 scenario is that the Company experiences product procurement delays due to Year 2000 problems. These would arise because the Company's three major suppliers described above are located outside of the United States. The Company has not assessed, and may not be able to assess, what Year 2000 problems may occur with the public infrastructure, including transportation and export systems, of these countries. Such problems may result in delays in the Company's procuring products, which the Company estimates may be approximately 4 weeks. The Company is in the process of developing a contingency plan to address this scenario. This plan will include the maintenance of a 3 to 6 week safety supply of product. The Company expects this contingency plan to be in place by the fourth quarter of calendar 1999.
The Company continues to have 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.
Liquidity and Capital Resources
As of October 31, 1999, the Company had working capital of $116.6 million including cash, cash equivalents and short-term investments of $74.1 million. Net cash used in operating activities in the first nine months of fiscal 2000 was due primarily to a net loss of $31.4 million, and decreases of $14.3 million in accounts payable and $9.1 million in accrued expenses and increases of $7.6 million in accounts receivable, offset by adjustments of depreciation of $9.5 million and amortization of $6.6 million, and the in-process research and development write-off of $4.3 million relating to the merger with STB. Net cash provided by operating activities in the first nine months of fiscal 1998 was due primarily to net income of $19.6 million, and increases of $22.2 million and $5.5 million in accounts payable and accrued liabilities, respectively, partially offset by a $21.6 million and $14.7 million increase in inventory and accounts receivable, respectively, due to the increase in manufacturing to meet customer demand associated with the generation of revenues.
Net cash used in investing activities was approximately $23.4 million and $17.9 million in the nine months ended October 31, 1999 and September 30, 1998, respectively, and was due in each period to the purchase of investments and to the purchase of property and equipment, except in the nine months ended October 31, 1999, which includes $9.1 million used in the merger of STB. The Company does not have any significant capital spending or purchase commitments other than normal purchase commitments and commitments under leases. The Company expects capital expenditures to increase over the next several years as it expands facilities and acquires equipment to support the planned expansion of its operations.
Net cash provided by financing activities for the nine months ended October 31, 1999 of $7.8 million was due to the net proceeds on the drawdown from its line of credit offset by the net repurchase of common stock of $3.1 million and payments on its capital lease obligations. Net cash provided by financing activities was approximately $54.4 million in the first nine months of fiscal 1998 due primarily to proceeds from the public offering in March 1998.
The Company's future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of expansion of research and product development efforts and the success of these development efforts, the costs and timing of expansion of sales and marketing activities, the extent to which the Company's existing and new products gain market acceptance, competing technological and market developments, the costs involved in maintaining and enforcing patent claims and other intellectual property rights, and available borrowings under line of credit arrangements and other factors. The Company believes that the proceeds from its March 1998 public offering, the Company's current cash balances and cash generated from operations and from available or future debt financing will be sufficient to meet the Company's operating and capital requirements through at least April 2000. However, there can be no assurance that the Company will not require additional financing within this time frame. The Company's forecast of the period of time through which its financial resources will be adequate to support its operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary. The factors described earlier in this paragraph will impact the Company's future capital requirements and the adequacy of its available funds. The Company may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. There can be no assurance that such additional funding, if needed, will be available on terms attractive to the Company, or at all. Furthermore, any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve restrictive covenants. Strategic arrangements, if necessary to raise additional funds, may require the Company to relinquish its rights to certain of its technologies or products. The failure of the Company to raise capital when needed could have a material adverse effect on the Company's business, financial condition and results of operations.
Factors Affecting Operating Results
The Quarterly Operating Results of the Company May Fluctuate. The Company'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 the Company'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 the Company's products and its customers' products;
- Gains or losses of significant customers or strategic relationships;
- The volume and timing of customer orders;
- The availability, pricing and timeliness of delivery of components for the Company's products;
- The timing of new product announcements or introductions by competitors;
- Product obsolescence, the management of product transitions;
- Production delays; and
- Decreases in the average selling prices of products.
Any one or more of the factors listed above or other factors could cause the Company to fail to achieve its revenue and profitability expectations. Most of the Company's operating expenses are relatively fixed in the short term. The Company 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, the Company believes that investors 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.
