<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 0-21336
THE 3DO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 94-3177293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GALVESTON DRIVE,
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices, including zip code)
(415) 261-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
As of October 31, 1996, the number of outstanding shares of the registrants'
common stock was 27,896,068.
<PAGE> 2
THE 3DO COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
September 30, 1996 and March 31, 1996
Consolidated Statements of Operations for
the three and six months ended September 30, 1996
and 1995
Consolidated Statements of Cash Flows for
the six months ended September 30, 1996 and 1995
Condensed Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE 3DO COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,118 $ 9,459
Short-term investments 52,666 40,686
Accounts receivable, net 2,770 2,060
Inventory 910 1,270
Prepaid and other current assets 2,296 942
--------- ---------
Total current assets 65,760 54,417
Property and equipment, net 9,679 8,642
Deposits and other assets 2,753 271
--------- ---------
Total assets $ 78,192 $ 63,330
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,250 $ 1,905
Accrued expenses 5,746 3,814
Deferred revenue 47,285 47,818
Current portion of capital lease obligations 1,000 1,424
Hardware incentive obligations 2,944 4,620
Other current liabilities 1,323 1,787
--------- ---------
Total current liabilities 61,548 61,368
Deferred revenue 6,454 44
Capital lease obligations, net of current portion 872 1,287
Other liabilities 698 500
--------- ---------
Total liabilities 69,572 63,199
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares issued -- --
Common stock, $.01 par value; 50,000,000 and 25,000,000
shares authorized; 27,892,957 and 26,003,402
shares issued and outstanding, respectively 279 260
Additional paid-in capital 162,522 150,541
Cumulative translation adjustment (188) (189)
Accumulated deficit (153,993) (150,481)
--------- ---------
Total stockholders' equity 8,620 131
--------- ---------
Total liabilities and stockholders' equity $ 78,192 $ 63,330
========= =========
</TABLE>
See accompanying condensed Notes to consolidated financial statements.
3
<PAGE> 4
THE 3DO COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
September 30, September 30,
-------------------------- ------------------------
1996 1995 1996 1995
------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Royalties and license fees $20,822 $ 2,798 $ 35,000 $ 6,177
Software publishing 2,494 2,710 3,386 4,746
Developer products and other 3,434 1,601 3,693 3,371
------- -------- -------- --------
Total revenues $26,750 $ 7,109 $ 42,079 $ 14,294
------- -------- -------- --------
Cost of revenues:
Royalties and pressing fees 23 318 209 662
Software publishing 1,762 1,283 1,896 1,570
Developer products and other 1,060 492 1,872 1,066
------- -------- -------- --------
Total cost of revenues 2,845 2,093 3,977 3,298
------- -------- -------- --------
Gross profit 23,905 5,016 38,102 10,996
------- -------- -------- --------
Operating expenses:
Research and development 12,127 9,591 21,417 18,953
In-process research and development -- -- 7,700 --
Sales and marketing 2,584 1,843 3,727 4,195
General and administrative 3,173 2,007 5,953 4,040
------- -------- -------- --------
Total operating expenses 17,884 13,441 38,797 27,188
------- -------- -------- --------
Operating income (loss) 6,021 (8,425) (695) (16,192)
Net interest and other income 786 93 1,111 67
------- -------- -------- --------
Income (loss) before income
and foreign withholding taxes 6,807 (8,332) 416 (16,125)
Income and foreign
withholding taxes -- 427 4,000 562
------- -------- -------- --------
Net income (loss) $ 6,807 $ (8,759) $ (3,584) $(16,687)
======= ======== ======== ========
Net income (loss) per common and
common equivalent share $ 0.23 $ (0.34) $ (0.13) $ (0.67)
======= ======== ======== ========
Common and common equivalent shares
used in computing per share amounts 30,243 25,622 27,260 25,051
======= ======== ======== ========
</TABLE>
See accompanying condensed Notes to consolidated financial statements.
