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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
Form 10-K/A
Amendment No. 1
<TABLE>
<S> <C>
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act
of 1934 for the fiscal year ended January 31, 2000
or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act
of 1934 for the transition period from to
.
Commission File Number: 000-22651
</TABLE>
3DFX INTERACTIVE, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 77-0390421
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
4435 FORTRAN DRIVE, SAN JOSE, CA 95134
(Address of principal executive office) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (408) 935-4400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
PREFERRED SHARE PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the common stock on June 5,
2000 of $8.38 per share, as reported on the Nasdaq National Market, was
approximately $168,659,360. Shares of common stock held by each officer and
director and by each person known to 3dfx Interactive, Inc. who owns 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of June 5, 2000, the registrant had outstanding 24,644,437 shares of
common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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FORWARD-LOOKING STATEMENTS
Unless the context otherwise requires, the term "3dfx" when used in this
Form 10-K/A ("Report") and in the Annual Report to the Stockholders refers to
3dfx Interactive, Inc., a California corporation, and its consolidated
subsidiaries and predecessors. This Report and the Annual Report to Stockholders
contain some forward-looking statements within the meaning of the federal
securities laws. When used therein, the words "expects," "plans," "believes,"
"anticipating," "estimates," and similar expressions are intended to identify
forward-looking statements. Actual results and the timing of some events could
differ materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including without limitation those set
forth under "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors" below.
PART I
ITEM 3. LEGAL PROCEEDINGS
On September 21, 1998, 3dfx filed suit against nVidia in Northern
California District Federal Court. The complaint alleges patent infringement
relating to nVidia's use of multi-texturing technology in its RIVA TNT product.
Discovery in the case is presently under way.
A securities class action lawsuit was filed October 9, 1998 in Dallas
County, Texas against STB Systems, Inc. ("STB"), which 3dfx acquired by merger
in May, 1999. The suit was brought against STB and some of its officers and
directors and the underwriters who participated in the STB secondary offering on
March 20, 1998. The petition alleges that the registration statement for the
secondary public offering contained false and misleading statements of material
facts and omitted to state material facts. The petition asserts claims under
Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, and
Sections 581-33A of the Texas Securities Act on behalf of a purported class of
persons who purchased or otherwise acquired STB common stock in the public
offering. The petition seeks recission and/or unspecified damages. That action
was removed to federal court in April 2000.
On December 17, 1999, a similar securities class action lawsuit was also
filed in the United States District Court for the Northern District of Texas,
Dallas Division, against STB and three of its officers and directors. The action
asserts claims under Sections 10 and 20 of the Securities Exchange Act of 1934.
On February 8, 2000, another similar class action lawsuit, asserting claims
under Sections 10 and 20 of the Securities Exchange Act of 1934, was filed
against STB and three of its officers and directors in the United States
District Court for the Northern District of Texas. All of these actions have
subsequently been consolidated, and the parties have now reached an agreement in
principle to settle their actions. The settlement, which is subject to final
documentation and Court approval, does not reflect any admission of liability by
any of the defendants. The principal terms of the settlement call for the
establishment of a settlement fund consisting of $4.7 million to be paid by
insurance.
3dfx is a party from time to time to some other legal proceedings arising
in the ordinary course of business. Although the amount of any liability that
could arise with respect to these proceedings cannot be predicted accurately,
3dfx believes that any liability that might result from such claims will not
have a material adverse effect on its financial position.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. 3dfx's actual results could differ materially from
those discussed in the forward-looking statements as a result of some factors
including those set forth under "-- Risk Factors" and elsewhere in this Report.
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Consolidated Financial Statements
and Notes thereto appearing elsewhere in this Report.
OVERVIEW
General
3dfx was founded in August 1994 to design, develop, market and support 3D
graphics chips, graphics boards and API software for the interactive electronic
entertainment market. 3dfx derives revenue from the sale of 3D and 3D/2D
graphics chips and graphics boards designed primarily for use in PCs. 3dfx began
commercial shipments of its first 3D graphics product, the Voodoo Graphics
chipset, in September 1996 and introduced subsequent graphics chipsets in fiscal
1997 and fiscal 1998. In March 1999, 3dfx began shipment of its Voodoo3 product
family of enhanced and more fully-featured, single chip 3D/2D media processors.
3dfx's Voodoo3 product family was broadened in fiscal 1999 to include
board-level products.
3dfx's sales have historically been concentrated among a limited number of
customers. Revenues derived from sales to Ingram Micro accounted for
approximately 13% of revenues for the fiscal year ended January 31, 2000.
Revenues derived from sales by 3dfx to STB prior to the May 13, 1999 effective
date of the 3dfx/STB merger accounted for 6.5% of revenues for the fiscal year
ended January 31, 2000. The announcement and consummation of the merger between
3dfx and STB caused some of 3dfx's customers to end or curtail their
relationships with the combined company. For example, two of 3dfx's largest
customers in fiscal 1998, Creative Technology Ltd. and Diamond Multimedia
Systems, Inc., competed directly with STB. These customers (and their
subsidiaries) together accounted for approximately $117.5 million, or
approximately 58%, of 3dfx's total revenue in fiscal 1998. Sales to Diamond and
Creative Technology following the announcement of the merger decreased
significantly from prior levels and these customers are no longer customers of
the combined company. To date, the loss of business from 3dfx's historical
customer base has not been fully replaced through the sale of the combined
company's board level products, which has negatively impacted 3dfx's revenues.
If other customers of 3dfx terminate their relationship with the combined
company or sales of the combined company's graphics boards continue to be less
than the sales generated with 3dfx's historical customer base, 3dfx's business
could be materially harmed.
As part of its manufacturing strategy, 3dfx leverages the expertise of
third party suppliers in the areas of wafer fabrication, assembly, quality
control and assurance, reliability and testing. This strategy allows 3dfx to
devote its resources to research and development and sales and marketing
activities while avoiding the significant costs and risks associated with owning
and operating a wafer fabrication facility and related operations. 3dfx does not
manufacture the semiconductor wafers used for its products and does not own or
operate a wafer fabrication facility. All of 3dfx's wafers are currently
manufactured by Taiwan Semiconductor Manufacturing Corporation ("TSMC") in
Taiwan. 3dfx obtains manufacturing services from TSMC on a purchase order basis.
3dfx provides TSMC with a rolling six month forecast of its supply needs and
TSMC builds to 3dfx's orders. 3dfx purchases wafers and die from TSMC. Once
production yield for a particular product stabilizes, 3dfx pays an agreed price
for wafers meeting some acceptance criteria pursuant to a "good die" only
pricing structure for that particular product. Until production yield for a
particular product stabilizes, however, 3dfx must pay an agreed price for wafers
regardless of yield. Such wafer and die purchases constitute a substantial
portion of cost of products revenues once products are sold. TSMC is responsible
for procurement of raw materials used in the production of 3dfx's products. 3dfx
believes that raw materials required are readily available. 3dfx's products are
packaged by three third party subcontractors, Advanced Semiconductor Engineering
Group ("ASE"), Caesar Technology, Inc. and
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Siliconware. All of 3dfx's products are tested by ASE. This assembly and testing
is conducted on a purchase order basis rather than under a long-term agreement.
All purchases of wafers and assembly and test services are denominated in U.S.
dollars.
In connection with the grant of stock options to employees since inception
(August 1994) through the effective date of 3dfx's IPO, 3dfx recorded aggregate
deferred compensation of approximately $1.9 million, representing the difference
between the deemed fair value of the common stock for accounting purposes and
the option exercise price at the date of grant. This amount is presented as a
reduction of shareholders' equity and is amortized ratably over the vesting
period of the applicable options. This amortization resulted in charges to
operations of $484,000 (of which $194,000 and $290,000 were recorded in research
and development expenses and selling, general and administrative expenses,
respectively) in each of the years ended January 31, 2000, December 31, 1998 and
1997, and will result in charges over the next two quarters of approximately
$172,000 (of which $69,000 and $103,000 will be recorded in research and
development expenses and selling, general, and administration expenses,
respectively.)
Overview of STB Merger and Treatment of IPR&D
3dfx completed the STB merger in May 1999. As a result of the merger, STB
is now a wholly owned subsidiary of 3dfx. The merger was accounted for under the
purchase method of accounting. The purchase price of $139.3 million included
$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 $13.3 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 $37.9
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:
<TABLE>
<CAPTION>
ESTIMATED FISCAL 2000
AMOUNT USEFUL LIFE AMORTIZATION
----------- ----------- ------------
<S> <C> <C> <C>
Purchased existing technology:
1.5 year life....................................... $ 6,475,000 1.5 years $3,540,000
3 year life......................................... 4,966,000 3 years 1,357,000
Trademarks............................................ 4,406,000 5 years 722,000
Workforce-in-place.................................... 2,250,000 5 years 369,000
Executive covenants................................... 1,000,000 5 years 164,000
Goodwill.............................................. 37,900,000 5 years 5,190,000
</TABLE>
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 3dfx's 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
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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.
Gross Margins. Projected gross margins associated with the identified
projects 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. 3dfx 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 following table sets forth some statement of operations data of 3dfx
expressed as a percentage of revenue for each of the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
DECEMBER 31,
JANUARY 31, ------------------
2000 1998 1997
----------- ------- -------
<S> <C> <C> <C>
REVENUES.................................................. 100.0% 100.0% 100.0%
Cost of sales............................................. 79.8% 59.0% 51.3%
------ ------- -------
Gross profit............................................ 20.2% 41.0% 48.7%
------ ------- -------
Operating expenses:
Research and development................................ 18.3% 16.8% 28.2%
Selling, general and administrative..................... 17.6% 17.5% 25.8%
In-process research and development..................... 1.2% 0.0% 0.0%
Restructuring expense................................... 1.2% 0.0% 0.0%
Goodwill and intangibles amortization................... 2.8% 0.0% 0.0%
------ ------- -------
Total operating expenses.................................. 41.2% 34.3% 54.0%
------ ------- -------
Income (loss) from operations............................. (21.0%) 6.7% (5.3%)
Interest and other income (expense), net.................. 0.6% 7.8% 1.4%
Provision for income taxes................................ (2.9%) (3.8%) 0.0%
------ ------- -------
Net income (loss)......................................... (17.6%) 10.7% (3.9%)
====== ======= =======
</TABLE>
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YEARS ENDED JANUARY 31, 2000 (FISCAL 2000) AND DECEMBER 31, 1998 (FISCAL 1998)
Revenues. Revenues are recognized upon product shipment. 3dfx's total
revenues were $360.5 for the fiscal year ended January 31, 2000 and $202.6
million for the fiscal year ended December 31, 1998. Fiscal 2000 revenues
includes revenues of $299.6 million generated from sales of board-level products
incorporating Voodoo3 technology by STB following the May 13, 1999, effective
date of the merger. Revenues in fiscal 2000 were principally attributable to
sales of 3dfx's Voodoo3 and Voodoo Banshee products. Substantially all of the
revenues in fiscal 1998 were derived from sale of 3dfx's Voodoo Banshee chip and
its Voodoo2 and Voodoo Graphics chipsets.
Gross Profit. Gross profit consists of total revenues less cost of sales.
Cost of sales consists primarily of costs associated with the purchase of
components and the procurement of semiconductors from 3dfx's contract
manufacturers, labor and overhead associated with procurement, assembly,
testing, packaging, warehousing and shipping, and warranty costs. Gross profit
as a percentage of revenues was 20% and 41% for the fiscal years ended January
31, 2000 and December 31, 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. 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
fiscal 2000, as compared with the margins of Voodoo2 and Voodoo Graphics
products sold in fiscal 1998. 3dfx's future gross profits will be affected by
the overall level of sales; the mix of products sold in a period; manufacturing
yields; the impact of price protection credits granted to 3dfx's customers; and
3dfx's ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
3dfx's foundries in connection with manufacturing start-up of new products.
Research and development expenses increased 94% from $34.0 million in the fiscal
year ended December 31, 1998 to $66.1 million in the fiscal year ended January
31, 2000. Included in the fiscal 2000 amount is $7.9 million in research and
development expenses attributable to the operations of STB following the May 13,
1999 effective date of the merger. Excluding the impact of expenses related to
STB's operations, research and development expenses increased 70% in fiscal 2000
as compared to the year ended December 31, 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. 3dfx
expects to continue to make substantial investments in research and development
and anticipates that research and development expenses will increase in absolute
dollars in future periods, although these 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 79% from $35.4 million in
fiscal year ended December 31, 1998 to $63.5 million in the fiscal year ended
January 31, 2000. The increase is primarily attributable to the inclusion of
$36.8 million in expenses relating to the operations of STB following the May
13, 1999, effective date of the merger. Excluding the impact of expenses related
to STB's operations, selling, general and administrative expenses decreased 25%
for fiscal 2000, as compared to fiscal 1998. This decrease in selling, general
and administrative expenses is primarily a result of a reduction in selling
expenses due to 3dfx's elimination of the costs of many independent sales
representatives, which were supplanted by the combined 3dfx direct sales force,
partially offset by increases in 3dfx's bad debt expense. 3dfx expects that
selling, general and administrative expenses will increase in absolute dollars
in future periods, although such expenses as a percentage of total revenues will
fluctuate.
In-Process Research and Development. 3dfx also recorded a one-time
write-off for in-process research and development in connection with the STB
merger of $4.3 million in the fiscal year ended January 31, 2000.
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Restructuring Expense. During the fiscal year ended January 31, 2000, 3dfx
incurred restructuring expenses totaling approximately $4.4 million.
Approximately $2.6 million of this amount related to downsizing the expense
levels of 3dfx given 3dfx's current financial losses. In August 1999, 3dfx
recorded a restructuring charge of $1.8 million, representing a one-time
reduction in workforce related to the merger with STB.
Goodwill and Other Intangibles Amortization. In connection with the STB
merger, 3dfx recorded assets representing goodwill of approximately $37.9
million and intangibles of approximately $19.1 million. These amounts will be
amortized ratably over the amortization periods of the applicable assets. For
the fiscal year ended January 31, 2000, 3dfx recorded $10.2 million in related
amortization.
Interest and Other Income (Expense), Net. Interest and other income
(expense), net decreased from $15.9 million in the fiscal year ended December
31, 1998 to $2.2 million in the fiscal year ended January 31, 2000. The decrease
is primarily related to a one-time recognition of income in fiscal 1998 as a
result of the Sega litigation settlement, as well as decreased earnings from
lower invested cash balances. In addition, in fiscal 2000 3dfx incurred interest
expense on its revolving credit facility and its outstanding equipment line of
credit and capital lease balances.
Provision (Benefit) For Income Taxes. 3dfx recorded an income tax benefit
of $10.3 million for the fiscal year ended January 31, 2000, an effective tax
rate of 14%. As a result of the impact of non-deductible expenses including
intangible amortization and in-process research and development, 3dfx's
effective tax rate in fiscal 2000 differed from the statutory rate. 3dfx
recorded a provision for income taxes of $7.7 million for the fiscal year ended
December 31, 1998, an effective tax rate of 26%. 3dfx'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. 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.
Management regularly assesses the realizability of deferred tax assets
recorded based upon the weight of available evidence, including such factors as
the recent earnings history and expected future taxable income. Management
believes that it is more likely than not that 3dfx will not realize a portion of
its deferred tax assets and, accordingly, a valuation allowance of $17,164,000
has been established for such amounts at January 31, 2000.
ONE MONTH PERIOD ENDED JANUARY 31, 1999
As a result of 3dfx's change in fiscal year to January 31 from December 31
commencing on February 1, 1999, 3dfx has reported separately the one-month
period ended January 31, 1999. During this period, revenues for 3dfx were $17.0
million and were principally attributable to the sales of 3dfx's Voodoo Banshee
and Voodoo2 chipsets. Costs of revenues were $14.5 million with gross profit as
a percent of revenues equal to approximately 15%. This is below the previous
year's gross profit percentage due primarily to 3dfx's merger with STB announced
in December 1998. This contributed to lost revenues from former customers and
price reductions to existing customers as 3dfx announced its intention to enter
the graphics board business and compete with its existing customer base.
Research and Development expenditures were $3.3 million for the period and
Sales, General, and Administrative expenses were $4.6 million for the period.
Interest and Other Income was $0.3 million, derived primarily from 3dfx's cash
balances. There was a tax benefit in the period ended January 31, 1999 in the
amount of $1.6 million. This benefit equates to a tax rate of 32% and is
consistent with 3dfx's recent tax rate percentages.
YEARS ENDED DECEMBER 31, 1998 (FISCAL 1998) AND DECEMBER 31, 1997 (FISCAL
1997)
Revenues. Revenues increased 359.7% from $44.1 million in fiscal 1997 to
$202.6 million in fiscal 1998. Revenues are recognized upon product shipment.
Revenues in fiscal 1998 were principally attributable to sales of 3dfx's
Voodoo2, Voodoo Banshee and Voodoo Graphics chipsets. Revenues in fiscal 1997
and fiscal 1998 were principally attributable to sales of 3dfx's Voodoo Graphics
and Voodoo Rush
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chipsets. In both years, revenue growth was a result of increased customer
demand for and market acceptance of these products.