Loss of Customers or Suppliers because of STB Merger; Limited Sources for Chips and Boards. The STB merger caused some of 3Dfx's customers to end or curtail their relationships with the Company because the Company's products are now both graphics chips and graphics boards. Thus, the Company competes with companies that were previously 3Dfx's customers, graphics board manufacturers. Similarly, the merger has disrupted STB's relationships with its suppliers, some of whom were competitors of 3Dfx. The loss of STB suppliers may cause the Company to lose customers that want the Company's products to contain components from those suppliers. The loss of customers of 3Dfx could cause a decline in sales for the Company unless new sales by the combined company have an offsetting effect.
For example, two of 3Dfx's largest customers, Creative and Diamond, were direct competitors of STB. During 1998, sales to Diamond (and its subsidiaries) represented approximately 32% of 3Dfx's total revenue and sales to Creative (and its subsidiaries) represented approximately 26% of 3Dfx's total revenue. New products being developed by the Company will primarily be sold directly to OEM and retail customers rather than through Diamond and Creative. As a result, sales to Diamond and Creative Labs following the merger have been reduced significantly from prior levels and these customers are no longer customers of the Company. Similarly, nVidia, which was a major supplier of STB and which was a direct competitor of 3Dfx, has terminated its relationship with the Company. Although the Company has continued to sell to its customers its current products that use nVidia graphics chips, it does not expect to use nVidia's graphic chips on any new products. Unless the Company can persuade STB's customers that are purchasing products using nVidia graphics chips to purchase new products based on 3Dfx graphics chips, STB's revenue contribution to the Company will be reduced significantly.
As a result of the merger, STB has become significantly dependent on 3Dfx's graphics chip design and development capabilities and 3Dfx has become more dependent on STB's graphics boards and manufacturing capabilities. This occurred 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 graphics chips or STB's graphics boards fail to meet the requirements of either company's customers, the Company's relationship with those customers could be hurt. This could negatively affect the Company's financial performance. In addition, STB is highly dependent on 3Dfx's ability to provide graphics chips on a timely basis meeting the rigid scheduling requirements of OEMs. If 3Dfx's graphics chips could not be provided on a timely basis, STB may not be able to readily find suitable alternative graphics chips, which could result in the loss of business and customers as well as unused manufacturing capacity.
The Company Has a Limited Operating History. The Company has been shipping products only since the third quarter of 1996. This limited operating history makes the assessment of the Company's future operating results difficult. Additionally, the Company 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. Additionally, the Company had net losses of $17.6 million and $31.4 million in the three and nine months ended October 31, 1999. Although the Company had net income of $21.7 million in 1998, $3.1 million and $19.6 million in the three and nine months ended September 30, 1998, respectively, 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.
The Company Faces Intense Competition. The markets in which the Company 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 the Company's products. The Company does not compete on the basis of price alone. The Company 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; and
- Ability to bring new products to the market in a timely way.
Many of the Company's current and potential competitors have substantially greater financial, technical, manufacturing, marketing, distribution and other resources than the Company. These competitors may also have greater name recognition and market presence, longer operating histories, lower cost structures and larger customer bases than the Company. As a result, such competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. Prior to the merger with STB, certain of 3Dfx's principal competitors offered a single vendor solution, because they maintain their own semiconductor foundries and may therefore benefit from certain capacity, cost and technical advantages. While the merger with STB enhances the Company's ability to compete with these competitors, the Company faces significant risks in achieving the benefits of the merger with STB and to the extent those benefits are not realized, these competitors continue to pose a threat to the Company.
The Company 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 the Company's largest competitors as suppliers to the PC OEM and retail markets. Regardless of the relative qualities of the Company'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.
The Company has traditionally competed 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 or companies that have recently entered the market with an integrated 3D/2D solution but which have not traditionally manufactured 2D solutions or have not been involved in the market previously. These competitors include 3Dlabs, Inc., Ltd., ATI Technologies, Inc., nVidia Corporation, Micron Technology, Inc., S3 Incorporated and Trident Microsystems. The Company 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. Additionally, Intel has recently entered the 3D graphics market, targeting its efforts at the mainstream PC market. The Company also faces potential competition from companies that have focused on the high-end of the 3D market and the production of 3D systems targeted for the professional engineering market and who are now developing lower cost versions of their 3D technology to bring workstation-like 3D graphics to mainstream applications. These competitors include 3Dlabs, Integraph Corporation, Real 3D, an operating unit of Lockheed Martin Corp., and Silicon Graphics, Inc.