4
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THE 3DO COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months ended
September 30,
--------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,584) $(16,687)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,305 2,834
Deferred revenue 5,877 (456)
In-process research and development 7,700 --
Changes in operating assets and liabilities:
Accounts receivable, net 230 (425)
Inventory 581 (653)
Prepaid and other assets (939) (1,767)
Accounts payable 431 (595)
Accrued expenses 839 121
Hardware incentives (1,236) 928
Other liabilities (265) 467
-------- --------
Net cash provided by (used in) operating activities 12,939 (16,233)
-------- --------
Cash flows from investing activities:
Short-term investments, net (11,914) (1,082)
Capital expenditures (3,897) (958)
-------- --------
Net cash used in investing activities (15,811) (2,040)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1,364 17,737
Payments on capital lease obligations (840) (788)
-------- --------
Net cash provided by financing activities 524 16,949
-------- --------
Effect of foreign currency translation 7 (424)
-------- --------
Net decrease in cash and cash equivalents (2,341) (1,748)
Cash and cash equivalents at beginning of period 9,459 4,846
-------- --------
Cash and cash equivalents at end of period $ 7,118 $ 3,098
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 283 $ 381
Income and foreign withholding taxes $ 4,000 $ 274
</TABLE>
See accompanying condensed Notes to consolidated financial statements.
5
<PAGE> 6
THE 3DO COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The consolidated financial statements of The 3DO Company, a Delaware
corporation (the "Company"), as of September 30, 1996 and for the quarter and
six months ended September 30, 1996 and 1995 are unaudited, and in the opinion
of management, include all adjustments (consisting of only normal recurring
items) necessary for the fair presentation of the financial position and results
of operations for the interim periods. Certain amounts for prior periods have
been reclassified to conform to the current period presentation.
These consolidated financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1996. The results of
operations for the quarter and six months ended September 30, 1996 are not
necessarily indicative of the results expected for the entire year.
NOTE 2 - ACQUISITIONS
In May 1996, the Company entered into an agreement to issue 592,000
shares of stock in exchange for the stock of Archetype Interactive Corporation
("Archetype"), a software developer of a multi-user role playing game designed
to be played over the Internet. The Company accounted for this acquisition using
the "pooling of interests" method; however, prior periods have not been restated
because the results of operations of Archetype were immaterial to the
consolidated results of operations of the Company for all periods presented.
In June 1996, the Company purchased certain assets and assumed certain
liabilities of New World Computing, Inc. ("NWC"), a PC platform game developer
located in Agoura Hills, California. As consideration for the purchase, the
Company issued 1.02 million shares of its common stock to NWC. In addition,
under the terms of the agreement, the Company will be obligated to make a cash
payment to NWC in the event that the value of the 3DO stock issued in the
transaction falls below an amount equal to approximately $10 per share during a
period following the closing date. The Company recorded this transaction in June
1996 using the purchase method of accounting. A one-time charge was recorded in
the first quarter of this fiscal year for $7.7 million representing the amount
of the purchase price assigned to In-process research and development. Also
included as part of the purchase price were intangibles valued at $2.9 million,
to be amortized on a straight line basis over a period of one to five years.
The following unaudited pro forma information presents the results of
operations of The 3DO Company and New World Computing for the three and six
months ended September 30, 1996 and 1995, with pro forma adjustments as if New
World Computing had been consummated as of the beginning of the periods
presented.
Pro forma financial information:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ------------------
1996 1995 1996 1995
------------------ ------------------
<S> <C> <C> <C> <C>
Revenue 26,750 8,975 42,920 16,874
Net Income (loss) 6,807 (8,238) (5,165) (16,660)
Income (loss) per Share 0.23 (0.31) (0.19) (0.64)
</TABLE>
6
<PAGE> 7
NOTE 3 - INVENTORY
Inventory consists of raw materials and finished goods which are stated
at the lower of average cost or market.
NOTE 4 - REVENUE RECOGNITION
The Company recognizes revenue from royalty and pressing fee agreements
upon receipt of documentation indicating that the compact disc ("CD")
manufacturer shipped CDs to the software title developers or publishers, or the
licensed chipset foundry shipped chipsets to the hardware manufacturers. Revenue
from the sale of software titles published and distributed by the Company and
developer products is recognized at the time of shipment, provided the Company
has no outstanding obligations. Subject to certain limitations, the Company
permits customers to obtain exchanges of software titles published and
distributed by the Company, within certain specified periods, and provides price
protection on certain unsold merchandise. Software publishing revenue is
reflected net of an allowance for returns and price protection. Revenue from
third party engineering and licensing agreements are recognized using the
percentage-of-completion method.
Deferred revenue consists primarily of payments received in advance of revenue
being earned under engineering and licensing agreements.
NOTE 5 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding, and common equivalent shares from stock
options, when dilutive, using the modified treasury stock method.