Gross Profit. Gross profit consists of total revenues less cost of
revenues. Cost of revenues consists primarily of costs associated with the
purchase of components, the procurement of semiconductors and printed circuit
board assemblies from 3dfx's contract manufacturers, labor and overhead
associated with such procurement and warehousing, shipping and warranty costs.
Cost of revenues does not include expenses related to development contract
revenues. Cost of revenues increased 429% from $22.6 million in fiscal 1997 to
$119.6 million in fiscal 1998. Gross profit as a percentage of revenues was 41%
and 48.7% in fiscal 1998 and fiscal 1997, respectively, due to a change in
product mix. 3dfx's future gross profit will be affected by the overall level of
sales, the mix of products sold in a period, manufacturing yields, and 3dfx's
ability to reduce product procurement costs.
Research and Development. Research and development expenses consist
primarily of compensation and other expenses related to research and development
personnel, occupancy costs of research and development facilities, depreciation
of capital equipment used in product development and engineering costs paid to
3dfx's foundries in connection with manufacturing start-up of new products. In
addition, costs associated with development contracts are included in research
and development during fiscal 1997. There was no such cost in fiscal 1998.
Research and development expenses increased 174.3% from $12.4 million in fiscal
1997 to $34 million in fiscal 1998. The increase reflects an increase in
non-recurring engineering costs and engineering personnel costs resulting from
the commencement of manufacturing of prototypes of the Voodoo Banshee chip and
Voodoo3 chipset. 3dfx expects to continue to make substantial investments in
research and development and anticipates that research and development expenses
will increase in absolute dollars in future periods, although such expenses as a
percentage of total revenues will fluctuate.
Selling, General and Administrative. Selling, general and administrative
expenses include compensation and benefits for sales, marketing, finance and
administration personnel, commissions paid to independent sales representatives,
tradeshow, advertising and other promotional expenses and facilities expenses.
Selling, general and administrative expenses increased 211.2% from $11.4 million
in fiscal 1997 to $35.4 million in fiscal 1998. The increase resulted from the
addition of personnel in sales, marketing, finance and administration as 3dfx
expanded operations, increased commission expenses associated with the
commencement of commercial sales and increased involvement in tradeshow and
advertising activities. 3dfx expects that selling, general and administrative
expenses will increase in absolute dollars in future periods, although such
expenses as a percentage of total revenues will fluctuate.
Interest and Other Income, Net. Interest and other income, net increased
from $630,000 in fiscal 1997 to $15.9 million in fiscal 1998. The increase is
primarily related to a one-time recognition of income as a result of the
settlement of litigation on September 9, 1998 relating to the Sega's termination
of the Technology License and Development Agreement (the "Sega Agreement") with
3dfx in July 1997. The increase also reflects earnings from higher cash balances
resulting from the completion of 3dfx's initial public offering in June 1997 and
a public offering in March 1998, partially offset by interest expense on the
outstanding equipment line of credit and capital lease balances.
Provision For Income Taxes. Provision for income taxes was $7.7 million in
fiscal 1998. 3dfx recorded no provision for income taxes in fiscal 1997 as it
incurred losses during such period. At December 31, 1998, 3dfx had net operating
loss carryforwards for federal and state income tax purposes of approximately
$10.7 million and $9.7 million, respectively, which expire beginning in 2011 and
2001, respectively. Under the Tax Reform Act of 1986, the amount of and the
benefit from net operating losses that can be carried forward may be impaired in
some 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.
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QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly results of operations
data for each quarter during the fiscal years ended January 31, 2000 and
December 31, 1998. This unaudited information has been prepared by 3dfx on a
basis consistent with 3dfx's audited consolidated financial statements appearing
elsewhere in this Report and includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented. The unaudited quarterly information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Report. In light of 3dfx's limited operating history,
3dfx believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------------------------------------
JANUARY 31, OCTOBER 31, JULY 31, APRIL 30, DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 1999 1999 1999 1998 1998 1998 1998
----------- ----------- -------- --------- ------------ ------------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............... $109,388 $105,856 $104,836 $ 40,444 $ 60,743 $ 33,206 $ 58,643 $ 50,008
Cost of sales.......... 96,750 88,624 76,308 26,190 38,474 24,971 30,443 25,730
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit........... 12,638 17,232 28,528 14,254 22,269 8,235 28,200 24,278
-------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and
development.......... 19,689 18,040 16,577 11,756 9,873 10,038 8,308 5,826
Selling, general and
administrative....... 19,514 18,329 19,006 6,620 10,791 6,971 8,041 9,638
In-process research and
development.......... -- -- 4,302 -- -- -- -- --
Restructuring
expense.............. 2,552 1,830 -- -- -- -- -- --
Goodwill and
intangibles
amortization......... 3,627 3,627 2,974 -- -- -- -- --
Total operating
expenses............. 45,382 41,826 42,859 18,376 20,664 17,009 16,349 15,464
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations........... (32,744) (24,594) (14,331) (4,122) 1,605 (8,774) 11,851 8,814
Interest and other
income (expense),
net.................. 192 393 685 911 1,259 13,045 1,052 514
Provision for income
taxes................ (666) (6,583) (2,047) (1,027) 773 1,153 3,871 1,866
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $(31,886) $(17,618) $(11,599) $ (2,184) $ 2,091 $ 3,118 $ 9,032 $ 7,462
-------- -------- -------- -------- -------- -------- -------- --------
Basic net income (loss)
per share............ ($ 1.31) ($ 0.73) ($ 0.50) ($ 0.14) $ 0.13 $ 0.20 $ 0.59 $ 0.57
Diluted net income
(loss) per share..... ($ 1.31) ($ 0.73) ($ 0.50) ($ 0.14) $ 0.13 $ 0.20 $ 0.59 $ 0.50
</TABLE>
Revenues over the last eight quarters were derived primarily from the sale
of the Voodoo Graphics, Voodoo2, and Voodoo Banshee and Voodoo 3 chipsets. In
the third quarter of 1998, 3dfx experienced a significant reduction in demand as
compared to the two previous quarters, for its Voodoo2 chipset, primarily from
one customer, as well as a greater than expected seasonal slowdown, which
resulted in a decrease in revenues from the previous quarter. In the fourth
quarter of 1998, significant increases in demand for 3dfx's new Voodoo Banshee
product, combined with a stable demand as compared to the third quarter of 1998
for its Voodoo2 chipset, resulted in significant revenue growth in the fourth
quarter of 1998 as compared to the previous quarter. The first quarter of fiscal
2000 was less the previous quarter, as a result of decreased demand for the
Voodoo 2 and Voodoo Banshee products. Quarters two, three and four of fiscal
2000, reflect significantly higher revenue numbers as a result of the
introduction of the Voodoo 3 chipset and the STB Systems merger.
Cost of sales in the first quarter of fiscal year 2000 was less in total
dollars as compared to the previous quarter as a result of lower revenues.
However, cost of sales remained consistent with previous quarters as a
percentage of revenues. Cost of sales for quarters two, three and four of fiscal
2000 are up significantly due to increased revenues as a result of the merger.
Substantially all of the sales and cost of sales for these quarters is comprised
of 3D graphics cards, as compared to chipsets in previous quarters.
9
<PAGE> 10
Cost of sales as a percentage of total sales also increased significantly, as
the margin on board level sales is traditionally less than chipset sales.
Cost of sales in 1998 increased in the first, second and fourth quarters as
a result of increased sales in each of these quarters. Additionally, in the
fourth quarter of 1998, costs of sales increased due to the product revenue mix
during the quarter which carried lower gross margins than historically
experienced. In the third quarter of 1998, cost of sales decreased when compared
to the previous quarter primarily due to lower revenues, partially offset by
increased costs associated with the initial shipments of 3dfx's Voodoo Banshee
product, additional overhead costs with respect to lower revenues as a result of
a greater than expected seasonal slowdown in the retail channel, and to an
increase in inventory reserves due to an exceptionally rapid rate of product
lifecycle obsolescence.
Research and development expenses increased quarter to quarter in fiscal
2000 and in 1998, except for the fourth quarter of 1998. The increase in
research and development expenses in each quarter through September 1998 and the
first quarter of fiscal 2000 reflects an increase in headcount, non-recurring
engineering costs resulting from the commencement of manufacturing of the
Voodoo2 chipsets and the Voodoo Banshee and Voodoo3 chips. In the fourth quarter
of 1998, research and development expenses decreased slightly from the previous
quarter primarily due to a reduction in non-recurring engineering costs. The
significant increase in quarters two, three and four are primarily result of the
STB merger, as well as increased headcount and charges associated with the
Voodoo 3 and VSA-100 family and other future products.
Selling, general and administrative expenses fluctuated quarter to quarter
throughout 1998 and through the first quarter of fiscal 2000. These fluctuations
are primarily a result of increased finance and administrative staffing and
related costs necessary to support higher levels of operations, commission
expenses associated with levels of revenues and varying levels of involvement in
tradeshow and advertising activities. The significant increase in cost for the
remaining quarters of fiscal 2000 is a result of the STB merger as well as
advertising and other cost associated with the retail channel business.
Interest and other income (expense), net fluctuated quarter to quarter in
1998, however remained fairly consistent, declining slightly quarter to quarter
in fiscal 2000. The increase in interest and other income in the three months
ended September 30, 1998 is primarily related to a one-time recognition of
income as a result of the recent Sega litigation settlement, as well as to
increased earnings from higher cash balances resulting from the completion of
3dfx's initial public offering in June 1997, and a public secondary offering in
March 1998, partially offset by interest expense on the outstanding equipment
line of credit and capital lease balances. Interest and other income (expense),
net for the fiscal 2000 quarters consist primarily of interest income on short
term investments, partially offset by interest expense on the revolving credit
facility and interest expense on outstanding equipment leases.
3dfx believes that, even if it does achieve significant sales of its
products, quarterly and annual results of operations will be affected by a
variety of factors that could materially adversely affect revenues, gross profit
and income from operations. Accordingly, 3dfx believes that period to period
comparisons of its results of operations should not be relied upon as an
indication of future performance. In addition, the results of any quarterly
period are not indicative of results to be expected for a full fiscal year. In
some future quarters, 3dfx's results of operations may be below the expectations
of public market analysts or investors. In such event, the market price of
3dfx's common stock could be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2000, 3dfx had working capital of $98.5 million including
cash, cash equivalents and short-term investments of $65.8 million. Net cash
used in operating activities in the fiscal year ended January 31, 2000 was due
primarily to a net loss of $63.3 million, and increases of $5.3 million in other
assets, decreases in accrued expenses of $8.3 million, partially offset by
adjustments of depreciation of $14.9 million and amortization of $10.2 million,
and the in-process research and development write-off of $4.3 million, as well
as decreases in accounts receivable and inventory of $7.1 million and $5.3
million, respectively. Net cash provided by operating activities in fiscal 1998
was due primarily to net income of
10
<PAGE> 11
$21.7 million, and increases of $28.5 million in accounts payable and $13.3
million in accrued liabilities, partially offset by increases of $20.1 million
in inventory due to the increase in manufacturing to meet customer demand and
$24.9 million in accounts receivable associated with the generation of revenues.
Net cash used in operating activities in fiscal 1997 was due primarily to the
net loss of $1.7 million, and a $12.2 million increase in accounts receivable
partially offset by a $10.3 million increase in accounts payable.
Net cash used in investing activities was approximately $5.4 million, $10.9
million and $10.7 million in the fiscal years ended January 31, 2000, December
31, 1998 and December 31, 1997, respectively, and was due in each period to the
purchase of investments and to the purchase of property and equipment. In
addition, $8.7 million was used in the merger of STB, offset by cash acquired as
a result of the merger of $29.9 million in fiscal year 2000, 3dfx does not have
any significant capital spending or purchase commitments other than normal
purchase commitments and commitments under leases. 3dfx expects capital
expenditures to increase over the next several years as it expands facilities
and acquires equipment to support the planned expansion of its operations. Net
cash provided by financing activities for the fiscal year ended January 31, 2000
was $7.0 million due to the net proceeds on the drawdown from its line of
credit, partially offset by the net repurchase of common stock of $1.9 million
and payments on its capital lease obligations. Net cash provided by financing
activities was approximately $58.1 million in the fiscal year ended December 31,
1998 and approximately $34.6 million in the fiscal year ended December 31, 1997,
due primarily to proceeds from the public offering in March 1998 and the initial
public offering in June 1997.
3dfx has a $25 million revolving credit facility ("Revolving Credit
Facility"), as well as a $3.0 million term loan ("Term Loan"). At January 31,
2000, $25.0 million was outstanding under the Revolving Credit Facility and $1.9
million was outstanding under the Term Loan. Principal amounts outstanding under
the Revolving Credit Facility bear interest at LIBOR plus 100 basis points
(6.82% at January 31, 2000). Amounts outstanding under the Term Loan bear
interest at LIBOR plus 250 basis points and are payable in 60 monthly
installments of principal and interest (8.32% at January 31, 2000). Payment of
principal and interest began November 1, 1997. Formulas based on eligible
accounts receivable determine availability under the Revolving Credit Facility.
3dfx has pledged $25 million of cash and short term-term investments, as well of
3dfx's owned assets as collateral to secure the Revolving Credit Facility. All
indebtedness under the Revolving Credit Facility matures on December 19, 2000,
and indebtedness under the Term Loan matures on November 1, 2002 (subject to
renewal of the Revolving Credit Facility through such date).
3dfx is obligated under a five-year agreement to lease a facility in
Richardson, Texas which was previously the corporate headquarters of STB
Systems. Construction of the 210,000 square foot facility was completed in
December 1998. The total cost of the land and building was approximately $22.8
million. 3dfx made lease payments of approximately $187,000 per month in fiscal
2000, although the lease agreement provides that the amount of the lease
payments is subject to adjustment based upon prevailing interest rates.
Consequently, an increase in prevailing interest rates will increase the expense
of the facility. 3dfx previously entered into an interest rate swap agreement
that fixes the interest rate on a majority of the lease obligation at 7.55%.
3dfx does not currently use a portion of the facility and has subleased a
portion of the unused space, constituting approximately forty percent of the
facility space, to third parties under long term leases expiring in
approximately five years. At the end of the initial five-year lease term, 3dfx
has the option to renew the lease for an additional five years, pay off the
underlying debt or cause the building to be sold. In the event of a sale, the
proceeds are to be used to retire the underlying debt. Any excess will be paid
to 3dfx. Any remaining unpaid balance owing on the underlying obligation after
the sale of the facility will be the responsibility of 3dfx.
3dfx has invested in capital equipment through equipment leases for its
manufacturing facility in Juarez, Mexico. 3dfx's aggregate obligations under all
such equipment lease financing arrangements totaled approximately $5.7 million
at January 31, 2000.
11
<PAGE> 12
3dfx's future liquidity and capital requirements will depend upon numerous
factors, including the costs and timing of the expansion of research and product
development efforts and the success of these development efforts, the costs and
timing of expansion of sales and marketing activities, the extent to which
3dfx's existing and new products gain market acceptance, competing technological
and market developments, the costs involved in maintaining and enforcing patent
claims and other intellectual property rights, available borrowings under line
of credit arrangements and other factors. 3dfx believes that its current cash
balances and cash generated from operations and from available or future debt
financing will be sufficient to meet 3dfx's operating and capital requirements
through at least the end of the current fiscal year. However, there can be no
assurance that 3dfx will not require additional financing within this time
frame. 3dfx's forecast of the period of time through which its financial
resources will be adequate to support its operations is a forward-looking
statement that involves risks and uncertainties, and actual results could vary.
The factors described earlier in this paragraph will impact 3dfx's future
capital requirements and the adequacy of its available funds. 3dfx may be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. There can be no assurance that
such additional funding, if needed, will be available on terms attractive to
3dfx, or at all. Furthermore, any additional equity financing may be dilutive to
shareholders, and additional debt financing, if available, may involve
restrictive covenants. Strategic arrangements, if necessary to raise additional
funds, may require 3dfx to relinquish its rights to some of its technologies or
products. The failure of 3dfx to raise capital when needed could have a material
adverse effect on 3dfx's business, financial condition and results of
operations.
IMPACT OF ADOPTION OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments, including some
derivative instruments embedded in other contracts, and for hedging securities.
Currently, as 3dfx has no derivative instruments, the adoption of SFAS No. 133
would have no impact on 3dfx's financial condition or results of operations. To
the extent 3dfx begins to enter into such transactions in the future, 3dfx will
adopt the Statement's disclosure requirements in the quarterly and annual
financial statements for the year ending January 31, 2002.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," (SAB 101), which clarifies the SEC's views on revenue recognition.
3dfx believes its existing revenue recognition policies and procedures are in
compliance with SAB 101 and therefore, SAB 101's adoption will have no material
impact on 3dfx's financial condition, results of operations or cash flows.
RISK FACTORS
This Report contains certain forward-looking statements within the meaning
of the federal securities laws. 3dfx's actual results and the timing of certain
events could differ greatly from those anticipated in these forward-looking
statements as a result of known and unknown factors, including the risks faced
by 3dfx described below. The risks and uncertainties described below are not the
only ones facing 3dfx. Additional risks and uncertainties not presently known by
3dfx or that 3dfx does not currently believe are important may also harm 3dfx's
business operations. If any of the following risks actually occur, 3dfx's
business, financial conditions or results of operations could be seriously
harmed. The following factors and other information in this Report should be
considered carefully in evaluating 3dfx and an investment in 3dfx's common
stock.