In addition, as a result of the acquisition of STB, The Company now competes with graphics board manufacturers, suppliers who sell graphics chips directly to OEMs, OEMs who internally produce graphics chips or integrate graphics chips on the main computer processing board of their personal computers, commonly known as the motherboard, and from the makers of other personal computer components and software that are increasingly providing graphics processing capabilities.
The Company Depends on the PC Market. For 1996, 1997 and 1998, 82%, 93% and 100% of the Company's revenues were derived from graphics chips sold for use in PCs. The Company expects to continue to derive almost all of its revenues from the sales of products for use in PCs, although as a result of the STB merger, the Company expects to sell graphics boards as well as graphics chips. The PC and graphics chip and board 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; and
- Significant expenditures for capital equipment and product development.
The PC and graphics chip and board 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 the Company's products. Moreover, such changes in demand could be large and sudden. Since PC manufacturers often build inventories during periods of anticipated growth, they may be left with excess inventories if growth slows or if they have incorrectly forecasted product transitions. In such cases, the manufacturers may abruptly stop purchasing additional inventory from suppliers such as the Company 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 the Company's products, would materially harm the Company's business.
In addition, the PC and graphics chip and board industries have in the past experienced significant economic downturns at various times, characterized by lower product demand and accelerated reduction of product prices. The Company may experience substantial period-to-period fluctuations in results of operations due to general semiconductor industry conditions.
Dependence on the Retail Distribution Channel. The Company's products have historically been distributed in the retail distribution channel. To access the retail channel, the Company has depended on graphics board manufacturers whose products are sold to consumers. The Company developed its strong presence in the retail market through its own marketing efforts, as well as through the significant marketing efforts of a number of customers, including Diamond and Creative Labs. As a result of the STB merger, the Company has lost some of its largest customers, who were direct competitors of STB, and has become primarily dependent on STB to support the retail sales channel. Historically, STB has targeted low levels of retail sales volume and has directed most of its sales and marketing resources to the OEM sales channel. As a result, there may be substantial risks associated with the Company's dependence on near-term revenues from the retail channel as the Company transitions to direct sales in the retail channel.
The Company Faces the Challenge of Growth. The Company 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 the Company'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, the Company's future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls, and any failure to do so could inhibit growth and harm the company.
The Company Depends on New Product Development. The markets for which the Company'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. The Company's businesses will depend to a significant extent on its ability to successfully develop new products. As a result, the Company believes that significant expenditures for research and development will continue to be required in the future. To succeed in this environment the Company must anticipate the features and functionality that customers will demand. The Company 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 the Company'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 the Company's and its customers' products;
- Competitive pricing of products; and
- Introduction of new products to the market within the limited time window for OEM design cycles and retail selling seasons.
As the markets for the Company's products continue to develop and competition increases, the Company anticipates that product life cycles will shorten and average selling prices will decline. In particular, average selling prices and, in some cases, gross margins for the Company's products will decline as products mature. Thus, the Company will need to introduce new products to maintain average selling prices and gross margins. To do this, the Company must successfully identify new product opportunities and develop and bring new products to market in a timely manner. The Company has in the past experienced delays in completing development and introduction of new products. The failure of the Company to successfully develop and introduce new products and achieve market acceptance for such products would materially harm the Company's business.
The Company's Products Have Short Product Life Cycles; The Company Must Successfully Manage Product Transitions. The Company's products have short product life cycles. A failure by the Company 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 the Company's brand name, reputation and relationships with its customers and cause longer term harm to its business.
The PC market frequently undergoes transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. The Company'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, the Company 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 the Company's revenues for a substantial period.
The success of the Company 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 the Company to gain market share.
There are long lead times for certain components used in the Company's products. Therefore, the Company 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. The Company's existing products may not continue to be accepted by its markets and the Company 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 the Company's businesses.