NOTE 6 - INCENTIVE PROGRAMS
The Company provided a manufacturing incentive of $5.00, $4.00 and
$3.00 for each 3DO Multiplayer system distributed in calendar years 1993, 1994
and 1995, respectively. Amounts under this and certain other incentive programs
were accrued as the obligation arose and as of September 30, 1996 the Company
had accrued approximately $2.9 million. In May 1996, one of the Company's
hardware licensees elected to receive 47,090 shares of the Company's stock in
lieu of a cash payment of $0.4 million. In addition, a cash payment of $1.2
million was paid on April 1, 1996. The September 30, 1996 balance is due to be
paid on April 1, 1997.
The Company entered into an agreement with its hardware system
licensees to provide two shares of 3DO Common Stock for each 3DO hardware system
they shipped from February 1, 1994 through September 30, 1994 at or below
certain suggested retail prices. This program was extended through December 31,
1994 for one licensee. The market value of the stock issued or to be issued
under this incentive program was recognized as an expense at the time the
Company incurred the obligation to issue the stock, and is separately reflected
in the Consolidated Statements of Operations. The Company issued 400,000 shares
as of September 30, 1996 and anticipates issuing an additional 90,090 shares
under this program.
In October 1994, the Company established a Market Development Fund
("MDF") program under which a pressing fee is charged to authorized CD pressing
facilities for each copy of a licensed software title that is manufactured
outside of Japan. In the quarter ended December 31, 1994, all funds collected
under this program were used for advertising and promoting the 3DO format and
product family. Beginning January 1, 1995, a portion of
7
<PAGE> 8
the MDF funds were used by the Company for advertising and promotions, while the
remainder was to be paid to qualifying hardware system licensees, based on their
shipments of 3DO hardware systems in certain markets, to encourage production
and reduced pricing of such systems. All such pressing fees are recognized as
revenue, and the amount due to hardware systems licensees is accrued and
recorded as an offset to revenue, as the applicable CDs are pressed. The related
advertising and promotions expenditures under the program are recorded as
incurred, and are separately reflected as an operating expense in the Statements
of Operations.
NOTE 7 - INCOME TAXES
Income tax expense totaled $0 and $4.0 million for the three and six
months ended September 30, 1996 and $0.4 million and $0.6 million for three and
six months ended September 30, 1995, respectively. Income tax expense represents
foreign income and withholding taxes, and minimum state taxes.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The 3DO Company ("3DO" or the "Company") designs, integrates, licenses
and sells interactive technologies and applications software products. The
Company is focused on creating technologies and entertainment products for the
advanced 64-bit market and is engaged in the development of software titles for
multiple hardware platforms including the IBM-compatible PC CD-ROM platform (the
"PC"), the 64-bit M2 platform being developed by Matsushita, and the Internet.
References to "3DO" or the "Company" mean The 3DO Company, a Delaware
corporation, and its subsidiaries and predecessor entities.
The Company developed a next generation 64-bit technology (the "M2
Technology") and in December 1995 the Company and Matsushita entered into a
definitive license agreement, pursuant to which the Company granted Matsushita a
perpetual, exclusive, worldwide license, with the right to grant sublicenses,
with respect to the M2 Technology, for use in both hardware and software for
games and all other applications (the "Technology Licensing Agreement"). The
license was granted in exchange for an upfront license payment of $100 million,
and for certain royalties which shall be paid to 3DO for certain software
products manufactured after January 1, 1998, which are compatible with the M2
Technology. Under the terms of the Technology Licensing Agreement, Matsushita
has granted 3DO a non-exclusive license to use the M2 Technology for the
development, manufacture and distribution of hardware products designed for use
in the computer field, of software and peripherals compatible with hardware
products developed by Matsushita or its sublicensees that incorporate the M2
Technology, and of development systems to third parties outside of Japan that
are authorized by Matsushita to develop and publish software products compatible
with hardware products that incorporate the M2 Technology. Revenue pertaining to
the license fees under the Technology Licensing Agreement is being recognized by
the Company using the percentage-of-completion method based on the costs
incurred to fulfill its commitments to deliver technology as specified in the
agreement. The Company estimates that it will recognize revenue in connection
with the Technology Licensing Agreement through June 30, 1998.
On April 24, 1996, the Company agreed to make certain modifications to
the M2 system design, pursuant to the terms of an addendum (the "Addendum") to
the Technology Licensing Agreement with Matsushita. As consideration for
providing engineering and certain support services, the Company will receive an
additional aggregate fee of approximately $4.5 million to be received in
installments in fiscal 1997 and 1998. The payments by Matsushita are contingent
upon the Company meeting certain milestones by particular dates, as stipulated
in the Addendum. The Company intends to recognize this revenue using the
percentage-of-completion method, up to the amount of cash received.