12
<PAGE> 13
3DFX'S PROPOSED MERGER WITH GIGAPIXEL POSES A NUMBER OF SIGNIFICANT RISKS TO
3DFX'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The proposed merger of GigaPixel with and into a wholly-owned subsidiary of
3dfx, which will result in GigaPixel becoming a wholly-owned subsidiary of 3dfx,
involves some specific risks, including the following:
- 3dfx and GigaPixel may encounter substantial difficulties and costs
integrating the two companies' products, technologies, research and
development activities, administration, sales and marketing and other
aspects of operations in a timely manner. The difficulties, costs and
delays involved in this integration may increase operating costs, cause
lower than anticipated financial performance or lead to the loss of
customers and employees. The failure to successfully integrate 3dfx and
GigaPixel in a timely manner could result in a failure of the combined
company to realize any of the anticipated benefits of the merger and
could materially harm the business of the combined company.
- Uncertainty in the marketplace or customer concern regarding the impact
of the merger on the combined company could result in customers or
potential customers of 3dfx or GigaPixel deferring purchasing or
licensing decisions until they have had an opportunity to assess that
impact, or ceasing to do business with 3dfx and GigaPixel altogether,
which could harm the business of the combined company.
- Because some GigaPixel customers and licensees compete with 3dfx, these
customers and licensees may cease to do business, or may reduce the
amount of business that they do, with the combined company, which could
cause a decline in the combined company's revenues.
- The merger will dramatically increase the number of freely tradeable
3dfx shares and will result in a substantial dilution to current 3dfx
shareholders, which could drive down the price of 3dfx common stock.
Upon the issuance of shares of 3dfx common stock in connection with the
merger, current GigaPixel shareholders will hold approximately 37.2% of
the then outstanding number of shares of common stock of 3dfx, based on
the number of shares of 3dfx common stock outstanding on March 27, 2000.
Subject to certain contractual restrictions and relevant securities laws
generally applicable to affiliates, all of the shares of 3dfx common
stock issued in the merger will be freely tradable in the public market.
Actual sales or the perception of the potential for significant sales in
the public market of a substantial number of these shares following
completion of the merger could adversely affect the market price of 3dfx
common stock.
- GigaPixel has reported net losses in recent historical periods, and if
these losses continue, they would adversely affect 3dfx's financial
performance and condition. GigaPixel has incurred net losses for both of
the years ended December 31, 1998 and December 31, 1999. If the combined
company is not successful in reversing the performance of GigaPixel's
business operations, those business operations would have a negative
impact on the overall business of the combined company.
- Because of the purchase accounting treatment of the merger, non-cash
charges associated with the amortization of goodwill and other
intangibles will reduce 3dfx's earnings in the future, which could
adversely affect 3dfx's stock price.
- The combined company's success following the merger will depend on the
retention and integration of key personnel.
- There will be substantial expenses resulting from the GigaPixel merger.
- The closing of the merger is subject to certain conditions that might
not be satisfied in a timely manner, which could prevent the merger from
being consummated.
In addition, in the event of the consummation of the merger with GigaPixel,
there are a number of risks related to the business and operations of GigaPixel
that would affect the operations of the combined
13
<PAGE> 14
company, including a number of the same or similar risks faced by 3dfx
identified below, as well as a number of risks specific to GigaPixel, including
GigaPixel's limited operating history, its dependence on a limited number of
customers, GigaPixel's inability to control or influence its licensees'
manufacturing, promotion, distribution or pricing of products incorporating its
3D core technologies and its limited experience in the set-top box, game console
and portable device markets. In the event that the merger is not consummated,
3dfx will face other risks, including the opportunity costs associated with the
pursuit of a business combination with GigaPixel.
3dfx MAY EXPERIENCE UNEXPECTED REVENUE SHORTFALLS AND QUARTERLY VARIATIONS IN
OPERATING RESULTS.
3dfx's quarterly and annual results of operations have varied significantly
in the past and are likely to continue to vary in the future. These variations
are the result of a number of factors, many of which are beyond 3dfx's control.
These factors include:
- The ability to successfully develop, introduce and market new or enhanced
products
- The ability to introduce and market products in accordance with customer
design requirements and design cycles
- Changes in the relative volume of sales of various products with
different margins
- Changes in demand for 3dfx's products or for 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
3dfx's products
- The timing of new product announcements or introductions by competitors
- Product obsolescence and the management of product transitions
- Production delays
- Decreases in the average selling prices of products
Any one or more of the factors listed above or other factors could cause
3dfx to fail to achieve its revenue and profitability expectations. Most of
3dfx's operating expenses are relatively fixed in the short term. 3dfx may be
unable to rapidly adjust spending to compensate for any unexpected sales
shortfall, which could materially harm quarterly operating results. As a result
of the above factors, 3dfx does not believe that you should rely on
period-to-period comparisons of results of operations as an indication of future
performance or that the results of any one quarter should be viewed as
indicative of results to be expected for a full fiscal year.
3DFX IS GROWING RAPIDLY AND MAY NOT HAVE THE RESOURCES TO MANAGE EFFECTIVELY
ADDITIONAL GROWTH.
The recent growth and potential future growth of 3dfx has placed
significant demands on its management as well as on its technical,
administrative, operational and financial resources. As a result, 3dfx may not
have sufficient resources to sustain and effectively manage any additional
growth. The expansion of 3dfx's business to take advantage of new market
opportunities will require significant technical resources, management attention
and financial resources. To manage additional growth 3dfx may be required to:
- Expand its engineering, sales, marketing and customer support
organizations
- Attract and retain additional qualified personnel
- Expand its physical facilities
- Invest in the development or enhancement of its current products and
develop new technologies and products that meet changing industry needs
- Develop systems, procedures or controls to support the expansion of its
operations
An inability on the part of 3dfx to sustain or manage any additional growth
could have a material adverse effect on the business, operating results and
financial condition of 3dfx.
14
<PAGE> 15
3DFX WILL DEPEND ON ITS ABILITY TO EFFECTIVELY DEVELOP NEW TECHNOLOGIES AND
PRODUCTS TO MEET THE CHANGING INDUSTRY STANDARDS, PRACTICES AND CUSTOMER NEEDS
ASSOCIATED WITH THE RAPIDLY CHANGING AND INTENSELY COMPETITIVE PC AND GRAPHICS
CHIP AND BOARD INDUSTRIES.
3dfx will depend, in part, on its ability to develop leading technologies,
enhance its existing services and develop and introduce new technologies and
products to meet the needs of 3dfx's customers. 3dfx also must continue to meet
the demands of technological advances and emerging industry standards and
practices on a timely and cost-effective basis. Although 3dfx will strive to be
a technological leader, future technology advances may not complement or be
compatible with its products. In addition, 3dfx may be unable to economically
and timely incorporate technology changes and technology advances into its
business. 3dfx may be unsuccessful in effectively using new technologies,
adapting its services to emerging industry standards or developing, introducing
and marketing product enhancements or new products. 3dfx may also experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these products. The inability or delay of 3dfx to
develop and introduce new technologies or products or to enhance existing
products or services on a timely and cost-effective basis, or the failure of new
technologies or products to achieve market acceptance, could have a material
adverse effect on its business, operating results and financial condition.
3DFX'S OPERATIONS DEPEND ON THE EXPERIENCE OF KEY PERSONNEL AND ITS ABILITY TO
RETAIN, ATTRACT AND INTEGRATE ITS KEY PERSONNEL.
3dfx's business operations depend on the continued services of its
executive officers and other key personnel. 3dfx may be unable to retain its key
personnel or to attract other qualified personnel. The future operations of 3dfx
depend upon its ability to retain, attract and integrate key management
personnel.
In addition, competition for highly-skilled technical personnel is intense
in the industries in which 3dfx operates. 3dfx's shareholders cannot be assured
that 3dfx will be able to successfully identify, attract, hire and retain
highly-skilled technical personnel in a timely and effective manner. Moreover,
competitors may intensify their efforts to recruit highly-skilled technical
personnel currently employed by 3dfx as a result of its proposed merger with
GigaPixel. The loss of services of one or more highly-skilled technical
personnel, the failure to attract and retain other highly-skilled technical
personnel or to recruit new highly-skilled technical personnel could disrupt
operations and have a negative effect on employee productivity and morale of
3dfx.
AS NEARLY ALL OF THE REVENUES OF 3DFX WILL BE DERIVED FROM THE PC AND GRAPHICS
BOARD AND CHIP INDUSTRIES, A DOWNTURN IN ANY ONE OF THESE INDUSTRIES WOULD
LIKELY ADVERSELY AFFECT 3DFX'S BUSINESS.
For the fiscal years ended December 31, 1997, December 31, 1998 and January
31, 2000, 93%, 100% and 100% of 3dfx's revenues were derived from graphics chips
and graphics boards sold for use in PCs. 3dfx expects to continue to derive its
revenues primarily from the sale of products for use in PCs and, in the longer
term, for use in the consumer product markets. These markets are cyclical and
have been characterized by:
- Rapid technological change;
- Evolving industry standards;
- Cyclical and seasonal 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.
15
<PAGE> 16
The PC market has grown substantially in recent years. However, such growth
may not continue. A decline in PC or semiconductor sales or in the growth rate
of such sales would likely reduce demand for 3dfx's products. Moreover, such
changes in demand could be large and sudden. Since PC manufacturers often build
inventories during periods of anticipated growth, they may be left with excess
inventories if growth slows or if they have incorrectly forecasted product
transitions. In such cases, the manufacturers may abruptly stop purchasing
additional inventory from suppliers such as 3dfx until the excess inventory has
been used. Such suspension of purchases or any reduction in the demand for PCs
generally, or for particular products that incorporate 3dfx's products, would
materially harm 3dfx's business.
In addition, the PC market has experienced significant economic downturns
at various times in the past, characterized by lower product demand and
accelerated reduction of product prices. In addition, the consumer product
market will likely experience significant volatility as it develops. 3dfx may
experience substantial period-to-period fluctuations in its results of
operations due to general conditions in the semiconductor industry.
BECAUSE 3DFX DEPENDS ON THE RETAIL/DISTRIBUTOR DISTRIBUTION CHANNEL, THE
INABILITY TO ADEQUATELY SUPPORT THE RETAIL/DISTRIBUTOR DISTRIBUTION CHANNEL
WOULD LIKELY HARM 3DFX'S ABILITY TO SELL AND TO MARKET ITS PRODUCTS.
3dfx's products have historically been distributed in the
retail/distributor distribution channel. To access the retail/distributor
channel, 3dfx depends on getting adequate retail shelf space to sell its
products. 3dfx has developed a presence in the retail/distributor distribution
channel through its own marketing efforts, as well as through the significant
marketing efforts of a number of its customers. Although 3dfx successfully
penetrated the retail/distributor distribution channel, there can be no
assurances that this success will continue in the future.
3DFX'S LIMITED EXPERIENCE IN MANAGING AND INTEGRATING ORGANIZATIONS MAY RESULT
IN FUTURE ACQUISITIONS OR JOINT VENTURES BEING DIFFICULT AND DISRUPTIVE.
3dfx regularly evaluates acquisition and joint venture opportunities, and
in the future 3dfx may make acquisitions of other companies or technologies or
enter into joint ventures. 3dfx's proposed merger with GigaPixel is an example
of such an acquisition. These acquisitions or joint ventures may divert the time
and resources of 3dfx's management. Further, 3dfx has limited experience in
integrating newly acquired organizations into its operations. Acquisitions
involve many risks, including:
- Difficulty in integrating or otherwise assimilating technologies,
products, personnel and operations;
- Diversion of management's attention from other business concerns;
- Issuance of dilutive equity securities and incurrence of debt or
contingent liabilities;
- Large write-offs and amortized expenses related to goodwill and other
intangible assets;
- Loss of key employees of acquired organizations;
- Risks of entering markets in which 3dfx has no or limited prior
experience; and
- Payments of cash, incurrence of debt or assumption of other liabilities
to acquire other businesses.
The result of one or more of these factors could have a material adverse
effect on the business, operating results and financial condition of 3dfx.
3DFX'S LIMITED OPERATING HISTORY MAKES THE ASSESSMENT OF ITS FUTURE OPERATING
RESULTS DIFFICULT.
3dfx has been shipping products only since the third quarter of 1996. This
limited operating history makes the assessment of 3dfx's future operating
results difficult. Additionally, 3dfx incurred net losses of approximately $1.7
million in fiscal 1997 and $63.3 million in fiscal 2000. The net losses in
fiscal 2000 were attributable to substantial reduction in revenues due to a
delayed product launch, changes in component costs with no ability to adjust
pricing, additional unanticipated costs relating to 3dfx's merger with STB
Systems, Inc. ("STB") and continuing significant costs incurred in product
research,
16
<PAGE> 17
development and testing and in connection with the amortization of intangibles.
3dfx may also be unable to sustain or to increase revenues on a consistent basis
in the future, and in the near term, it is unlikely to have profits due to the
amortization of intangibles.
3DFX'S FINANCIAL RESULTS DEPEND SIGNIFICANTLY ON ITS ABILITY TO CONTINUALLY
DEVELOP NEW PRODUCTS AND TECHNOLOGIES.
The markets for which 3dfx's products and technologies are designed are
intensely competitive and are characterized by short product life cycles,
rapidly changing technology, evolving industry standards and declining average
selling prices. As a result, the financial performance of 3dfx depends to a
significant extent on 3dfx's ability to successfully develop new products.
Because of the rapidly changing technologies in the businesses in which 3dfx
will operate, 3dfx believes that significant expenditures for research and
development will continue to be required by 3dfx in the future. To succeed in
these businesses, 3dfx must anticipate the features and functionality that
customers will demand. 3dfx must then incorporate those features and
functionality into products that meet the design requirements of the PC,
graphics chip and graphics board markets and the timing requirements of retail
selling seasons. The success of 3dfx's new product introductions will depend on
several factors, including:
- Proper new product definition;
- Timely completion and introduction of new product designs;
- The ability of subcontractors and component manufacturers to effectively
design and implement the manufacture of new products and technologies;
- The quality of new products and technologies;
- Product and technology performance as compared to competitors' products
and technologies;
- Market acceptance of 3dfx's and its customers' products;
- Competitive pricing of products and technologies; and
- Introduction of new products and technologies to the market within the
limited time window for retail selling seasons and OEM design cycles.
As the markets for 3dfx's products continue to develop and competition
increases, 3dfx anticipates that product life cycles will shorten and that the
average selling prices of these products will decline. In particular, average
selling prices and, in some cases, gross margins for 3dfx's products and
technologies will decline as those products and technologies mature. Thus, 3dfx
will need to introduce new products and technologies to maintain average selling
prices and gross margins. To do this, 3dfx must successfully identify new
product and technology opportunities and develop and bring new products and
technologies to market in a timely manner. 3dfx has in the past experienced
delays in completing the development and introduction of new products. The
failure of 3dfx to successfully develop and introduce new products and
technologies or to achieve market acceptance for such products and technologies
would materially harm the business and financial performance of 3dfx.
BECAUSE 3DFX'S PRODUCTS WILL HAVE SHORT PRODUCT LIFE CYCLES, 3DFX MUST
SUCCESSFULLY MANAGE PRODUCT TRANSITIONS.
In the past, 3dfx's products have had short product life cycles, and 3dfx
believes that its products will continue to have short product life cycles in
the future. A failure by 3dfx to successfully introduce new products within a
given product cycle could materially harm its business for that cycle and
possibly in subsequent cycles. Any such failure could also damage 3dfx's brand
name, reputation and relationships with its customers and cause long-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.
3dfx's products must be able to support the new features and performance levels
being required by PC manufacturers at the beginning of such a transition.
17
<PAGE> 18
Otherwise, 3dfx will likely lose business as well as the opportunity to compete
for new design contracts until the next product transition. An inability to
develop products with required features and performance levels or even a short
delay in bringing a new product to market could significantly reduce 3dfx's
revenues for a substantial period.
The success of 3dfx will depend upon continued market acceptance of its
existing products, and its ability to continually develop and introduce new
products and technologies and new product features and enhancements to meet
changing customer requirements. Each new product cycle presents new
opportunities for competitors of 3dfx to gain market share.
Some components used in 3dfx's products have also historically required
long lead times. Therefore, 3dfx may not be able to quickly reduce its
production or inventory levels in response to unexpected shortfalls in sales or,
conversely, to increase production in response to unexpected demand. If 3dfx is
unable to quickly identify, develop, manufacture or market new products and
technologies or to enhance its existing products and technologies rapidly, then
3dfx's business and results of operations could be materially and adversely
affected.
BECAUSE 3dfx HAS SIGNIFICANT CUSTOMER CONCENTRATION, THE LOSS OF ANY OF ITS
SIGNIFICANT CUSTOMERS WOULD HAVE A MATERIAL ADVERSE EFFECT ON 3dfx'S FINANCIAL
PERFORMANCE AND RESULTS OF OPERATIONS.