The Company Has Significant Customer Concentration. The Company's sales are highly concentrated among a limited number of customers. Revenues derived from sales to Dell Computer Corporation, Ingram Micro and Gateway, Inc. accounted for approximately 13%, 12% and 11% of revenues for the quarter ended October 31, 1999. Revenues derived from sales to Ingram Micro accounted for approximately 15% of the nine months ended October 31, 1999. Revenues derived from sales to STB prior to the effective date of the Merger accounted for 8% of the revenues for the nine months ended October 31, 1999. Revenues derived from sales to Creative, Elitetron, and Guillemot accounted for approximately 25%, 20% and 10%, respectively, of revenues for the quarter ended September 30, 1998. Revenues derived from Diamond, Creative and Elitetron accounted for approximately 35%, 20% and 15%, respectively, of revenues for the first nine months of fiscal 1998. The Company expects that a small number of customers will continue to account for a substantial portion of its revenues for the foreseeable future.
All of the Company'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 the Company cancels an order or ceases to be a customer, the Company's business and financial condition could be materially harmed. As a result of the merger with STB, the Company has lost several of its current customers. See "Overview" above for a fuller discussion of the effect of the merger on the Company's customer base.
The Company Has Significant Product Concentration. The Company's revenues are dependent on the markets for 3D/2D and 3D media processors and graphics boards for PCs and on the Company's ability to compete in those markets. Since the Company has no other products, the Company's business would be materially harmed if it were unsuccessful in selling these products.
The Company Depends on Independent Manufacturers and Other Third Parties. The Company's graphics chip products require wafers manufactured with state-of-the-art fabrication equipment and techniques. The Company does not manufacture the semiconductor wafers used for its graphics chip products and does not own or operate a wafer fabrication facility. Taiwan Semiconductor Manufacturing Company, or TSMC, currently manufactures all of the Company's wafers in Taiwan. The Company obtains manufacturing services from TSMC on a purchase order basis. The Company depends on TSMC to:
- Produce wafers of acceptable quality and with acceptable manufacturing yields;
- Deliver those wafers to the Company and its independent assembly and testing subcontractors on a timely basis; and
- Allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs.
The Company expects to continue to be dependent upon TSMC in the future. The Company 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 the Company's graphics chip 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 the Company on short notice. Any disruption in the Company's access to TSMC's production capacity would materially harm the Company's business.
There are many other risks associated with the Company's dependence upon third party manufacturers, including:
- Reduced control over delivery schedules, quality assurance, manufacturing yields and cost;
- The potential lack of adequate capacity during periods of excess demand;
- Limited warranties on wafers supplied to the Company; and
- Potential misappropriation of the Company 's intellectual property.
The Company's graphics chip 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 graphic chips products, the Company 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 the Company's graphics chip products. A significant amount of time is required to qualify assembly and test subcontractors. Therefore, product shipments could be delayed significantly if the Company is required to find alternative subcontractors. And problems associated with the delivery, quality or cost of the assembly and testing of the Company's products could materially harm the Company'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, the Company 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, the Company must pay an agreed price for wafers regardless of yield. Accordingly, in this latter circumstance, the Company bears the risk of final yield of good die. Poor yields would materially harm the Company's business.
Semiconductor manufacturing yields are a function of both product design, which is developed largely by the Company, 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 the Company and the manufacturer. The offshore location of the Company's manufacturer compounds this risk because it increases the effort and time required to identify, communicate and resolve manufacturing yield problems. As the Company's relationships with TSMC and any additional manufacturing partners develop, yields could be harmed from difficulties in adapting the Company's technology and product design to the proprietary process technology and design rules of each manufacturer.
The Company's manufacturers may not achieve or maintain acceptable manufacturing yields in the future. Because of the Company's potentially limited access to wafer fabrication capacity from its manufacturers, any decrease in manufacturing yields could result in an increase in the Company's per unit costs and force the Company to allocate its available product supply among its customers. Such an allocation could potentially adversely impact customer relationships as well as revenues and gross profit. Any inability of the Company to achieve planned yields from its manufacturers could materially harm the Company 's business. The Company also faces the risk of product recalls resulting from design or manufacturing defects which are not discovered during the manufacturing and testing process. In the event of a significant number of product returns due to a defect or recall, the Company's revenues and gross profit could be materially harmed.