In February 1996, the Company licensed the 3-D graphics portion of the
M2 Technology to Cirrus Logic, a leader in video graphics controllers, for the
potential development of high-end 3-D graphics chips for the PC market. Under
the terms of the Joint Development and License Agreement (the "Cirrus
Agreement") the Company was to develop certain modifications to the "3-D
Engine," which is a component of the proprietary semiconductor technology which
is part of the M2 Technology. As partial consideration under such agreement, the
Company has received a non-refundable sum of $2.5 million as of September 30,
1996. This payment has been recognized into revenue under the percentage of
completion method. The Company believes Cirrus has specific obligations under
the contract to pay an additional $4.5 million in nonrefundable license fees,
prepaid royalties, and termination fees.
9
<PAGE> 10
Cirrus filed a complaint to rescind the Cirrus Agreement on the grounds
of frustration of purpose, mistake, failure of consideration, concealment, and
non-disclosure, and to obtain a repayment of $2.5 million in nonrefundable
payments made to the Company. The Company has responded to Cirrus' complaint and
filed a cross-complaint for Cirrus' breach of the Agreement to enforce its
rights under the Cirrus Agreement, including procurement of the payment by
Cirrus of $4.5 million in nonrefundable license fees, prepaid royalties, and
termination fees, and seeking damages, interest, and attorneys' fees and costs.
There can be no assurance that the Company will prevail in the litigation or
receive the additional $4.5 million that it believes Cirrus owes.
Prior to the fourth quarter of fiscal 1996, the Company generated a
majority of its revenue from software royalties and pressing fees on titles
published by its software licensees. Since the fourth quarter of fiscal 1996,
however, the Company derived a majority of its revenue from the recognition of
income from the Technology Licensing Agreement. In addition, the Company also
generated revenue from the licensing and distribution of software titles
published by the Company and others, and from its licensing agreement with
Cirrus Logic in the first quarter of this fiscal year.
The Company generally recognizes revenue from the sale of software
titles published and distributed by the Company and developer products at the
time of shipment, and recognizes semiconductor and software title royalty and
pressing fee revenue upon receipt of evidence of shipment from the relevant
semiconductor foundry or the CD pressing plant. Revenue pertaining to the Cirrus
Agreement and the Technology Licensing Agreement is recognized using the
percentage-of-completion method.
The Company provided a manufacturing incentive of $5.00, $4.00 and
$3.00 for each 3DO Multiplayer system distributed in calendar years 1993, 1994
and 1995, respectively. This and certain other incentive programs were accrued
as the obligation arose and as of September 30, 1996 the Company had accrued
approximately $2.9 million. In May 1996, one of the Company's hardware licensees
elected to receive 47,090 shares of the Company's stock in lieu of a cash
payment of $0.4 million. In addition, a cash payment of $1.2 million was paid on
April 1, 1996. The September 30, 1996 balance is due to be paid on April 1,
1997.
On May 31, 1996, the Company acquired all the outstanding capital stock
of Archetype Interactive Corporation ("Archetype"), a software developer of a
multi-user role playing game designed to be played over the Internet. In
exchange for the outstanding capital stock of Archetype, the Company issued
shares of its common stock to the Archetype shareholders. The Company accounted
for this acquisition using the "pooling of interests" method.
On June 30, 1996, the Company purchased certain assets and assumed
certain liabilities of New World Computing, Inc. ("NWC"), a PC platform game
developer located in Agoura Hills, California. As consideration for the
purchase, the Company issued 1.02 million shares of its common stock to NWC. In
addition, under the terms of the agreement, the Company will be obligated to
make a cash payment to NWC in the event that the value of the 3DO stock issued
in the transaction falls below an amount equal to approximately $10 per share
during a period following the closing date. The Company recorded this
transaction in June 1996 using the purchase method of accounting. A one-time
charge was recorded in the first quarter for $7.7 million representing the
amount of the purchase price assigned to In-process research and development.
The Company will continue to incur substantial expenditures to develop
its business in fiscal 1997. The Company expects that its operating results will
fluctuate as a result of a wide variety of factors, including changes in the
composition of the Company's revenues, a potential sale or joint venture of its
hardware business, the timing of new hardware and software product introductions
by its licensees and by its competitors, the Company's expenditures on research
and development, marketing and promotional programs, and the general state of
the national and global economies. In addition, the Company's revenue will be
affected by the seasonal nature of the market for consumer electronics products
and variations as a result of the demand for a particular software title.