3dfx's sales are highly concentrated among a limited number of customers.
For the fiscal year ended January 31, 2000, 3dfx's largest customer, Ingram
MicroD, Inc., accounted for approximately 13.0% of its net revenues, while
3dfx's 6 largest customers collectively accounted for approximately 40.5% of its
net revenues. There can be no assurance that 3dfx will be able to retain such
customers or to continue to derive significant revenues from them. The loss of
any one of 3dfx's significant customers could have a material adverse effect on
its financial performance and results of operations
BECAUSE 3dfx DOES NOT TYPICALLY ENTER INTO LONG-TERM CONTRACTS WITH ITS
CUSTOMERS, THERE CAN BE NO ASSURANCE THAT HISTORICAL SALES VOLUMES WILL CONTINUE
IN THE FUTURE.
All of 3dfx's sales are made pursuant to purchase orders. The lack of
long-term commitments, together with the customer concentration noted above,
poses a significant risk to 3dfx. If a single customer of 3dfx cancels an order
or ceases to be a customer of 3dfx, then 3dfx's business and financial condition
could be materially harmed.
BECAUSE 3dfx HAS LIMITED PRODUCT DIVERSITY, IF 3DFX WERE UNABLE TO INCREASE OR
MAINTAIN 3DFX'S HISTORICAL SALES VOLUMES, THERE COULD BE A NEGATIVE IMPACT ON
3DFX'S RESULTS OF OPERATIONS.
3dfx's revenues depend on the markets for 3D/2D and 3D graphics chips and
boards for PCs and on 3dfx's ability to compete effectively in those markets.
Since 3dfx currently has no other products, 3dfx's business would be materially
harmed if it were unable to continue to sell these products at historical levels
or to increase these historical sales levels in the future.
BECAUSE 3dfx DEPENDS ON THIRD PARTY DEVELOPERS AND PUBLISHERS TO CREATE AND
MARKET SOFTWARE TITLES THAT OPERATE WITH ITS GRAPHICS CHIPS, THERE CAN BE NO
ASSURANCE THAT A SUFFICIENT NUMBER OF QUALITY SOFTWARE TITLES THAT ARE
COMPATIBLE WITH 3DFX'S PRODUCTS WILL BE DEVELOPED.
3dfx believes that the availability of numerous high quality, commercially
successful software entertainment titles and applications significantly affects
sales of its products. 3dfx depends on third party software developers and
publishers to create, produce and market software titles that will operate with
3dfx's graphics chips. Only a limited number of software developers are capable
of creating high quality entertainment software. Competition for these resources
is intense and is expected to increase. Therefore, a sufficient number of high
quality, commercially successful software titles compatible with 3dfx's products
may not be developed. In addition, the development and marketing of game titles
that do not fully demonstrate the technical capabilities of 3dfx's products
could create the impression that 3dfx's technology offers only marginal
performance improvements, if any, over competing products.
18
<PAGE> 19
3dfx'S DEPENDENCE ON SINGLE SOURCE MANUFACTURERS WILL EXPOSE IT TO SIGNIFICANT
RISK IF THE OPERATIONS OF THESE MANUFACTURERS AND OTHER THIRD PARTIES ARE
INTERRUPTED.
3dfx's graphics chip products require wafers manufactured with
state-of-the-art fabrication equipment and techniques. Currently, 3dfx does not
manufacture the semiconductor wafers used for its graphics chip products and
does not own or operate a wafer fabrication facility, nor does 3dfx expect to
manufacture semiconductor wafers or to own or operate a wafer fabrication
facility in the future. Taiwan Semiconductor Manufacturing Company, or TSMC,
currently manufactures all of 3dfx's wafers in Taiwan. 3dfx obtains
manufacturing services from TSMC on a purchase order basis. 3dfx depends on TSMC
to:
- Produce wafers of acceptable quality and with acceptable manufacturing
yields;
- Deliver those wafers to 3dfx and its independent assembly and testing
subcontractors on a timely basis; and
- Allocate to 3dfx a portion of its manufacturing capacity sufficient to
meet 3dfx's needs.
3dfx expects to continue to be dependent upon TSMC in the future. 3dfx has
no readily available alternative source of supply, and it could take several
months to establish a strategic relationship with a new manufacturing partner.
As a result, a manufacturing disruption (such as the one that occurred in
September 1999 when an earthquake struck Taiwan) or capacity constraints
experienced by TSMC would negatively impact the production of 3dfx's graphics
chips and boards and, consequently, would have a negative effect on 3dfx's
business and results of operations.
BECAUSE 3dfx PRIMARILY DEPENDS ON A SINGLE GRAPHICS BOARD MANUFACTURING
FACILITY, ANY DISRUPTION OF THE GRAPHICS BOARD MANUFACTURING OPERATIONS AT THIS
FACILITY COULD MATERIALLY HARM 3DFX'S BUSINESS.
3dfx's sole graphics board manufacturing facility is located in Juarez,
Mexico. Although a portion of 3dfx's board production is secured from third
party sources, 3dfx is substantially dependent on this single manufacturing
facility. As a result, any disruption of 3dfx's graphics board manufacturing
operations at this facility could materially harm its business. Such 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
graphics board manufacturing facilities, 3dfx 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 materially harm 3dfx's business.
3dfx'S INTERNATIONAL OPERATIONS WILL MAKE IT SUSCEPTIBLE TO GLOBAL ECONOMIC
FACTORS, FOREIGN TAX LAW ISSUES, FOREIGN BUSINESS PRACTICES AND CURRENCY
FLUCTUATIONS.
3dfx relies on foreign third-party manufacturing, assembly and testing
operations that are located in Asia for its graphics chips and relies primarily
on its own Mexican manufacturing facility for graphics boards. 3dfx also has
significant export sales. These international operations subject 3dfx to a
number of risks associated with conducting business outside of the United
States. These risks include:
- Unexpected changes in legislative or regulatory requirements;
- Delays resulting from difficulty in obtaining export licenses for some
technology;
- Tariffs, quotas and other trade barriers and restrictions;
- Longer accounts receivable payment cycles;
- Difficulties in collecting payment, including increased credit
exposures;
- Potentially adverse tax consequences, including repatriation of
earnings;
19
<PAGE> 20
- 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 3dfx, and consequently, its business. Recently, financial markets in
Asia have experienced significant turmoil, which could harm 3dfx's international
sales or operations. Currently, all of 3dfx's product sales and its arrangements
with its foundry, assembly and test vendors provide for pricing and payment in
U.S. dollars. To date, 3dfx has not engaged in any currency hedging activities,
although 3dfx may do so in the future. An increase in the value of the U.S.
dollar relative to foreign currencies could make 3dfx's products more expensive
and potentially less competitive in foreign markets.
3dfx MAY BE UNABLE TO ADEQUATELY PROTECT ITS PROPRIETARY RIGHTS OR PREVENT THEIR
UNAUTHORIZED USE, WHICH COULD DIVERT ITS FINANCIAL RESOURCES AND HARM ITS
BUSINESS.
3dfx's success will depend upon its proprietary technology. 3dfx currently
relies upon a combination of patents, copyrights, trademarks, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
technology rights. Despite current efforts to protect these proprietary rights,
protective measures may not be adequate to prevent misappropriation or
independent third-party development of 3dfx's technology. The laws of many
foreign jurisdictions offer less protection of intellectual property rights than
the laws of the United States. Effective patent, copyright, trademark and trade
secret protection may not be available in other jurisdictions. In addition, 3dfx
may need to litigate claims against third parties to enforce its intellectual
property rights, protect its trade secrets, determine the validity and scope of
the proprietary rights of others or defend against claims of infringement or
invalidity. On September 21, 1998, 3dfx filed suit against nVidia in Northern
California District Federal Court. 3dfx's complaint alleges patent infringement
relating to nVidia's use of multi-texturing technology in its RIVA TNT product.
Discovery in this case is presently under way. This litigation, and other
litigation like it, could result in substantial cost and diversion of management
resources. A successful claim against 3dfx could effectively block its ability
to use or license its technology in the United States or abroad. Any failure of
3dfx to protect its proprietary rights adequately could have a material adverse
effect on the business, operating results and financial condition of 3dfx.
3DFX RELIES ON SEVERAL TECHNOLOGY LICENSES FROM THIRD PARTIES, THE LOSS OF WHICH
MAY HARM 3DFX'S ABILITY TO DEVELOP AND SELL ITS SERVICES.
3dfx currently possesses, and in the future 3dfx may procure, licenses from
third parties relating to its services or technology. Certain of these licenses
are critical to 3dfx's business and would be difficult to replace. If 3dfx were
unable to obtain or maintain these licenses, its ability to develop and to sell
its products could be impaired. If 3dfx or its suppliers are unable to obtain
licenses, 3dfx could be forced to market products without some technological
features. 3dfx also licenses some software and technology for its operations. If
3dfx were unable to obtain licenses or to obtain such licenses on competitive
terms, there could be a material adverse effect on the ability of 3dfx to
effectively offer its products.
BECAUSE THE MARKETS IN WHICH 3DFX WILL OPERATE ARE INTENSELY COMPETITIVE, 3DFX
MAY LOSE MARKET SHARE AND BE FORCED TO REDUCE THE PRICE OF ITS PRODUCTS.
The markets in which 3dfx competes are intensely competitive and are likely
to become more competitive in the future. Existing competitors and new market
entrants may introduce products that are less costly or provide better
performance or features than 3dfx's products. 3dfx does not compete on the basis
of price alone. 3dfx believes that the principal competitive factors for 3D
graphics products are:
- Product performance and quality;
20
<PAGE> 21
- Conformity to industry standard application programming interfaces, or
APIs;
- Access to customers and distribution channels;
- Brand awareness;
- Price;
- Product support; and
- Ability to bring new products to the market in a timely manner.
Many of 3dfx's current and potential competitors have substantially greater
financial, technical, manufacturing, marketing, distribution and other resources
than 3dfx. These competitors may also have greater name recognition and market
presence, longer operating histories, lower cost structures and larger customer
bases than 3dfx. As a result, such competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements. Some of
3dfx's principal competitors offer a single vendor solution, because they
maintain their own semiconductor foundries and may therefore benefit from some
capacity, cost and technical advantages.
3dfx seeks to use strategic relationships to augment its capabilities.
However, the benefits of these relationships may not be realized or sufficient
to overcome the established market positions of 3dfx's largest competitors.
Regardless of the relative qualities of 3dfx's products, the market power,
product breadth and customer relationships of its larger competitors can be
expected to provide such competitors with substantial competitive advantages.
3dfx competes primarily against companies that offer a board or chip
solution to the 3D/2D PC graphics market. These companies typically have
operated in the PC 2D graphics market and now offer 3D capability as an
enhancement to their 2D solutions. These competitors include ATI Technologies,
Inc., S3 Incorporated, Creative Technology Ltd. and nVidia. 3dfx also faces
potential competition from companies that have focused on the high-end of the 3D
market and the production of 3D systems targeted for the professional
engineering market, including 3Dlabs, Inc., Integraph Corporation and SGI. These
companies are developing lower cost versions of their 3D technology to bring
workstation-like 3D graphics to mainstream applications. Intel Corporation also
competes in the 3D graphics market by offering an integrated core logic/3D/2D
solution aimed at the mainstream PC market. These companies may enter the
interactive electronics entertainment market, and, if they do, then 3dfx may not
be able to compete successfully against them.
3dfx now also competes with graphics board manufacturers, with suppliers
who sell graphics chips directly to OEMs, with 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 with the
makers of other personal computer components and software that are increasingly
providing graphics processing capabilities.
3DFX MAY REQUIRE ADDITIONAL FINANCING TO MEET ITS FUTURE CAPITAL AND OPERATIONAL
REQUIREMENTS AND MAY FACE UNCERTAINTY IN OBTAINING FAVORABLE FINANCING
ALTERNATIVES.
If the liquidity and cash flow from 3dfx's operations are insufficient to
meet its operating and capital requirements, then 3dfx may have to seek
additional financing, including public or private debt or equity offerings that
may be dilutive to 3dfx's shareholders. If adequate funds are not available on
acceptable terms, then 3dfx may be unable to develop or enhance its services,
take advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. 3dfx's future capital requirements will depend on
numerous factors, including 3dfx's profitability, operational cash requirements,
competitive pressures, development of new services and applications, acquisition
of complementary businesses or technologies and response to unanticipated
requirements. There can be no assurance that any financing alternatives sought
by 3dfx will be available, or, if available, will be on terms or in amounts
attractive to 3dfx.
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<PAGE> 22
POTENTIAL YEAR 2000 ISSUES MAY EXPOSE 3DFX TO LIABILITY OR LOSS.
3dfx has not experienced any material adverse impact from the transition to
the year 2000. Even though no material adverse impact from the year 2000
transition has been noted through internal investigations and inquiries with its
major customers and suppliers, 3dfx cannot provide any assurance that its
suppliers and customers have not been affected in a manner that is not yet
apparent. 3dfx will continue to monitor its year 2000 compliance and the year
2000 compliance of its suppliers and customers.
LITIGATION MAY DIVERT 3DFX'S RESOURCES AND REDUCE THE MARKET PRICE OF 3DFX'S
COMMON STOCK.
In the past, following periods of volatility in the market price of a
company's stock, securities class action litigation has been brought against the
issuing company. It is possible that similar litigation could be brought against
3dfx. Such litigation could result in substantial costs and would likely divert
management's attention and resources. Any adverse determination in such
litigation could also subject 3dfx to significant liabilities. A securities
class action lawsuit of this type was filed October 9, 1998 in Dallas County,
Texas against STB, which 3dfx acquired by merger in May 1999. The suit was
brought against STB and some of its officers and directors and the underwriters
who participated in the STB secondary offering on March 20, 1998. The petition
alleges that the registration statement for the secondary public offering
contained false and misleading statements of material facts and omitted to state
material facts. The petition asserts claims under Sections 11, 12(a)(2) and 15
of the Securities Act of 1933, as amended, and Sections 581-33A of the Texas
Securities Act on behalf of a purported class of persons who purchased or
otherwise acquired STB common stock in the public offering. The petition seeks
recission and/or unspecified damages. That action was removed to federal court
in April 2000. On December 17, 1999, a similar securities class action lawsuit
was also filed in the United States District Court for the Northern District of
Texas, Dallas Division, against STB and three of its officers and directors. The
action asserts claims under Sections 10 and 20 of the Securities Exchange Act of
1934. On February 8, 2000, another similar class action lawsuit, asserting
claims under Sections 10 and 20 of the Securities Exchange Act of 1934, was
filed against STB and three of its officers and directors in the United States
District Court for the Northern District of Texas. All of these actions have
subsequently been consolidated, and the parties have now reached an agreement in
principle to settle them. The settlement, which is subject to final
documentation and Court approval, does not reflect any admission of liability by
any of the defendants. The principal terms of the settlement call for the
establishment of a settlement fund consisting of $4.7 million to be paid by
insurance.
THE STOCK PRICE OF 3DFX HAS BEEN AND MAY CONTINUE TO BE EXTREMELY VOLATILE DUE
TO MANY FACTORS, WHICH MAY MAKE IT MORE DIFFICULT FOR 3DFX SHAREHOLDERS TO SELL
THEIR SHARES AT PRICES THEY FIND ATTRACTIVE.
Several factors have caused the stock price of 3dfx common stock to be
extremely volatile in the past and may cause the stock price of 3dfx common
stock to be extremely volatile in the future. The 3dfx stock price could be
subject to wide fluctuations in response to a variety of factors, including the
following:
- Actual or anticipated variations in quarterly operating results;
- The ability of 3dfx to successfully develop, introduce and market new or
enhanced products and technologies on a timely basis;
- Unexpected changes in demand for 3dfx's products and services;
- The pricing policies of 3dfx's competitors;
- Announcements of technological innovations or new products by 3dfx or
its competitors;
- Changes in securities analysts' recommendations;
- Changes in the market valuations of other similarly situated companies;
- Announcements by 3dfx or its competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments; and
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<PAGE> 23
- Market fluctuations and performance of the PC and graphics chip and
board industries.
In addition, the trading prices of technology stocks as a whole have
experienced particularly extreme price and volume fluctuations and such effects
have often been unrelated to the operating performance of the applicable
companies. Any negative change in the public's perception of the prospects of
technology companies or other broad market and industry factors could depress
the market price of 3dfx common stock, regardless of its operating performance.
Market fluctuations, as well as general political and economic conditions, such
as recession or interest rate or currency rate fluctuations, may also decrease
the market price of 3dfx's common stock.
3DFX'S SHAREHOLDER RIGHTS PLAN MAY DISCOURAGE A THIRD PARTY FROM ACQUIRING
CONTROL OF 3DFX.