The Company Faces Risks Relating to Intellectual Property. The Company relies primarily on a combination of patent, mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. If these efforts are not sufficient to protect the Company's intellectual property, the Company's business may be harmed. Many foreign jurisdictions offer less protection of intellectual property rights than the United States. Therefore, the protection provided to the Company'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, the Company's products may become the target of infringement claims. If that were to occur, the Company 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 the Company's business. Litigation by or against the Company could result in significant expense to the Company and could divert the efforts of the Company's technical and management personnel, regardless of the outcome of such litigation.
The Company's International Operations Are Subject to Certain Risks. The Company relies on foreign third-party manufacturing, assembly and testing operations that are located in Asia. In addition, the Company has significant export sales. These international operations subject the Company 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; and
- Foreign currency fluctuations.
Any of these factors could materially harm the international operations and sales of the Company, and consequently, its business. Recently, the financial markets in Asia have experienced significant turmoil, which could harm the Company's international sales or operations. Currently, all of the Company's product sales and its arrangements with its foundry and assembly and test vendors provide for pricing and payment in U.S. dollars. To date, the Company has not engaged in any currency hedging activities, although the Company may do so in the future. An increase in the value of the U.S. dollar relative to foreign currencies could make the Company's products more expensive and potentially less competitive in foreign markets.
The Company's Stock Price May Be Volatile; Securities Class Action Litigation.. The trading price of the Company'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 the Company, its customers or competitors;
- Changes in securities analysts' recommendations;
- Earnings estimates for the Company; and
- General fluctuations in the stock market.
The Company'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 the Company'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 the Company's common stock.
In the past, following periods of volatility in the market price of a company's stock, securities class action litigation has been brought against the issuing company. It is possible that similar litigation could be brought against the Company. 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 the Company to significant liabilities. A securities class action lawsuit of this type was filed on October 9, 1998 in Dallas County, Texas against STB and certain of its officers and directors, along with the underwriters who participated in STB's public offering on March 20, 1998. The lawsuit alleges that the registration statement for STB's secondary public offering contained false and misleading statements of material facts and omitted to state material facts, alleging that the registration statement failed to disclose certain alleged STB product defects, alleged difficulties with some of STB's major customers and STB's allegedly deteriorating financial performance. The lawsuit seeks recission and/or unspecified damages. The Company denies the allegations in the lawsuit and intends to vigorously defend the lawsuit. In the event the plaintiffs in the lawsuit prevail in connection with any of their claims, then, depending upon the magnitude of damages and expenses incurred by the Company and the extent to which such damages and expenses are covered by insurance, the lawsuit could have a negative effect on the financial condition and results of the Company.
Risks Associated with Year 2000 Compliance. The Company 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. The Company believes that all of its existing products are Year 2000 compliant and has conducted or is conducting Year 2000 compliance testing. Despite such belief, the Company's products may not be Year 2000 compliant. If the Company's products fail to perform, including failures due to the onset of calendar year 2000, its business would likely be materially harmed.
Any Year 2000 problems could materially harm the Company's business. In addition, the Company's customers and suppliers may not be year 2000 compliant, which could materially harm the Company's business. See "Year 2000 Compliance" above for discussion of the Company's efforts in evaluating, testing and correcting Year 2000 compliance issues.
The Company Depends on Third Party Developers and Publishers. The Company believes that the availability of numerous high quality, commercially successful software entertainment titles and applications significantly affects sales of its graphics chips and boards. The Company depends on third party software developers and publishers to create, produce and market software titles that will operate with its 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 the Company's products may not be developed. In addition, the development and marketing of game titles that do not fully demonstrate the technical capabilities of the Company's products could create the impression that the Company's technology offers only marginal performance improvements, if any, over competing products.
The Company's success will be substantially affected by the adoption by software developers of Glide, its proprietary, low-level 3D API. Although the Company's products support game titles developed for most industry standard APIs, the Company believes that Glide currently allows developers to fully exploit the technical capabilities of the Company's 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 the Company. 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 Company's architecture. There can be no assurance that Glide will be adopted by a sufficient number of software developers or that developers who have used Glide in the past will continue to do so in the future.
Risks related to Environmental Regulation. The production and manufacture of certain of the Company's products requires the use of toxic and other hazardous substances. If the Company does not comply with all local, state, federal and foreign governmental regulations relating to the storage, use and disposal of these substances, substantial monetary fines could be levied against the Company or the production of the Company's products could be suspended, resulting in product delivery delays, cancelled product orders, decreased revenue and negative financial results.