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are subject to the
"safe harbor" created by that section. These forward-looking statements include,
but are not limited to, statements concerning future revenues, expenses, cash
flows, and capital resources. The Company's actual future results could differ
materially from those projected in the forward-looking statements. Some factors
which could cause future actual results to differ materially from the Company's
recent results or those projected in the forward-looking statements are
described in "Factors Affecting Operating Results," below. The Company assumes
no obligation to update the forward-looking statements or such factors.
10
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RESULTS OF OPERATIONS
For the quarter ended September 30, 1996, the Company incurred a net
profit of $6.8 million compared to a net loss of $8.8 million for the same
quarter fiscal 1995. For the six months ended September 30, 1996 and 1995, the
Company incurred net losses of $3.6 million and $16.7 million, respectively.
Included in the net loss for the six months ended September 30, 1996 is a $7.7
million charge for in-process research and development related to the
acquisition of the assets of New World Computing, Inc. and $4.0 million in
withholding taxes related to the payment of $40 million by Matsushita pursuant
to the Technology Licensing Agreement.
Revenue for the three months ended September 30, 1996 and 1995 totaled
$26.8 million and $7.1 million, respectively. Revenue for the six months ended
September 30, 1996 totaled $42.1 million compared to $14.3 million for the six
months ended September 30, 1995. Royalties and pressing fees of $20.8 million
and $35.0 million were the largest component of revenue for the three and six
months ended September 30, 1996 compared to $2.8 million and $6.2 million in the
prior comparable periods. The increase is due primarily to the revenue
recognition of the Technology Licensing Agreement with Matsushita, which totaled
$19.5 million and $31.8 million for the quarter and six months ended September
30, 1996, respectively. This revenue was recognized using the percentage-of-
completion method.
Software publishing revenue totaled $2.5 million and $3.4 million for
the three and six months ended September 30, 1996 compared to $2.7 million and
$4.7 million for the three and six months ended September 30, 1995. Revenue for
this fiscal year was derived primarily from the company's first shipments of PC
platform titles. Revenue for the prior comparable periods was comprised
primarily of the revenue from the licensing and publishing of software titles
for the 3DO 32-bit platform.
Developer products and other revenue totaled $3.4 million and $3.7
million for the quarter and six months ended September 30, 1996 compared to $1.6
million and $3.4 million for the prior comparable periods. Developer products
revenue was higher in the current quarter compared to the same quarter last year
due primarily to increased shipments of M2 development systems to MEI and other
M2 software developers.
Cost of revenues of $2.8 million and $4.0 million for the quarter and
six months ended September 30, 1996 compared to $2.1 million and $3.3 million
for the quarter and six months ended September 30, 1995, respectively, consists
of direct costs associated with development systems products and software titles
sold and amortization of prepaid royalties. Internal development costs on
software title development for the Company's published titles are recognized as
incurred and included in research and development expenses. Cost of revenues
decreased, as a percentage of revenue, for the quarter and six months ended
September 30, 1996 compared to the same periods in fiscal 1995. The decrease is
primarily due to the revenue from the 64-bit M2 licensing agreement with
Matsushita recognized in the current fiscal year, which has no associated cost
of revenue.
Research and development expenses, including in-process research and
development, increased to $12.1 million and $29.1 million for the three and six
months ended September 30, 1996 from $9.6 million and $19.0 million for the
three and six months ended September 30, 1995, respectively. This increase is
primarily due to the one-time $7.7 million expense for in-process research and
development related to the Company's acquisition of the assets of New World
Computing in June 1996, and on going development expenses associated with
Cyclone Studios, Archetype Interactive and New
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World Computing, which were acquired by the Company in November 1995, May 1996
and June 1996, respectively. The Company anticipates that research and
development expenses may increase in future periods due to the Company's
activities in developing software titles for multiple platforms.
Sales and marketing expenses increased from $1.8 million for the
quarter ended September 30, 1995 to $2.6 million for the same period in 1996,
but decreased from $4.2 million for the six months ended September 30, 1995 to
$3.7 million for the current comparable period. The increase in the current
quarter was attributable to the marketing expenses for the launch of its debut
Internet and PC CD-ROM software products. The decrease in expenses for the six
months comparison was primarily due to the disposition of 3DO Japan Co., Ltd.
which resulted in a $1.3 million expense reduction. It is anticipated that this
expense will increase in future periods as the Company promotes the release of
its software titles.