On October 30, 1998, 3dfx adopted a shareholder rights plan that gives each
holder of 3dfx common stock the right to purchase one one-thousandth of a share
of 3dfx's preferred stock if a tender or exchange offer is announced by an
entity or individual that has acquired 12% or more of 3dfx's outstanding common
stock. The shareholder rights plan may make it more difficult for a third party
to acquire control of 3dfx or may discourage acquisition bids for 3dfx
altogether.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements and supplemental data
required by this item and set forth at the pages indicated in item 14(a) of this
Report and, for selected quarterly data, to the subsection "Results of
Operations -- Quarterly Results of Operations" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of June 5, 2000 information regarding the
beneficial ownership of 3dfx's outstanding common stock by:
- Each person known by 3dfx to own beneficially more than five percent of
the outstanding common stock
- Each director and each chief executive officer and the four other most
highly compensated executive officers whose salary and bonus for fiscal
2000 exceeded $100,000
- All directors and executive officers of 3dfx as a group
The following calculations of the percentage of outstanding shares are
based on 24,644,437 shares of 3dfx's common stock outstanding as of June 5,
2000.
Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment power
with respect to securities, subject to community property laws, where
applicable. Information for each 5% shareholder is derived solely from filings
with the Commission on or before June 5, 2000.
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<PAGE> 24
Shares of the common stock subject to options that are presently
exercisable or exercisable within 60 days of June 5, 2000 are deemed outstanding
and beneficially owned by the person holding such options for the purpose of
computing the percentage of ownership of such person but are not treated as
outstanding for the purpose of computing the percentage of any other person.
These options are separately set forth below in the column titled "Options."
<TABLE>
<CAPTION>
NAME AND ADDRESS (1) SHARES OPTIONS TOTAL PERCENTAGE
-------------------- -------- ------- --------- ----------
<S> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Gilder Gagnon Howe & Co. LLC (2).................... 2,669,602 -- 2,669,602 10.8%
1775 Broadway, 26th Floor
New York, NY 10019
David A. Rocker(3).................................. 1,232,628 -- 1,232,628 5.0%
c/o Rocker Partners, L.P.
45 Rockefeller Plaza, Suite 1759
New York, NY 10111
DIRECTORS AND OFFICERS:
L. Gregory Ballard.................................. 50,000 -- 50,000 *
Richard Burns....................................... -- 23,333 23,333 *
Gordon A. Campbell.................................. 381,632(4) 82,000 463,632 1.9%
James L. Hopkins.................................... 2,498 82,985 85,483 *
Alex Leupp.......................................... -- 12,469 12,469 *
Scott D. Sellers.................................... 205,000 94,974 299,974 1.2%
Anthony Sun......................................... 16,000 18,000 34,000 *
James Whims......................................... 2,400 63,833 66,233 *
David Zacarias...................................... 1,261 68,490 69,751 *
Janet Leising....................................... 2,500 -- 2,500 *
All executive officers and directors as a group (10
persons).......................................... 615,791 537,068 1,152,859 4.7%
</TABLE>
---------------
* Less than 1%.
(1) Except as otherwise noted, address is c/o 3dfx Interactive, Inc., 4435
Fortran Drive, San Jose, CA 95134.
(2) Information with respect to Gilder Gagnon Howe & Co. LLC was obtained from a
Schedule 13G filed with the Securities and Exchange Commission, which
indicates that Gilder Gagnon Howe & Co. LLC has no voting power with respect
to the shares beneficially held, but does share dispositive power over these
shares that are held in customer accounts.
(3) Information with respect to David A. Rocker was obtained from a Schedule 13G
filed with the Securities and Exchange Commission, which indicates that Mr.
Rocker has sole voting and dispositive power over all of the shares
indicated by virtue of his position as the sole managing partner of Rocker
Partners, L.P., and through Rocker Offshore Management Company, Inc., an
investment advisor to Compass Holdings, Ltd.
(4) Includes 77,084 shares held by Techfarm, L.P., and 3,854 held by Techfarm
Management Inc. (dba Techfarm, Inc.), 300,694 shares held by Gordon A.
Campbell. Mr. Campbell is President of Techfarm, Inc., the general partner
of Techfarm, L.P. and Mr. Campbell disclaims beneficial ownership of the
shares held by Techfarm, L.P. and Techfarm Management Inc.
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<PAGE> 25
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements.
The following financial statements are filed as part of this Report.
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 1998 and
January 31, 2000.......................................... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, December 31, 1998 and January 31, 2000
and for the month ended January 31, 1999.................. F-3
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 1997, December 31, 1998
and January 31, 2000 and for the month ended January 31,
1999...................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, December 31, 1998 and January 31, 2000
and for the month ended January 31, 1999.................. F-5
Notes to Consolidated Financial Statements.................. F-6
(a)(2) Financial Statement Schedules.
Report of Independent Accountants on Financial Statement
Schedule.................................................. S-1
Schedule II Valuation and Qualifying Accounts for the Years
Ended December 31, 1997, December 31, 1998 and January 31,
2000 and for the month ended January 31, 1999............. S-2
(a)(3) Exhibits.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization by and between the
Registrant and STB Systems, Inc. dated as of December 13,
1998 and the related Stock Option Agreement and form of
Voting Agreement
3.1(2) Restated Articles of Incorporation of the Registrant
3.2(10) Bylaws of the Registrant (as amended May 1999)
3.3(5) Certificate of Determination Series A Participating
Preferred Stock of Registrant
4.1(2) Specimen Common Stock Certificate
4.2(5) Preferred Shares Rights Agreement dated October 30, 1998,
between Registrant and BankBoston, N.A., Rights Agent
10.1(2) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(6) 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder
10.3(2) 1997 Director Option Plan and form of Director Stock Option
Agreement thereunder
10.4(2) 1997 Employee Stock Purchase Plan and forms of agreement
thereunder
10.5(2) Lease Agreement dated August 7, 1996 between Registrant and
South Bay/Fortan, and Tenant Estoppel Certificate dated
March 25, 1997 between Registrant and CarrAmerica Realty
Corporation for San Jose, California office
10.6(2) Investors' Rights Agreement dated September 12, 1996,
Amendment No. 1 to Investors' Rights Agreement dated
November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to
Investors' Rights Agreement dated March 27, 1997 by and
among the Registrant and holders of the Registrant's Series
A, Series B and Series Preferred Stock.
10.7.1(3) Warrant to purchase shares of Common Stock issued to
Creative Labs, Inc.
10.7.2(2) Warrant to purchase shares of Series B Preferred Stock
issued to MMC/GATX Partnership No. 1.
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.8(2) Form of Restricted Stock Purchase Agreement between the
Registrant and certain shareholders
10.9(2) Master Equipment Lease Agreement dated January 1, 1996 by
and between the Registrant and MMC/GATX Partnership No. 1
10.10(2) Master Equipment Lease dated March 31, 1995 by and between
the Registrant and Lighthouse Capital Partners, L.P.
10.11.1(9) Amended and Restated Credit Agreement dated December 21,
1999 by and between STB Systems, Inc. and Bank One, Texas,
N.A. and Comerica Bank-Texas
10.11.2(9) First Amendment to Amended and Restated Credit Agreement
dated February 25, 2000 by and between STB Systems, Inc.,
Bank One, Texas, N.A. and the Original Lenders as therein
defined
10.11.3(9) Guaranty of the Registrant dated November 23, 1999 in favor
of Bank One, Texas, N.A. (and other lenders)
10.11.4(9) First Amendment to Guaranty of the Registrant dated as of
December 21, 1999 in favor of Bank One, Texas, N.A. (and
other lenders)
10.11.5(9) Security Agreement dated as of November 21, 1997 by STB
Systems, Inc. in favor of BankOne, Texas, N.A., (and other
lenders)
10.11.6(9) First Amendment to Security Agreement dated as of December
21, 1999 by STB Systems, Inc. in favor of BankOne, Texas,
N.A., (and other lenders)
10.11.7(7) Participation Agreement dated as of November 14, 1997 among
Asset XVII Holdings Company, L.L.C., as lessor, STB Systems,
Inc., as lessee and Bank One, Texas, N.A., as lender
10.11.8(7) Lease and Development Agreement dated as of November 14,
1997 among Asset XVII Holdings Company, L.L.C., as lessor,
and STB Systems, Inc., as lessee
10.12.1(2) Change of Control Letter Agreement between the Registrant
and Scott D. Sellers
10.12.2(2) Change of Control Letter Agreement between the Registrant
and Gary Tarolli
10.13.+(4) Software License and Co-marketing Agreement made as of June,
1997 by and between Electronic Arts, Inc. and the Registrant
10.14(4) Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.15(3) Lease Agreement dated as of January 6, 1998 by and between
the Registrant and GEOMAXX
10.16(3) Separation Agreement dated as of October 12, 1997 by and
between the Registrant and Gary P. Martin
10.17(3) 1997 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
10.18(8) 1999 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
21.1 Subsidiaries of the Registrant
(a) STB Systems, Inc.
(b) 3dfx kk Limited (Japan)
(c) 3dfx International
(d) Galapagos Acquisition Corp.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1(9) Power of Attorney
27.1(9) Financial Data Schedule
</TABLE>
---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
* Filed herewith.
(1) Incorporated by reference to Schedule 13D filed by STB Systems, Inc. dated
December 23, 1998 with respect to the Registrant.
26
<PAGE> 27
(2) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-25365) which was declared
effective on June 25, 1997.
(3) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-46119) filed with the
Commission on February 11, 1998.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A which was filed with the Commission on
November 9, 1998.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(7) Incorporated by reference to exhibits filed with STB Systems, Inc.'s Annual
Report on Form 10-K for the fiscal year ended October 31, 1997.
(8) Incorporated by reference to exhibit 4.1 filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-86661) which was filed
with the Commission on September 7, 1999.
(9) Previously filed with the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 2000.
(10) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4 (File 333-76355) filed on April 15,
1999.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Amendment
No. 1 to its Annual Report on Form 10-K/A to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: June 5, 2000
3dfx INTERACTIVE, INC.
/s/ ALEX LEUPP
By:
--------------------------------------
Alex Leupp
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ALEX LEUPP President, Chief Executive Officer and June 5, 2000
--------------------------------------------- Director (Principal Executive Officer)
(Alex Leupp)
/s/ DAVID ZACARIAS Vice President, Administration and Chief June 5, 2000
--------------------------------------------- Financial Officer (Principal Financial
(David Zacarias) and Accounting Officer)
* Chairman of the Board June 5, 2000
---------------------------------------------
(Gordon A. Campbell)
* Director June 5, 2000
---------------------------------------------
(James Hopkins)
* Director June 5, 2000
---------------------------------------------
(Scott D. Sellers)
Director June 5, 2000
---------------------------------------------
(Anthony Sun)
* Director June 5, 2000
---------------------------------------------
(James Whims)
*/s/ DAVID ZACARIAS
-------------------------------------------
(David Zacarias)
Attorney-in-Fact
</TABLE>
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of 3dfx Interactive, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of 3dfx Interactive, Inc., at December
31, 1998 and January 31, 2000 and the results of its operations and its cash
flows for each of the years ended December 31, 1997, 1998 and January 31, 2000,
and for the month ended January 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of 3dfx's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 29, 2000, except for Note 13,
which is as of March 27, 2000
F-1
<PAGE> 30
3DFX INTERACTIVE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 41,818 $ 92,922
Short-term investments.................................... 24,012 3,058
Accounts receivable less allowance for doubtful accounts
of $6,681 and $2,280................................... 66,160 36,335
Inventory................................................. 45,065 23,991
Other current assets...................................... 28,407 12,089
-------- --------
Total current assets...................................... 205,462 168,395
Property and equipment, net................................. 40,269 15,629
Intangibles................................................. 12,942 --
Goodwill.................................................... 32,709 --
Other assets................................................ 4,729 97
-------- --------
$296,111 $184,121
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of Credit............................................ $ 25,000 $ --
Accounts payable.......................................... 60,879 41,104
Accrued liabilities....................................... 20,385 16,031
Current portion of capitalized lease obligations.......... 732 389
-------- --------
Total current liabilities......................... 106,996 57,524
-------- --------
Capitalized lease obligations, less current portion......... 1,881 284
-------- --------
Commitments (Note 10)
Shareholders' Equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, no par value, 50,000,000 shares authorized;
24,442,370 and 15,671,067 shares issued and
outstanding............................................ 251,883 126,569
Warrants.................................................. 242 242
Deferred compensation..................................... (172) (697)
Accumulated other comprehensive income.................... 1,844
Accumulated deficit....................................... (66,563) 199
-------- --------
Total shareholders' equity........................ $187,234 126,313
-------- --------
$296,111 $184,121
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 31
3DFX INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR YEAR FOR YEAR ENDED FOR THE
ENDED DECEMBER 31, MONTH ENDED
JANUARY 31, ------------------ JANUARY 31,
2000 1998 1997 1999
----------- -------- ------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $360,523 $202,601 $44,069 $17,048
Cost of revenues................................. 287,872 119,618 22,611 14,527
-------- -------- ------- -------
Gross profit..................................... 72,651 82,983 21,458 2,521
-------- -------- ------- -------
Operating expenses:
Research and development....................... 66,062 34,045 12,412 3,340
Selling, general and administrative............ 63,468 35,441 11,390 4,614
In-process research and development............ 4,302 -- -- --
Restructuring expense.......................... 4,382 -- -- --
Amortization of goodwill and intangibles....... 10,228 -- -- --
Total operating expenses............... 148,442 69,486 23,802 7,954
-------- -------- ------- -------
Income (loss) from operations.................... (75,791) 13,497 (2,344) (5,433)
Interest and other income, net................... 2,180 15,869 630 322
-------- -------- ------- -------
Income (loss) before income taxes................ (73,611) 29,366 (1,714) (5,111)
Provision (benefit) for income taxes............. (10,324) 7,663 -- (1,636)
-------- -------- ------- -------
Net income (loss)................................ $(63,287) $ 21,703 $(1,714) $(3,475)
======== ======== ======= =======
Net income (loss) per share:
Basic.......................................... $ (2.81) $ 1.45 $ (0.16) $ (.22)
======== ======== ======= =======
Diluted........................................ $ (2.81) $ 1.33 $ (0.16) $ (.22)
======== ======== ======= =======
Shares used in net income (loss) per share
calculations (Note 1):
Basic.......................................... 22,536 14,917 10,767 15,641
-------- -------- ------- -------
Diluted........................................ 22,536 16,353 10,767 15,641
-------- -------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 32
3DFX INTERACTIVE, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- --------------------- NOTES DEFERRED
SHARES AMOUNT SHARES AMOUNT WARRANTS RECEIVABLE COMPENSATION
---------- ------- ---------- -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996....... 6,951,692 $28,701 1,890,013 $ 1,626 $353 $(19) $(1,250)
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, less issuance
costs............................. 70,167 521
Conversion of preferred stock to
common stock...................... (7,021,859) (29,222) 7,021,859 2,922
Issuance of common stock in
connection with the initial public
offering, less issuance costs..... 3,450,000 34,336
Issuance of common stock under
stock option and purchase plans... 214,757 413
Common stock repurchased........... (104,246) (9)
Exercise of warrants to purchase
common stock...................... 94,247 714 (329)
Issuance of warrant to purchase
common stock...................... 218
Repayment of notes receivable from
shareholders...................... 19
Deferred compensation.............. 415 (415)
Amortization of deferred
compensation...................... 484
Net loss...........................
---------- ------- ---------- -------- ---- ---- -------
Balance at December 31, 1997....... -- -- 12,566,630 66,717 242 -- (1,181)
Issuance of common stock in
connection with public offering,
less issuance costs............... 2,463,140 54,752
Issuance of common stock under
stock option and purchase plans... 643,451 2,301
Common stock repurchased........... (2,154) (1)
Tax benefit related to exercise of
stock options..................... 2,800
Amortization of deferred
compensation...................... 484
Net income.........................
---------- ------- ---------- -------- ---- ---- -------
Balance at December 31, 1998....... -- -- 15,671,067 126,569 242 -- (697)
Issuance of common stock under
stock option plan................. 44,815 140
Amortization of deferred
compensation...................... 40
Net loss...........................
---------- ------- ---------- -------- ---- ---- -------
Balance at January 31, 1999........ -- -- 15,715,882 126,709 242 -- (657)
Issuance of common stock under
stock option and purchase plans... 977,235 4,899
Common stock repurchased........... (517,501) (6,775)
Amortization of deferred
compensation...................... 484
STB acquisition.................... 8,266,754 127,050
Components of comprehensive income
(loss):
Net loss........................
Unrealized gain on
investments...................
Total comprehensive income
(loss)............................