Dependence on Third-Party Certification. The Company submits most of its graphics board products for compatibility and performance testing to the Microsoft Windows Hardware Quality Lab because OEM customers typically require such products to have this certification prior to making volume purchases. This certification typically requires up to several weeks to complete and entitles the Company to claim that a particular product is "Designed for Microsoft Windows." The Company may not receive this certification for future products in a timely fashion, which could result in product shipment delays and lost sales. Dependence on Single Manufacturing Facility for Graphics Boards. In connection with the acquisition of STB, the Company also acquired STB's sole manufacturing facility, which is located in Juarez, Mexico. Since the Company is dependent on this single manufacturing facility for the manufacture of graphics board products, any disruption of manufacturing operations at this facility would have far reaching negative consequences. A disruption could result from various factors, including difficulties in attracting and retaining qualified manufacturing employees, difficulties associated with the use of new, reconfigured or upgraded manufacturing equipment, labor disputes, human error, governmental or political risks or a natural disaster such as an earthquake, tornado, fire or flood.
In comparison to those of its competitors that do not maintain their own manufacturing facilities, the Company incurs higher relative fixed overhead and labor costs as a result of operating its own manufacturing facility. Any failure to generate the level of product revenues needed to absorb these overhead and labor costs would negatively affect the Company's financial results.
Risks related to Changes in Product Mix. The Company offers three broad
categories of products: (i) graphics boards and other multimedia
subsystems that are primarily sold to major original equipment
manufacturers, or OEMs, and, to a lesser degree, to commercial
customers, (ii) specialized technology products that are primarily sold
to resellers, the workstation groups of OEMs and corporate customers in
certain industries and (iii) graphics chips sold for inclusion in other
companies products. As a result of the varying gross profit margins
associated with its products and sales channels, shifts in the mix of
products sold or in the sales channels into which such products are sold
could significantly harm the Company's gross profits and gross profit
margins. For example, a decrease in sales of graphics boards and other
multimedia subsystems to the commercial market or in sales of
specialized technology products could result in a disproportionately
greater decrease in the Company's gross profit margin. This is because
these sales currently have higher gross profit margins than sales of
graphics boards and other multimedia subsystem products to the Company's
OEM customers. On the other hand, any decrease in the volume of graphics
boards and other multimedia subsystems sold to the Company's OEM
customers would significantly reduce total net sales and negatively
impact the Company's financial results.
PART II - Other Information
Item 6: Exhibits
(a) Exhibits
27.1 Financial Data Schedule
(b) Financial Statements Schedule
Schedule II - Valuation and Qualifying Accounts
Reports on Form 8-K
On October 13, 1999, the Registrant filed a report on Form 8-K relating to the resignation of L. Gregory Ballard, its Chief Executive Officer and President.
3DFX INTERACTIVE, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: December 15, 1999
| 3DFX INTERACTIVE, INC. |
| (Registrant) |
| By: | /s/ ALEX LEUPP |
|
| |
| Alex Leupp | |
| Chief Executive Officer | |
| (Principal Executive Officer) |
| By: | /s/ DAVID ZACARIAS |
|
| |
| David Zacarias | |
| Vice President, Administration and Chief Financial Officer | |
| (Principal Financial and Accounting Officer) |
FINANCIAL STATEMENTS SCHEDULE
3DFX INTERACTIVE, INC.
Valuation and Qualifying Accounts
For the nine months ended October 31, 1999 and September 30, 1998
(in thousands)
Additions
---------------------
Charged to Charged
Beginning Costs and to Other Ending
Balance Expenses Accounts Deductions Balance
---------------------------- --------- ---------- ---------- ---------- ---------
Allowance for Doubtful
Accounts:
For the nine months
ended October 31, 1999... $3,666 $2,653 $ 6,726 $2,815 $10,230
For the nine months
ended September 30, 1998. $308 $1,836 $ -- $275 $1,869
Inventory Reserve:
For the nine months
ended October 31, 1999... $7,828 $ -- $ 16,230 $4,825 $19,233
For the nine months
ended September 30, 1998. $661 $10,567 $ -- $1,047 $10,181
INDEX TO EXHIBITS
EXHIBITS
27.1 Financial Data Schedule
|
|