General and administrative expenses were $3.2 million and $6.0 million
for the quarter and six months ended September 30, 1996 compared to $2.0 million
and $4.0 million for the prior comparable periods. This increase is primarily
due to increased reserves against accounts receivable resulting from the
bankruptcy filing of a major customer, the amortization of goodwill associated
with the New World Computing acquisition and increased other employee benefits
Net interest and other income increased from $.1 million and $.1
million for the quarter and six months ended September 30, 1995 to $.8 million
and $1.1 million for the same periods this year, due primarily to interest
earned on higher cash balances as a result of proceeds collected from the
Technology Licensing Agreement with Matsushita.
The increase in the provision for income and foreign withholding taxes
for the six months ended September 30, 1996 from the same periods last year was
attributable to the 10% foreign withholding taxes on the $40 million payment
received from Matsushita in connection with the Technology Licensing Agreement.
The Company anticipates that operating expenses may increase in future
periods. This increase is expected to be mostly attributable to the Company's
activities in developing software titles and increasing its publishing and
distribution efforts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash and cash
equivalent balances and short-term investment balances, which totaled
approximately $59.8 million at September 30, 1996. At March 31, 1996, cash and
short-term investments totaled $50.1 million. This increase is primarily due to
the net proceeds of $36 million received from Matsushita for the Technology
Licensing Agreement, offset by operating losses and capital expenditures. Net
cash provided by operating activities of approximately $12.9 million for the six
months ended September 30, 1996 increased as compared with net cash used of
approximately $16.2 million for the same period in 1995. The increase is due
principally to the $36 million payment from Matsushita. For the six months ended
September 30, 1996, the Company invested approximately $3.9 million ($1.0
million in the same period in 1995) in fixed assets, excluding stock or asset
acquisitions, or assets acquired under capital lease obligations which were
primarily purchases of computer equipment, software applications and office
furnishings.
The Company will incur negative cash flow for the remainder of fiscal
year 1997 from the continued investment in the internal development of
entertainment software titles scheduled to be released in fiscal year 1998 and
beyond. In addition, the Company will be obligated to pay approximately $5
million to New World Computing, Inc., by December 31, 1996, as specified in the
Agreement of Purchase and Sale of Assets between the Company, NTN
Communications, Inc., and New World Computing, Inc., as consideration for the
purchase of certain of the assets of New World Computing, Inc. The Company
anticipates that the existing cash resources, future lease and working capital
financing and all other sources of funds should be sufficient to fund the
Company's
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activities through the end of fiscal year 1997. There can be no assurance that
additional capital will not be required in fiscal year 1998 since cash flows
will be affected by the rate at which the Company's hardware and software
licensees introduce their products and the resulting sale of these products, the
market acceptance of such products, the levels of advertising and promotions
required to promote market acceptance of the Company's and its licensees'
products, and the rate at which the Company independently develops, publishes
and distributes software titles. The level of financing required beyond fiscal
year 1997 will depend on these and other factors. If the Company needs to raise
additional funds through public or private financing, no assurance can be given
that additional financing will be available or that, if available, it will be
available on terms acceptable to the Company or its stockholders. Additional
financings may result in substantial and immediate dilution to existing
stockholders. If adequate funds are not available to satisfy either short or
long term capital requirements, the Company may be required to curtail its
operations significantly or to obtain funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights to
certain of its technologies and/or potential markets.
As part of its business strategy, the Company frequently evaluates
opportunities to enter into strategic alliances, joint ventures, acquisitions of
businesses, products or technologies and other similar transactions.
In September 1996, the Company announced its intention to enter into a
joint venture or sell its hardware business. The Company has entered into
discussions with a potential joint venture partner regarding a joint venture of
its hardware business. There can be no assurance at this time whether a binding
agreement will be signed for this transaction, or if a binding agreement is
signed, that such transaction will occur. Transactions such as the joint
venture or sale of advanced hardware technology are subject to a range of
contingencies, including a limited number of potential partners or acquirors,
the price and structure of a transaction, competitive conditions in the
industry, and the Company's ability to retain its technical personnel pending
completion of the transaction. There can be no assurance that the Company will
be able to enter into a joint venture or sale of its hardware business or that
such a transaction can be completed on satisfactory terms. There can be no
assurance that the Company will be able to retain a significant equity interest
in the joint venture, reduce expenses related to the hardware business, or
develop and exploit product opportunities in PC chips, game chips, and DVD
chips, Internet chips, video computer chips or systems. The particular
transaction or the absence of a transaction could cause the Company to
recognize significant write-offs or incur other costs which could produce
operating losses.