---------- ------- ---------- -------- ---- ---- -------
Balance at January 31, 2000........ -- -- 24,442,370 $251,883 $242 $ -- $ (172)
========== ======= ========== ======== ==== ==== =======
<CAPTION>
ACCUMULATED RETAINED
OTHER EARNINGS/
COMPREHENSIVE (ACCUMULATED
INCOME DEFICIT) TOTAL
------------- ------------ --------
<S> <C> <C> <C>
Balance at December 31, 1996....... $(19,790) $ 9,621
Issuance of Series C Convertible
Preferred Stock in January 1997 at
$7.50 per share, less issuance
costs............................. 521
Conversion of preferred stock to
common stock...................... (26,300)
Issuance of common stock in
connection with the initial public
offering, less issuance costs..... 34,336
Issuance of common stock under
stock option and purchase plans... 413
Common stock repurchased........... (9)
Exercise of warrants to purchase
common stock...................... 385
Issuance of warrant to purchase
common stock...................... 218
Repayment of notes receivable from
shareholders...................... 19
Deferred compensation.............. --
Amortization of deferred
compensation...................... 484
Net loss........................... (1,714) (1,714)
-------- --------
Balance at December 31, 1997....... (21,504) 44,274
Issuance of common stock in
connection with public offering,
less issuance costs............... 54,752
Issuance of common stock under
stock option and purchase plans... 2,301
Common stock repurchased........... (1)
Tax benefit related to exercise of
stock options..................... 2,800
Amortization of deferred
compensation...................... 484
Net income......................... 21,703 21,703
-------- --------
Balance at December 31, 1998....... 199 126,313
Issuance of common stock under
stock option plan................. 140
Amortization of deferred
compensation...................... 40
Net loss........................... (3,475) (3,475)
-------- --------
Balance at January 31, 1999........ (3,276) 123,018
Issuance of common stock under
stock option and purchase plans... 4,899
Common stock repurchased........... (6,775)
Amortization of deferred
compensation...................... 484
STB acquisition.................... 127,050
Components of comprehensive income
(loss):
Net loss........................ (63,287) (63,287)
Unrealized gain on
investments................... 1,844 1,844
--------
Total comprehensive income
(loss)............................ (61,443)
------ -------- --------
Balance at January 31, 2000........ $1,844 $(66,563) $187,234
====== ======== ========
</TABLE>
The accompanying notes are an intergral part of these financial statements.
F-4
<PAGE> 33
3DFX INTERACTIVE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE
FISCAL YEAR ENDED MONTH
----------------------------------------- ENDED
JANUARY 31, DECEMBER 31, DECEMBER 31, JANUARY 31,
2000 1998 1997 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................. $(63,287) $21,703 $(1,714) $(3,475)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation..................................... 14,930 5,249 2,238 675
Amortization..................................... 10,228 -- -- --
Write-off of acquired in-process R&D............. 4,302 -- -- --
Stock compensation............................... 484 484 484 40
Increase (decrease) in allowance for doubtful
accounts....................................... (646) 1,972 230 4,449
Changes in assets and liabilities:
Accounts receivable............................ 7,087 (24,920) (12,224) 4,341
Inventory...................................... 5,339 (20,146) 1,115 6,008
Other assets................................... (5,318) (9,456) (2,275) 327
Accounts payable............................... 1,765 28,531 10,337 (11,195)
Accrued and other long-term liabilities........ (8,340) 13,346 1,554 (869)
-------- ------- ------- -------
Net cash provided by/(used in) operating
activities..................................... (33,456) 16,763 (255) 301
-------- ------- ------- -------
Cash flows from investing activities:
Maturities (purchases) of short-term investments,
net............................................ (893) 2,926 (5,984) (18,330)
Acquisition of STB Systems....................... 21,243 -- -- --
Purchases of property and equipment.............. (25,733) (13,844) (4,730) (1,459)
-------- ------- ------- -------
Net cash used in investing activities............ (5,383) (10,918) (10,714) (19,789)
-------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of convertible
preferred stock, net........................... -- -- 521 --
Proceeds from initial public offerings, net...... -- 54,752 34,336 --
Proceeds from issuance (repurchase) of
common stock, net.............................. (1,876) 2,300 423 140
Tax benefit related to exercise of stock
options........................................ -- 2,800 -- --
Proceeds from exercise of warrants............... -- -- 385 --
Principal payments of capitalized lease
obligations, net............................... (358) (935) (751) 108
Proceeds (payments) on line of credit, net....... 9,209 (777) (299) --
-------- ------- ------- -------
Net cash provided by financing activities........ 6,975 58,140 34,615 248
-------- ------- ------- -------
Net increase in cash and cash equivalents.......... (31,864) 63,985 23,646 (19,240)
Cash and cash equivalents at beginning of period... 73,682 28,937 5,291 92,922
-------- ------- ------- -------
Cash and cash equivalents at end of period......... $ 41,818 $92,922 $28,937 $73,682
======== ======= ======= =======
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest......... $ 1,289 $ 141 $ 263 $ 3
Cash paid during the period for income taxes..... 2,361 6,200 -- --
Acquisition of property and equipment under
capitalized lease obligations.................. -- -- 842 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 34
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- 3DFX AND ITS SIGNIFICANT ACCOUNTING POLICIES:
3dfx
3dfx Interactive Inc. ("3dfx") was incorporated in California on August 24,
1994. 3dfx develops high performance, cost-effective graphics chips, graphics
boards, software and related technology that enables a highly immersive,
interactive and realistic 3D experience across multiple hardware platforms. 3dfx
has subsidiaries in the United States, Mexico, and other key markets in the
world. The consolidated financial statements include the financial statements of
3dfx and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
In March 1999, the Board of Directors determined that it would be in the
best interests of 3dfx and its shareholders to change its fiscal year from a
December fiscal year to a year beginning on February 1 and ending on January 31
("January fiscal year"), beginning on February 1, 1999. Accordingly, 3dfx has
separately presented the results of operations and cash flows for the one month
period ended January 31, 1999.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue recognition
Revenue from product sales is generally recognized upon product shipment.
Revenue resulting from development contracts is recognized under the percentage
of completion method based upon costs incurred relative to total contract costs
or when the related contractual obligations have been fulfilled and fees are
billable. Costs associated with development contracts are included in research
and development. Fiscal 1997 includes $1.7 million of development revenue and no
amounts were recognized in the other periods presented.
Cash equivalents and investments
3dfx considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. At January 31, 2000 and December
31, 1998, approximately $42,444,000 and $85,299,000, respectively, of money
market funds and commercial paper instruments, the fair value of which
approximate cost, are included in cash and cash equivalents.
Investments in debt securities are classified as "available for sale" and
have maturities greater than three months from the date of acquisition.
Investments classified as "available for sale" are reported at fair value with
unrealized gains and losses, net of related tax, if any, reported as a separate
component of shareholders' equity. Unrealized gains were $1.8 million during
fiscal year ended January 31, 2000. Unrealized gains and losses were not
material during the years ended December 31, 1998 and 1997 or during the one
month period ended January 31, 1999.
Concentration of credit risk
Financial instruments that potentially subject 3dfx to significant
concentrations of credit risk consist principally of cash equivalents,
short-term investments and accounts receivable.
F-6
<PAGE> 35
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3dfx invests primarily in money market accounts, commercial paper
instruments and term notes. Cash equivalents and short-term investments are
maintained with high quality institutions and their composition and maturities
are regularly monitored by management.
3dfx performs ongoing credit evaluations of its customers' financial
condition and maintains an allowance for uncollectible accounts receivable based
upon the expected collectibility of all accounts receivable. One customer
accounted for 11.4% of accounts receivable at January 31, 2000. Four customers
account for 25%, 24%, 11% and 10% of accounts receivable at December 31, 1998.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
YEARS ENDED
--------------------------- ONE MONTH
DECEMBER 31, ENDED
JANUARY 31, ------------ JANUARY 31,
2000 1998 1997 1999
----------- ---- ---- -----------
<S> <C> <C> <C> <C>
A.................................................... 13% -- -- --
B ................................................... -- 32% 37% --
C.................................................... -- 26% 0% 24%
D.................................................... -- 16% 16% 25%
E.................................................... -- -- -- 12%
</TABLE>
Inventory
Inventory is stated at the lower of cost or market, cost being determined
under the first-in, first-out method.
Property and equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally three years or less. Assets held under
capital leases are amortized using the straight-line method over the term of the
lease or estimated useful lives, whichever is shorter.
Long-lived assets held and used by 3dfx are reviewed for impairment
whenever events or changes in circumstances indicate that their net book value
may not be recoverable. An impairment loss is recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between net book
values of the assets and their estimated fair values. 3dfx believes that no
long-lived assets were impaired at January 31, 2000 and December 31, 1998.
Research and software development costs
Research and development costs are charged to operations as incurred.
Software development and prototype costs incurred prior to the establishment of
technological feasibility are included in research and development and are
expensed as incurred. Software development costs incurred subsequent to the
establishment of technological feasibility through the period of general market
availability of the product are capitalized, if material. To date, all software
development costs incurred subsequent to the establishment of technological
feasibility have been expensed as incurred due to their immateriality.
Stock-based compensation
3dfx accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." In
January 1996, 3dfx adopted the disclosure
F-7
<PAGE> 36
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (see Note 8).
Comprehensive Income
Other comprehensive income for the fiscal year ended January 31, 2000 was
$1.8 million, primarily representing unrealized gains from investing activities,
resulting in comprehensive income (loss) of $(61.4) million. There was no
comprehensive income for the fiscal year ended December 31, 1998 nor for the one
month period ended January 31, 1999.
Earnings (loss) per share
Basic earnings (loss) per share is computed using the weighted average
number of common shares outstanding during the periods. Diluted earnings (loss)
per share is computed using the weighted average number of common and
potentially dilutive common shares during the periods, except those that are
antidilutive. Reconciliations of the numerators and denominators of the basic
and diluted per share computations are as follows (in thousands):
<TABLE>
<CAPTION>
ONE MONTH
FISCAL YEAR ENDED ENDED
---------------------------- JANUARY 31,
2000 1998 1997 1999
-------- ------- ------- -----------
<S> <C> <C> <C> <C>
Net income (loss) available to common
shareholders (numerator)....................... $(63,287) $21,703 $(1,714) $(3,475)
-------- ------- ------- -------
Weighted average shares outstanding (denominator
for basic computations)........................ 22,536 14,917 10,767 15,641
======== ======= ======= =======
Effect of dilutive securities-common stock
equivalents.................................... -- 1,436 -- --
Weighted average shares outstanding (denominator
for diluted computation)....................... 22,536 16,353 10,767 15,641
======== ======= ======= =======
Basic income (loss) per share.................... $ (2.81) $ 1.45 $ (0.16) $ (0.22)
======== ======= ======= =======
Diluted income (loss) per share.................. $ (2.81) $ 1.33 $ (0.16) $ (0.22)
======== ======= ======= =======
</TABLE>
During the fiscal year ended January 31, 2000, the one month period ended
January 31, 1999 and the fiscal years ended December 31, 1998 and 1997, options
to purchase approximately 6,484,389, 3,499,000, 560,392 and 2,505,984 shares and
warrants to purchase approximately 36,960, 36,960, 36,960 and 93,636 shares,
respectively, were outstanding but are not included in the computation because
they are antidilutive.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended, requires that all
derivative instruments be recorded on the balance sheet at their fair market
value. Changes in the fair market value of derivatives are recorded each period
in current earnings or comprehensive income, depending on whether a derivative
is designed as part of a hedge transaction, and if so, the type of hedge
transaction. Substantially all of 3dfx's revenues and the majority of its costs
are denominated in U.S. dollars, and to date 3dfx has not entered into any
derivative contracts. 3dfx does not expect that the adoption of SFAS 133 will
have a material effect on its financial statements.
F-8
<PAGE> 37
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The effective date of SFAS 133, as amended, is for fiscal quarters of fiscal
years beginning after June 15, 2000.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statement," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The application of SAB No. 101
did not have a material impact on 3dfx's financial statements.
NOTE 2 -- ACQUISITION OF STB SYSTEMS, INC.
In May 1999, 3dfx completed the STB merger. As a result of the merger, STB
is now a wholly owned subsidiary of 3dfx. The merger was accounted for under the
purchase method of accounting. The purchase price of $139.3 million included
$116.1 million of stock issued at fair value (fair value being determined as the
average price of the 3dfx stock for a period of 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 $13.3 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 $37.9
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:
<TABLE>
<CAPTION>
ESTIMATED FISCAL 2000
AMOUNT USEFUL LIFE AMORTIZATION
----------- ----------- ------------
<S> <C> <C> <C>
Purchased existing technology:
1.5 year life...................................... $ 6,475,000 1.5 years $3,540,000
3 year life........................................ 4,966,000 3 years 1,357,000
Trademarks........................................... 4,406,000 5 years 722,000
Workforce-in-place................................... 2,250,000 5 years 369,000
Executive covenants.................................. 1,000,000 5 years 164,000
Goodwill............................................. 37,900,000 5 years 5,190,000
</TABLE>
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 3dfx's 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
F-9
<PAGE> 38
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 of our competitors and us.
Gross Margins. Projected gross margins associated with the identified
projects 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. 3dfx 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.
The following represents the unaudited pro forma results of operations of
3dfx for fiscal 2000 and 1998 as if the acquisition was consummated on January
1, 1998. The unaudited pro forma results of operations include certain pro forma
adjustments, including the amortization of intangible assets relating to the
acquisition. The unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisition occurred at January 1, 1998 or the results
that may occur in the future.
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Revenues.................................................... $441,312 $467,441
Net income (loss)........................................... $(81,061) $ 9,110
Basic net income (loss) per share........................... $ (3.39) $ 0.40
Diluted net income (loss) per share......................... $ (3.39) $ 0.37
</TABLE>
F-10
<PAGE> 39
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- BALANCE SHEET COMPONENTS (IN THOUSANDS):
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Inventory:
Raw material.............................................. $ 26,708 $ 2,891
Work-in-progress.......................................... 8,940 16,565
Finished goods............................................ $ 9,417 4,535
-------- -------
$ 45,065 $23,991
-------- -------
Property and equipment:
Computer equipment........................................ $ 27,108 $15,539
Purchased computer software............................... 18,035 5,253
Furniture and equipment................................... 28,113 3,350
-------- -------
73,256 24,142
Less: Accumulated depreciation and amortization........... (32,987) (8,513)
-------- -------
$ 40,269 $15,629
======== =======
</TABLE>
Assets acquired under capitalized lease obligations are included in
property and equipment and totaled $5,529,000 and $2,529,000 with related
accumulated amortization of $4,120,000 and $2,146,000 at January 31, 2000 and
December 31, 1998, respectively.
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Accrued liabilities:
Income taxes payable...................................... $ 4,807 $ 5,788
Accrued salaries, wages and benefits...................... 4,150 2,839
Sales returns reserves.................................... 1,245 2,938
Accrued marketing costs................................... 3,104 --
Other accrued liabilities................................. 7,079 4,466
-------- -------
$ 20,385 $16,031
======== =======
</TABLE>
NOTE 4 -- RESTRUCTURING CHARGES:
During the fiscal year ended January 31, 2000, 3dfx incurred restructuring
expenses totaling approximately $4,382,000. Approximately $2,552,000 of this
amount related to downsizing the expense levels of 3dfx given the 3dfx's current
financial losses, and $1,830,000 related to a one-time reduction in workforce
related to the merger with STB.
NOTE 5 -- DEBT:
3dfx has a line of credit agreement with a bank, which provides for maximum
borrowings in an amount up to the lesser of 80% of eligible accounts receivable
or $25,000,000. Borrowings under the line are secured by $25,000,000 of cash and
short-term investments and all of 3dfx's owned assets and bear interest at Libor
plus 100 basis points (6.82% as of January 31, 2000). The agreement requires
that 3dfx maintain certain levels of tangible net worth and generally prohibits
3dfx from paying cash dividends. As of January 31, 2000, 3dfx was in compliance
with its covenants. The line of credit expires on December 19, 2000. At January
31, 2000, $25,000,000 was outstanding under this line of credit.
F-11
<PAGE> 40
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3dfx has a $3,000,000 term loan which is payable in 60 monthly installments
of principal and interest beginning on November 1, 1997. The term loan bears
interest at Libor plus 250 basis points (8.32% as of January 31, 2000). At
January 31, 2000, $1,944,000 was outstanding under the term loan.
3dfx has a lease line of credit with a bank, which provides for the
purchase of up to $5,000,000 of property and equipment. Borrowings under this
line is secured by all of 3dfx's owned assets and bears interest at the bank's
prime rate plus 0.75% per annum. The agreement requires that 3dfx maintain
certain financial ratios and levels of tangible net worth, profitability and
liquidity. As of December 31, 1998, 3dfx was in compliance with its covenants.
The equipment line of credit expires in December 2001. At January 31, 2000,
there were no borrowings outstanding under this equipment line of credit.
NOTE 6 -- DEVELOPMENT CONTRACT:
In February 1997, 3dfx entered into a development and license agreement
with Sega Enterprises, Ltd., under which 3dfx is entitled to receive development
contract revenues and royalties based upon a cumulative volume of units sold by
Sega which include 3dfx's product. 3dfx recognized development contract revenues
of $1,817,000 in the year ended December 31, 1997, representing a non-refundable
amount due for the delivery of certain engineering designs and revenue
recognized under the percentage of completion method of accounting. 3dfx has no
further obligations to Sega with regard to the $1,817,000 of development
contract revenue recognized. 3dfx did not earn any royalty revenue in the year
ended December 31, 1997. Costs incurred during the period relating to this
contract are included in research and development expense.
In July 1997, Sega terminated the development and license agreement with
3dfx. In August 1997, 3dfx filed a lawsuit against Sega alleging breach of
contract, interference with the contract, misrepresentation, unfair competition
and threatened misappropriation of trade secrets. In September 1998, 3dfx
settled its lawsuit relating to this agreement and has accounted for this
settlement in its Consolidated Statements of Operations in the category,
Interest and Other Income, net.
NOTE 7 -- SHAREHOLDERS' EQUITY:
Common stock
3dfx has issued 1,646,250 shares of its common stock to founders and
investors. The shares either vested immediately or vested on various dates
through 1999. 3dfx can buy back unvested shares at the original price paid by
the purchasers in the event the purchasers' employment with 3dfx is terminated
for any reason. There were no such repurchases in fiscal 2000 or 1998.
In addition, during the fiscal years ended January 31, 2000 and December
31, 1998, certain employees exercised options to purchase 22,041 and 44,640
shares of common stock, respectively, which are subject to a right of repurchase
by 3dfx at the original share issuance price. The repurchase right lapses over a
period generally ranging from two to four years. During the fiscal years ended
January 31, 2000 and December 31, 1998, 12,501 and 2,154 shares of common stock,
respectively, were repurchased.
On June 16, 1999, 3dfx announced a stock repurchase program, whereby 3dfx
was authorized by its board of directors to repurchase shares of its common
stock in the open market. In accordance with the program, 3dfx subsequently
repurchased 505,000 shares of its common stock for approximately $6.8 million.
As of January 31, 2000 and December 31, 1998, approximately 8,917 and
44,640 shares, respectively, of common stock were subject to these repurchase
rights.
F-12
<PAGE> 41
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1997, 3dfx completed its initial public offering and issued
3,000,000 shares of its common stock to the public at a price of $11.00 per
share. 3dfx received cash of approximately $30,400,000, net of underwriting
discounts and commissions. Upon the closing of initial public offering, all
outstanding shares of 3dfx's then outstanding convertible preferred stock were
automatically converted into shares of common stock. On July 25, 1997, 3dfx's
underwriter exercised an option to purchase an additional 450,000 shares of
common stock at a price of $11.00 per share to cover over-allotments. 3dfx
received cash of approximately $3,900,000, net of underwriting discounts and
commissions.
In March 1998, 3dfx completed its secondary public offering of 2,900,000
shares of common stock at a price of $23.75 per share. Of the 2,900,000 shares
offered, 2,028,140 were sold by 3dfx and 871,860 were sold by selling
shareholders. 3dfx received cash of approximately $45,500,000, net of
underwriting discounts and commissions and other offering costs. 3dfx did not
receive any of the proceeds from the sale of shares by the selling shareholders.
On March 23, 1998, the 3dfx'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. 3dfx received cash of approximately $9,300,000, net of
underwriting discounts and commissions and other offering costs.
Convertible preferred stock
At December 31, 1996, the aggregate authorized number of preferred shares
was 7,269,018, of which 2,794,742, 2,818,412 and 1,655,864 were designated as
Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and
Series C Convertible Preferred Stock, respectively.
Each share of Series A, B and C Convertible Preferred Stock outstanding was
converted into one share of common stock upon the completion of the underwritten
initial public offering (IPO) of common stock in June 1997. The holders of
Series A, B and C Convertible Preferred Stock had voting rights equal to common
stock on an if-converted basis.
Warrants
In March 1995, 3dfx issued a warrant to a vendor to purchase 43,750 shares
of Series A Convertible Preferred Stock at $2.00 per share. The warrant was
deemed by management to have a nominal value at the date of grant. Upon
completion of 3dfx's IPO, this warrant was exchanged for a warrant to purchase
common stock. This warrant has been exercised in full and exchanged for 43,750
shares of common stock.
In January 1996, 3dfx entered into a line of credit. To secure the line,
3dfx issued to the lessor a warrant to purchase 19,886 shares of Series B
Convertible Preferred Stock at an exercise price of $4.40. The warrant expires
on January 1, 2003. The warrant was deemed by management to have a nominal value
at the date of grant. Upon completion of 3dfx' IPO, this warrant was exchanged
for a warrant to purchase common stock. A portion of this warrant has been
executed and exchanged for 12,926 shares of 3dfx common stock. 3dfx has reserved
6,960 shares of common stock for the exercise of this warrant.
In 1996, 3dfx issued to a university a warrant to purchase 5,000 shares of
Series C Convertible Preferred Stock at an exercise price of $7.50 per share.
This warrant was deemed to have a value of approximately $40,285 at the date of
grant and the related cost was recognized as other expense and research and
development expense, respectively, during 1996. The warrant for 5,000 shares
expires on December 31, 2001. Upon completion of 3dfx's IPO, the warrant for
5,000 shares was exchanged for a warrant to purchase common stock. 3dfx has
reserved 5,000 shares of common stock for the exercise of this warrant.
On December 3, 1997, 3dfx issued a warrant to purchase 25,000 shares of
common stock at a exercise price of $13.875 per share in conjunction with
developing a relationship with another company. The
F-13
<PAGE> 42
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
warrant is fully exercisable and expires December 3, 2002. 3dfx valued the
warrant under the "Black-Scholes" formula at approximately $218,000. The warrant
value will be amortized over a one-year period as a cost of revenue. 3dfx has
reserved 25,000 shares of common stock for the exercise of this warrant.
As of January 31, 2000, 3dfx had reserved 36,960 shares of common stock for
the exercise of warrants.
NOTE 8 -- STOCK OPTION PLANS:
The 1995 Plan
In May 1995, 3dfx adopted a Stock Plan (the "1995 Plan") which provides for
granting of incentive and nonqualified stock options to employees, consultants
and directors of 3dfx. In May 1998 and May 1999, 3dfx's shareholders approved an
increase of 1,700,000 and 2,000,000 shares, respectively, of Common Stock to be
reserved for issuance under the 1995 Plan. As of January 31, 2000, 6,375,000
shares of Common Stock have been reserved for issuance under the 1995 Plan.
Options granted under the 1995 Plan are generally for periods not to exceed
ten years, and are granted at prices not less than 100% and 85%, for incentive
and nonqualified stock options, respectively, of the fair market value on the
date of grant. Incentive stock options granted to shareholders who own greater
than 10% of the outstanding stock are for periods not to exceed five years, and
must be issued at prices not less than 110% of the fair market value of the
stock on the date of grant. Options granted under the 1995 Plan generally vest
25% on the first anniversary of the grant date and 1/48th of the option shares
each month thereafter, with full vesting occurring on the fourth anniversary of
the grant date.
The 1997 Plan
In October 1997, 3dfx adopted the 1997 Supplementary Stock Plan (the "1997
Plan"), which provides for granting of nonqualified stock options to employees
(excluding officers, consultants and directors) of 3dfx. Under the 1997 Plan,
1,200,000 shares of Common Stock have been reserved for issuance at January 31,
2000.
Options granted under the 1997 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1997 Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.
The 1999 Plan
In July 1999, 3dfx adopted the 1999 Supplementary Stock Plan (the "1999
Plan"), which provides for granting of nonqualified stock options to employees
(excluding officers, consultants and directors) of 3dfx and reserved 1,000,000
shares of Common Stock for issuance under the 1999 Plan. At January 31, 2000,
1,000,000 shares of Common Stock have been reserved for issuance under the 1999
Plan.
Options granted under the 1999 Plan are generally for periods not to exceed
ten years and are granted at the fair market value of the stock on the date of
grant. Options granted under the 1999 Plan generally vest 25% on the first
anniversary of the grant date and 1/48th of the option shares each month
thereafter, with full vesting occurring on the fourth anniversary of the grant
date.
F-14
<PAGE> 43
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Directors' Option Plan
In March 1997, 3dfx adopted a 1997 Directors' Option Plan. Under this plan
options to purchase 150,000 shares of Common Stock may be granted. The plan
provides that options may be granted at a price not less than fair value of a
share at the date of grant. The Director's Option Plan provides for an initial
option grant to purchase 12,500 shares of Common Stock to each new non-employee
director of 3dfx at the date he or she becomes a director. Each non-employee
director and Chairman of the Board of Directors will annually be granted an
option to purchase 5,000 and 10,000 shares of Common Stock, respectively,
beginning with the 1998 annual meeting of shareholders. If a director serves on
either the Audit Committee or Compensation Committee, he or she will annually be
granted an option to purchase 1,000 shares of Common Stock, respectively,
beginning with the 1997 annual meeting of shareholders. Options granted under
the Director' Plan are generally for ten years and are granted at the fair
market value of the stock on the date of grant. The initial 12,500 option grant
vests at a rate of 1/48 per month following the date of grant. The annual option
grant of 5,000, 10,000 or 1,000 vests at a rate of 1/12 per month following the
date of grant.
The following is a summary of activity under the 1995 Plan, the 1997 Plan,
the 1999 Plan and the Directors' Option Plan during the periods ended December
31, 1997 and 1998, January 31, 1999, and January 31, 2000:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED
AVAILABLE FOR OPTIONS AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
------------- ----------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996........................... 218,157 1,538,509 $ 0.54
Additional shares authorized........................... 1,274,992 -- --
Granted.............................................. (1,306,244) 1,306,244 $12.15
Exercised............................................ -- (180,015) $ 0.49
Canceled............................................. 158,754 (158,754) $ 3.86
Repurchased.......................................... 20,391 -- $ 0.08
---------- ----------
Balance at December 31, 1997........................... 366,050 2,505,984 $ 6.38
Additional shares authorized........................... 2,400,000 -- --
Granted.............................................. (3,617,765) 3,617,765 $15.72
Exercised............................................ -- (478,104) $ 1.34
Canceled............................................. 2,098,488 (2,098,488) $19.16
Repurchased.......................................... 2,154 -- $ 0.27
---------- ----------
Balance at December 31, 1998........................... 1,248,927 3,547,157 $ 9.02
Grants in January 1999............................... (83,850) 83,850 $12.38
Exercises in January 1999............................ -- (44,815) $ 3.13
Cancellations in January 1999........................ 87,192 (87,192) $ 7.80
---------- ---------- ------
Balance at January 31, 1999............................ 1,252,269 3,499,000 $ 9.21
Additional shares authorized........................... 3,000,000 --
Options related to acquisition of STB................ (566,913) 566,913 $10.72
Grants............................................... (4,800,897) 4,800,897 $11.68
Exercised............................................ -- (692,088) $ 3.60
Cancelled............................................ 1,690,333 (1,690,333) $12.46
---------- ----------
Balance at January 31, 2000............................ 574,792 6,484,389 $10.92
========== ==========
</TABLE>
At fiscal 2000, 1998 and 1997, 1,129,810, 768,183 and 471,937 respectively,
Common Stock options were vested.
F-15
<PAGE> 44
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Prior to 3dfx completing its IPO, 3dfx granted options for the purchase of
2,460,307 shares of Common Stock to employees at exercise prices ranging from
$0.20 to $12.00 per share. Management calculated deferred compensation of
approximately $1,900,000 related to options granted prior to the completion of
3dfx's IPO. Such deferred compensation will be amortized over the vesting period
of which relating to these options, of which $196,000, $484,000, $484,000 and
$484,000 has been amortized during the years ended December 31, 1996, 1997 and
1998 and January 31, 2000, respectively. Deferred compensation of $40,000 was
amortized for the one month period ended January 31, 1999.
In October 1998, substantially all outstanding options with an exercise
price in excess of $10.88 per share were canceled and replaced with new options
having an exercise price of $10.88, the fair market value on the date that the
employees accepted the repricing. A total of 1,409,790 options were repriced.
This repricing excluded executive officers. In December 1998, a repricing for
executive officers occurred where substantially all outstanding options with an
exercise price in excess of $13.13 per share were canceled and replaced with new
options having an exercise price of $13.13, the fair market value on the date
that the executive officers accepted the repricing. A total of 330,000 options
were repriced. In both the October and December repricings, any option holder
accepting such offer was not permitted to exercise the repriced option (both
vested and unvested shares) in the first twelve months following the date of the
applicable repricing.
Information relating to stock options outstanding under the 1995 Plan, the
1997 Plan, the 1999 Plan and the Directors' Plan at January 31, 2000 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------------ --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE VESTED EXERCISE PRICE
--------------- ----------- ----------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.20 - 0.90 227,337 6.53 $ 0.57 195,763 $ 0.55
$ 6.83 - 8.50 398,687 7.05 8.23 238,500 8.09
$ 8.88 1,232,250 9.83 8.88 -- --
$ 8.91 1,113,200 9.74 8.91 -- --
$ 9.05 - 10.77 472,144 9.27 9.70 78,995 10.24
$ 10.88 866,153 8.16 10.88 270,673 10.88
$11.00 - 16.00 1,109,556 8.20 12.74 323,414 12.98
$ 17.00 978,750 9.28 17.00 -- --
$17.37 - 23.25 86,312 8.56 20.90 22,465 22.50
-------------- --------- ---- ------ --------- ------
Total 6,484,389 8.89 $10.92 1,129,810 $ 9.29
========= ==== ====== ========= ======
</TABLE>
Employee Stock Purchase Plan
In March 1997, 3dfx's board of directors approved an Employee Stock
Purchase Plan. Under this plan, employees of 3dfx can purchase common stock
through payroll deductions. A total of 750,000 shares have been reserved for
issuance under this plan. As of January 31, 2000, 485,228 shares have been
purchased under the Employee Stock Purchase Plan.
F-16
<PAGE> 45
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain Pro Forma Disclosures
3dfx accounts for its stock option plans and the Employee Stock Purchase
Plan in accordance with the provisions of APB 25. Had 3dfx recorded compensation
costs based on the estimated grant date fair value, as defined by SFAS 123, for
awards granted under its stock option plans and the Employee Stock Purchase
Plan, 3dfx's net income (loss) and net income (loss) per share would have been:
<TABLE>
<CAPTION>
YEAR YEAR ENDED ONE MONTH
ENDED DECEMBER 31, ENDED
JANUARY 31, ----------------- JANUARY 31,
2000 1998 1997 1999
----------- ------- ------- -----------
<S> <C> <C> <C> <C>
Pro forma net income (loss)........................ $(75,915) $16,067 $(3,705) $(3,913)
Pro forma basic net income (loss) per share........ $ (3.37) $ 1.08 $ (0.32) $ (0.25)
Pro forma diluted net income (loss) per share...... $ (3.37) $ 0.98 $ (0.32) $ (0.25)
</TABLE>
The pro forma effect on net income (loss) and net income (loss) per share
for fiscal 2000, 1998 and 1997 is not representative of the pro forma effect on
net income (loss) and net income (loss) per share in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to 1995.
For the years ended January 31, 2000, December 31, 1998 and 1997, the fair
value of each option on the date of grant was determined utilizing the
Black-Scholes model.
The following assumptions were used for the stock option plans and the
Employee Stock Purchase Plan for the years ended January 31, 2000, December 31,
1998 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, DECEMBER 31,
----------- ------------
2000 1998 1997
----------- ---- ----
<S> <C> <C> <C>
Stock option plans:
Expected dividend yield..................................... -- -- --
Expected stock price volatility............................. 70% 70% 70%
Risk free interest rate..................................... 5.7% 5.1% 5.7%
Expected life (years)....................................... 6.5 5.9 4.0
Employee stock purchase plan:
Expected dividend yield..................................... -- -- --
Expected stock price volatility............................. 70% 70% 70%
Risk free interest rate..................................... 5.2% 4.8% 5.4%
Expected life (years)....................................... 0.5 0.5 0.5
</TABLE>
The weighted average fair value of stock options granted in the years ended
January 31, 2000, December 31, 1998 and 1997 was $8.04, $13.12 and $12.15 per
share, respectively.
Benefit Plan
As of January 31, 2000, 3dfx had two 401(k) Savings Plans which plans allow
all United States employees to participate by making salary deferral
contributions to the 401(k) Savings Plans. 3dfx may make discretionary
contributions to the 401(k) Savings Plans upon approval by the board of
directors. As of January 31, 2000, 3dfx has contributed to one of the 401(k)
Savings Plans but not the other.
F-17
<PAGE> 46
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- INCOME TAXES:
Income before income taxes and the significant components of the provision
for income taxes comprise:
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------- MONTH ENDED
JANUARY 31, DECEMBER 31, JANUARY 31,
2000 1998 1999
----------- ------------ -----------
<S> <C> <C> <C>
Income before income taxes........................... $(73,611) $29,366 $(5,111)
======== ======= =======
Provision for income taxes
Current:
Federal......................................... $ (8,936) $12,309 $(1,513)
State........................................... (1,558) 2,525 (124)
-------- ------- -------
(10,494) 14,834 (1,637)
-------- ------- -------
Deferred:
Federal......................................... 148 (6,252) 1
State........................................... 22 (919) 0
-------- ------- -------
170 (7,171) 1
-------- ------- -------
Total provision for income taxes..................... $(10,324) $ 7,663 $(1,636)
======== ======= =======
</TABLE>
The components of net deferred income tax assets are as follows:
<TABLE>
<CAPTION>
JANUARY 31, DECEMBER 31,
2000 1998
----------- ------------
<S> <C> <C>
Net operating losses........................................ $ 9,876 $ 4,337
Expenses not currently deductible........................... 11,867 7,171
Tax credit carryforwards.................................... 2,422 186
-------- -------
Deferred tax assets......................................... 24,164 11,695
Less: valuation allowance................................... (17,164) (4,524)
-------- -------
Net deferred income tax assets.............................. $ 7,000 $ 7,171
======== =======
</TABLE>
3dfx's actual provision differs from the provision(benefit) computed by
applying the statutory federal income tax rate to income(loss) before income
taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------- MONTH ENDED
JANUARY 31, DECEMBER 31, DECEMBER 31, JANUARY 31,
2000 1998 1997 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Tax (benefit) at statutory federal tax
rate................................... (25,028) 10,278 (600) (1,738)
State taxes, net of federal tax
benefit................................ (3,959) 1,687 (98) (147)
R&D credit............................... -- (692) -- --
In process research and development...... 1,723 -- -- --
Goodwill amortization.................... 4,097 -- -- --
Change in valuation allowance............ 12,577 (4,299) 698 --
Other, net............................... 266 689 -- 249
------- ------ ---- ------
Total provision for taxes................ (10,324) 7,663 -- (1,636)
======= ====== ==== ======
</TABLE>
F-18
<PAGE> 47
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At January 31, 2000, 3dfx had net operating loss carryforwards for federal
and state income tax purposes of approximately $23,700,000 and $34,100,000,
respectively. If not utilized, the federal and state net operating losses will
begin to expire beginning in 2011 and 2001, respectively.