FACTORS AFFECTING FUTURE PERFORMANCE
REORGANIZATION AND CHANGE IN STRATEGY
The Company is in the process of restructuring its organization to
focus on Internet and game entertainment software. As part of its
reorganization, the Company intends to sell its hardware business or contribute
its hardware business to a joint venture, and to organize its software business
into five production units. The Company expects that such change in strategy
will result in a change in the composition of the Company's revenues. Since
commencement of operations, the Company has been developing interactive
multimedia technologies. Prior to December 1995, the Company generated a
majority of its revenue from software royalties and pressing fees on titles
published by its software licensees for the 3DO Multiplayer platform. In the
near term, the Company expects to derive the majority of its revenue from
technology licensing fees and the publication and distribution of internally-
and externally-developed software titles. For most of fiscal year 1995 and
fiscal year 1996, the focus of the Company's business was on maximizing royalty
revenues from license and pressing fees from third-party software products
compatible with the 3DO Multiplayer format. However, the 3DO Multiplayer format
failed to achieve market acceptance. The Company expects that its future
revenues will mostly be from publishing entertainment software titles for
multiple platforms, initially focusing on the PC, M2 and Internet platforms.
Revenues to the Company under the M2 Technology License Agreement are dependent
on the Company fulfilling certain commitments under such agreement, and there
can be no assurance that the Company will fulfill its obligations under such
agreement, and any such failure of the Company to fulfill its obligations, or
any failure of such licensee to pay the fees under such agreement as they become
due, would have a material adverse effect upon the Company's business, operating
results and financial condition. There can be no assurance that the Company will
prevail in the current litigation regarding the Cirrus Agreement or receive the
additional $4.5 million that it believes Cirrus owes under the Cirrus Agreement.
Although the Company commenced operations in 1991, the Company has a very
limited operating history upon which an evaluation of the Company and its
current strategy can be based. The Company is at an early stage of development
in its new business strategy and is subject to all of the risks inherent in the
establishment of a new business enterprise.
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To address these risks, the Company must, among other things, respond
to competitive developments, continue to attract, retain and motivate qualified
personnel, and support the development and marketing of game entertainment
software. The Company's decision to focus its efforts on software title
publishing and distribution for the PC, M2, and Internet platforms is predicated
on the assumption that in the future the installed hardware base of PC, M2, and
Internet platforms will be large enough to permit this portion of 3DO's business
to operate profitably. There can be no assurance that the Company's assumption
will be correct. There can be no assurance that the Company will be able to
successfully compete as an entertainment software developer and publisher. Any
failure to achieve these goals could have a material adverse effect upon the
Company's business, operating results and financial condition.
JOINT VENTURE OR SALE OF HARDWARE BUSINESS
In September 1996, the Company announced its intention to enter into a
joint venture or sell its hardware business. The Company has entered into
discussions with a potential joint venture partner regarding a joint venture of
its hardware business. There can be no assurance at this time whether a binding
agreement will be signed for this transaction, or if a binding agreement is
signed, that such transaction will occur. Transactions such as the joint venture
or sale of advanced hardware technology are subject to a range of contingencies,
including a limited number of potential partners or acquirors, the price and
structure of a transaction, competitive conditions in the industry, and the
Company's ability to retain its technical personnel pending completion of the
transaction. There can be no assurance that the Company will be able to enter
into a joint venture or sale of its hardware business or that such a transaction
can be completed on satisfactory terms. There can be no assurance that the
Company will be able to retain its significant equity interest in the joint
venture, reduce expenses related to the hardware business, or develop and
exploit product opportunities in PC chips, game chips, DVD chips, Internet
chips, video computer chips or systems. The particular transaction or the
absence of a transaction could cause the Company to recognize significant
write-offs or incur other costs which could produce operating losses.
CHANGING PRODUCT PLATFORMS AND FORMATS
The Company is entering new markets with its software products,
specifically the PC and Internet markets. The markets for entertainment software
and entertainment software platforms are undergoing rapid technological change.