Deferred tax assets of approximately $1,500,000 as of January 31, 2000
relate to certain net operating loss carryforwards resulting from the
disqualifying sale of employee stock options and stock purchase plans. When
recognized, the tax benefit of these loss carryforwards are accounted for as a
credit to additional paid-in capital rather than a reduction of the income tax
provision.
Management regularly assesses the realizability of deferred tax assets
recorded based upon the weight of available evidence, including such factors as
the recent earnings history and expected future taxable income. Management
believes that it is more likely than not that the Company will not realize a
portion of its deferred tax assets and, accordingly, a valuation allowance of
$17,164,000 has been established for such amounts at January 31, 2000.
NOTE 10 -- COMMITMENTS AND CONTINGENCIES:
3dfx leases under noncancelable operating leases for certain of its
facilities and equipment in addition to equipment capital leases. Rent expense
on the operating leases for fiscal 2000, 1998 and 1999 was approximately
$6,679,000, $1,657,000 and $658,000, respectively.
Future minimum lease payments under the operating and capitalized leases
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITALIZED
LEASES LEASES
--------- -----------
<S> <C> <C>
2001........................................................ 8,857 900
2002........................................................ 8,773 720
2003........................................................ 8,366 540
2004........................................................ 6,419 --
2005........................................................ 5,836 --
Thereafter.................................................. 42,877 --
------ -----
Total minimum lease payments.............................. 81,128 2,160
====== =====
Less: amount representing interest.......................... 79
Present value of minimum lease payments..................... 2,081
Less: current portion....................................... 732
-----
Noncurrent portion of capitalized lease obligations......... 1,349
=====
</TABLE>
The non current portion of capitalized lease obligations does not include
$532,000, representing long-term lease liabilities to be amortized ratably over
3dfx's existing leases primarily in connection with its headquarters facilities
located in San Jose, Ca.
Purchase Commitments
3dfx's manufacturing relationship with Taiwan Semiconductor Manufacturing
Corporation ("TSMC") allows 3dfx to cancel all outstanding purchase orders, but
requires the repayment of all expenses incurred to date. As of January 31, 2000,
TSMC had incurred approximately $30,845,000 of manufacturing expenses on 3dfx's
outstanding purchase orders. 3dfx does not expect to cancel any of its
outstanding purchase orders.
F-19
<PAGE> 48
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Contingencies
A securities class action lawsuit was filed October 9, 1998 in Dallas
County, Texas against STB, which 3dfx acquired by merger in May, 1999. The suit
was brought against STB and some of its officers and directors and the
underwriters who participated in the STB secondary offering on March 20, 1998.
The petition alleges that the registration statement for the secondary public
offering contained false and misleading statements of material facts and omitted
to state material facts. The petition asserts claims under Sections 11, 12(a)(2)
and 15 of the Securities Act of 1933, as amended, and Sections 581-33A of the
Texas Securities Act on behalf of a purported class of persons who purchased or
otherwise acquired STB common stock in the public offering. The petition seeks
recission and/or unspecified damages. STB denies the allegations in the petition
and intends to defend the lawsuit vigorously.
On December 17, 1999, a similar securities class action lawsuit was also
filed in the United States District Court for the Northern District of Texas,
Dallas Division, against STB and three of its officers and directors. The action
asserts claims against Sections 10 and 20 of the Securities Exchange Act of 1934
and Rule 10b-5 of the Securities and Exchange Commission. STB denies the
allegations in the petition and intends to defend the lawsuit vigorously. On
February 8, 2000 another similar securities class action lawsuit was filed in
the United States District Court for the Northern District of Texas, Dallas
Division against STB and three of its officers and directors. STB denies
allegations in the action and intends to vigorously defend the lawsuit. These
two actions have now been consolidated.
3dfx is a party from time to time to some other legal proceedings arising
in the ordinary course of business. Although the amount of any liability that
could arise with respect to these proceedings cannot be predicted accurately,
3dfx believes that any liability that might result from such claims will not
have a material adverse effect on its financial position.
NOTE 11 -- RELATED PARTY TRANSACTIONS:
Since April 1995, a consulting company has been providing management
services to 3dfx for which 3dfx pays a monthly fee of $5,000 for consulting
services. The Chairman and a director of the board of directors of 3dfx are also
officers of the consulting company. Total payments for such management services
during fiscal year 2000, calendar years 1998, and 1997 were $55,000, $60,000 and
$60,000, respectively.
During fiscal year 2000, calendar years 1998, and 1997 a member of the
board of directors provided consulting services to 3dfx. Total payments for such
consulting services in fiscal year 2000, calendar years 1998, and 1997 were
$45,000, $60,000 and $45,000, respectively.
In April 1997, an officer of 3dfx resigned and subsequently founded
Quantum3D, Inc., a supplier of advanced graphic subsystems based on 3dfx
technology. Sales to Quantum3D, Inc. during fiscal years 2000, 1998, and 1997
totaled $1,588,000, $670,000 and $949,000, respectively. As of January 31, 2000,
3dfx has an outstanding trade receivable from Quantum3D, Inc. of approximately
$360,000.
In April 1999, 3dfx invested an amount of $3.1 million in exchange for a
minority interest in Quantum 3D in the form of Convertible Preferred Shares in
connection with Quantum 3D's private round of financing. These terms and pricing
of these shares was equivalent to other unaffiliated third participants in the
financing round.
In connection with the termination of an employee's employment with 3dfx,
and its Chief Financial Officer and Vice President, Administration on January
31, 1998, 3dfx entered into a Separation Agreement pursuant to which the
employee will remain a temporary employee through August 1, 2000. In addition,
all options granted to the employee pursuant to 3dfx's stock plans will continue
to vest through August 1, 2000. In the event of a Change of Control (as defined
in the Separation Agreement), 3dfx will (i) waive its right to repurchase any
unvested shares of common stock owned by the employee and (ii) accelerate
F-20
<PAGE> 49
3DFX INTERACTIVE, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the vesting of all unvested stock options granted to the employee pursuant to
3dfx's stock plans. For purposes of the separation agreement, a "Change of
Control" occurs, subject to some conditions and exceptions, upon (i) the
acquisition, directly or indirectly, by any person (other than existing
beneficial owners) of securities of 3dfx representing 50% or more of the total
voting power represented by 3dfx's then outstanding voting securities; (ii) the
merger or consolidation of 3dfx with another corporation in which the voting
securities of 3dfx outstanding immediately prior to such merger or consolidation
ceased to represent at least 50% of the voting power represented by the voting
securities of 3dfx thereafter, or (iii) the liquidation of 3dfx or the sale or
disposition of all or substantially all of 3dfx's assets.
NOTE 12 -- SEGMENT AND GEOGRAPHIC INFORMATION:
3dfx has adopted Statement of Financial Accounting Standards No. 131
"Disclosure about Segments of an Enterprise and Related Information"
("SFAS131"). Based on its operating management and financial reporting
structure, 3dfx has determined that it has one reportable business segment: the
design, development and sale of graphics boards incorporating 3dfx's proprietary
graphics chips. The following is a summary of product revenue by geographic area
based on the location of shipments (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------- MONTH
DECEMBER 31, ENDED
JANUARY 31, ------------------- JANUARY 31,
2000 1998 1997 1999
----------- -------- ------- -----------
<S> <C> <C> <C> <C>
United States.................................. $193,941 $144,415 $29,835 $ 9,325
International.................................. 166,582 61,186 14,234 7,723
-------- -------- ------- -------
Total.......................................... $360,523 $202,601 $44,069 $17,048
======== ======== ======= =======
</TABLE>
All sales are denominated in United States dollars. For all periods
presented, substantially all of 3dfx's long-lived assets were located in the
United States.
NOTE 13 -- SUBSEQUENT EVENTS
In March 2000, 3dfx entered into a Merger Agreement with Gigapixel
Corporation, a Delaware Corporation ("Gigapixel"). The Merger Agreements
provides for the Merger of a newly formed, wholly owned subsidiary of 3dfx with
and into Gigapixel (the "Merger"). Gigapixel will be the surviving corporation
of the Merger and, upon consummation will become a wholly owned subsidiary of
3dfx. 3dfx intends to account for this merger under the purchase method of
accounting. The Merger is contingent upon approval of both 3dfx's and
Gigapixel's shareholders, among other conditions.
In March 2000, 3dfx sold the Specialized Technology Group (STG), a business
unit that provides digital video products, multi-output MPEG decoder cards and
multi-monitor display adapters to a company of which Vanessa Ogle is President.
Ms. Ogle is a former employee of 3dfx and is the daughter of William E. Ogle.
Mr. Ogle served as Executive Vice President and Vice Chairman of the Board of
Directors of 3dfx until he resigned these positions in January 2000. The
transaction was accounted for as an asset sale, comprised primarily of inventory
and accounts receivable, in a leveraged buyout by the STG management group. 3dfx
will maintain a minority equity interest of less than 15% in STG following the
sale. The amount of the transaction was $5.1 million, and as a result, 3dfx
recorded a note receivable in the amount of $3.0 million. The note is payable in
accordance with a payment schedule, beginning February 1, 2001 and concluding
November 1, 2004.
F-21
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of 3dfx Interactive, Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 29, 2000, appearing in the 2000 Annual Report to
Shareholders of 3dfx Interactive, Inc. (which report and consolidated financial
statements are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
May 1, 2000
S-1
<PAGE> 51
SCHEDULE II
3DFX INTERACTIVE, INC.
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 21, 2000 AND DECEMBER 31, 1998, AND 1997
AND MONTH ENDED JANUARY 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO ASSUMED
BEGINNING COSTS AND FROM STB ENDING
BALANCE EXPENSES ACQUISITION DEDUCTIONS BALANCE
--------- ---------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended January 31, 2000........... $6,729 $ 2,392 $ 598 $3,038 $ 6,681
Month ended January 31, 1999.......... $2,280 $ 4,449 $ 0 $ 0 $ 6,729
Year ended December 31, 1998.......... $ 308 $ 2,561 $ 0 $ 589 $ 2,280
Year ended December 31, 1997.......... $ 78 $ 250 $ 0 $ 20 $ 308
Inventory Reserves:
Year ended January 31, 2000........... $7,828 $ 909 $18,000 $8,241 $18,496
Month ended January 31, 1999.......... $7,828 $ 0 $ 0 $ 0 $ 7,828
Year ended December 31, 1998.......... $ 661 $10,817 $ 0 $3,650 $ 7,828
Year ended December 31, 1997.......... $ 632 $ 40 $ 0 $ 11 $ 661
</TABLE>
S-2
<PAGE> 52
3DFX INTERACTIVE, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
2.1(1) Agreement and Plan of Reorganization by and between the
Registrant and STB Systems, Inc. dated as of December 13,
1998 and the related Stock Option Agreement and form of
Voting Agreement
3.1(2) Restated Articles of Incorporation of the Registrant
3.2(10) Bylaws of the Registrant (as amended May 1999)
3.3(5) Certificate of Determination of Series A Participating
Preferred Stock of Registrant
4.1(2) Specimen Common Stock Certificate
4.2(5) Preferred Shares Rights Agreement dated October 30, 1998,
between Registrant and BankBoston, N.A., Rights Agent
10.1(2) Form of Indemnification Agreement between the Registrant and
each of its directors and officers
10.2(6) 1995 Employee Stock Plan and form of Stock Option Agreement
thereunder
10.3(2) 1997 Director Option Plan and form of Director Stock Option
Agreement thereunder
10.4(2) 1997 Employee Stock Purchase Plan and forms of agreement
thereunder
10.5(2) Lease Agreement dated August 7, 1996 between Registrant and
South Bay/Fortan, and Tenant Estoppel Certificate dated
March 25, 1997 between Registrant and CarrAmerica Realty
Corporation for San Jose, California office
10.6(2) Investors' Rights Agreement dated September 12, 1996,
Amendment No. 1 to Investors' Rights Agreement dated
November 25, 1996, Amendment No. 2 to Investors' Rights
Agreement dated December 18, 1996 and Amendment No. 3 to
Investors' Rights Agreement dated March 27, 1997 by and
among the Registrant and holders of the Registrant's Series
A, Series B and Series Preferred Stock.
10.7.1(3) Warrant to purchase shares of Common Stock issued to
Creative Labs, Inc.
10.7.2(2) Warrant to purchase shares of Series B Preferred Stock
issued to MMC/GATX Partnership No. 1.
10.8(2) Form of Restricted Stock Purchase Agreement between the
Registrant and certain shareholders
10.9(2) Master Equipment Lease Agreement dated January 1, 1996 by
and between the Registrant and MMC/GATX Partnership No. 1
10.10(2) Master Equipment Lease dated March 31, 1995 by and between
the Registrant and Lighthouse Capital Partners, L.P.
10.11.1(9) Amended and Restated Credit Agreement dated December 21,
1999 by and between STB Systems, Inc. and Bank One, Texas,
N.A. and Comerica Bank-Texas
10.11.2(9) First Amendment to Amended and Restated Credit Agreement
dated February 25, 2000 by and between STB Systems, Inc.,
Bank One, Texas, N.A. and the Original Lenders as therein
defined
10.11.3(9) Guaranty of the Registrant dated November 23, 1999 in favor
of Bank One, Texas, N.A. (and other lenders)
10.11.4(9) First Amendment to Guaranty of the Registrant dated as of
December 21, 1999 in favor of Bank One, Texas, N.A. (and
other lenders)
10.11.5(9) Security Agreement dated as of November 21, 1997 by STB
Systems, Inc. in favor of BankOne, Texas, N.A., (and other
lenders)
10.11.6(9) First Amendment to Security Agreement dated as of December
21, 1999 by STB Systems, Inc. in favor of BankOne, Texas,
N.A., (and other lenders)
10.11.7(7) Participation Agreement dated as of November 14, 1997 among
Asset XVII Holdings Company, L.L.C., as lessor, STB Systems,
Inc., as lessee and Bank One, Texas, N.A., as lender
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
10.11.8(7) Lease and Development Agreement dated as of November 14,
1997 among Asset XVII Holdings Company, L.L.C., as lessor,
and STB Systems, Inc., as lessee
10.12.1(2) Change of Control Letter Agreement between the Registrant
and Scott D. Sellers
10.12.2(2) Change of Control Letter Agreement between the Registrant
and Gary Tarolli
10.13.+(4) Software License and Co-marketing Agreement made as of June,
1997 by and between Electronic Arts, Inc. and the Registrant
10.14(4) Master Equipment Lease dated July 1, 1997 by and between the
Registrant and Pentech Financial Services, Inc.
10.15(3) Lease Agreement dated as of January 6, 1998 by and between
the Registrant and GEOMAXX
10.16(3) Separation Agreement dated as of October 12, 1997 by and
between the Registrant and Gary P. Martin
10.17(3) 1997 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
10.18(8) 1999 Supplementary Stock Option Plan and form of Stock
Option Agreement thereunder
21.1 Subsidiaries of the Registrant
(a) STB Systems, Inc.
(b) 3dfx kk Limited (Japan)
(c) 3dfx International
(d) Galapagos Acquisition Corp.
23.1* Consent of PricewaterhouseCoopers LLP, Independent
Accountants
24.1(9) Power of Attorney
27.1(9) Financial Data Schedule
</TABLE>
---------------
+ Confidential treatment has been granted for portions of these agreements.
Omitted portions have been filed separately with the Commission.
* Filed herewith.
(1) Incorporated by reference to Schedule 13D filed by STB Systems, Inc. dated
December 23, 1998 with respect to the Registrant.
(2) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-25365) which was declared
effective on June 25, 1997.
(3) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-46119) filed with the
Commission on February 11, 1998.
(4) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1997.
(5) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form 8-A which was filed with the Commission on
November 9, 1998.
(6) Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(7) Incorporated by reference to exhibits filed with STB Systems, Inc.'s Annual
Report on Form 10-K for the fiscal year ended October 31, 1997.
(8) Incorporated by reference to exhibit 4.1 filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-86661) which was filed
with the Commission on September 7, 1999.
(9) Previously filed with the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 31, 2000.
(10) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4 (File 333-76355) filed on April 15,
1999.