As a result, the Company must continually anticipate and adapt its products to
emerging platforms and evolving consumer preferences. The introduction of new
platforms and technologies can render existing products obsolete and
unmarketable. Development of entertainment software products for new hardware
platforms requires substantial investments in research and development for
technologies such as motion capture, digitized speech and sound effects, music
and full motion video, and requires the Company to anticipate and develop
products for those platforms that will ultimately be successful. Generally,
software development efforts must occur well in advance of the release of new
platforms in order to introduce new products on a timely basis following the
release of such platforms. Although the Company intends to develop and market
entertainment software for certain advanced and emerging platforms, the
development and marketing efforts in connection therewith may require greater
financial and technical resources than currently possessed by the Company. In
addition, there can be no assurance that the platforms for which the Company
develops products will achieve market acceptance and, as a result, there can be
no assurance that the Company's development efforts with respect to such new
platforms will lead to marketable products or products that generate sufficient
revenues to offset research and development costs incurred in connection with
the creation of such products. There can be no assurance that the Company will
be successful in developing and marketing products for new platforms. Failure to
develop products for new platforms that achieve significant market acceptance
would have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, the Company does not have a
license to develop products for certain of the most popular platforms, including
the Sony, Sega and Nintendo proprietary platforms. Finally, the Company's
products must maintain compatibility with certain hardware, software and
hardware accessories. Any changes in
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any of such third-party product designs that result in incompatibility of the
Company's products could result in significant product returns and obsolescence.
DEPENDENCE ON PC MARKET
The Company's future success is in part dependent on the PC market,
which is extremely dynamic and has historically been characterized by wide
fluctuations in product supply and demand. From time to time, the PC industry
has also experienced significant downturns, often in connection with, or in
anticipation of, declines in general economic conditions. Furthermore, rapid
technological change in PC hardware may render the currently installed base of
PCs and the Company's technology obsolete. There can be no assurance that unit
sales of PCs will continue at their present levels or increase in the future.
The Company's revenues from its entertainment software products will be
dependent on marketing and distribution of titles to an installed base of PC
users. Any decrease in demand for PCs would have a material adverse effect on
the Company's operating results.
DEPENDENCE ON INTERACTIVE MULTIPLE-PLAYER GAMES ON INTERNET PLATFORM
The Company's future success is in part dependent upon continued growth
in the use of the Internet. Rapid growth in the use of and interest in the
Internet is a recent phenomenon. The Internet may not prove to be a viable
commercial marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure, such as a reliable network
infrastructure, or timely development of performance improvements including high
speed modems. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, there can
be no assurance that the Internet infrastructure will continue to be able to
support the demands placed upon it by any such growth. In addition, the Internet
could lose its viability due to delays in the development or adoption of new
standards and protocols required to handle increased levels of Internet
activity, or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in slower response times and adversely affect usage of entertainment
software developed for the Internet. If the use of the Internet does not grow,
or if the Internet infrastructure does not effectively support the growth that
may occur, the Company's business, results of operations and financial
conditions would be materially adversely affected.
There can be no assurance that multiple-player games over the Internet
will become popular or widespread. The Company has had limited experience in
this area and only recently acquired Archetype Interactive Corporation
("Archetype"), an Internet game company. Various technical issues relating to
multiple-player games over the Internet exist, such as system compatibility
problems and inadequate infrastructure. There has been little evidence of
success in this area and a profitable business model to capitalize on the
interactive entertainment and game market on the Internet has not yet been
established.
DEPENDENCE ON THE M2 TECHNOLOGY
The Company has undertaken a diversification plan to design, integrate,
license and sell products directed at the 64-bit interactive entertainment
market. The Company's next generation 64-bit M2 Technology, which has been
licensed to Matsushita and Cirrus Logic, has not yet been fully developed. The
Company must, among other things, establish technical feasibility and complete
development of the M2 Technology. The Company is dependent on Matsushita, as the
exclusive licensee, to develop and manufacture video game
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console products using the M2 Technology. Matsushita will control the timing of
any product launch, the pricing and marketing of any such products, and any
third-party licensing activities pertaining to such products. Matsushita has not
yet completed development of its production version of a video game console
based on the M2 Technology, and there can be no assurance that Matsushita or any
future hardware system licensee will be able to manufacture such a video game
console in large enough quantities or at low enough costs to enable this product
to be priced competitively. The video game hardware platform market is extremely
competitive and the Company's previous experience with the 3DO Multiplayer
platform, the first 32-bit, CDROM-based, video game console in the market,
demonstrates the perils involved with the development of new video game hardware
technology. An installed base of hardware using the M2 Technology is necessary
for the Company to successfully develop and market entertainment software for
such a hardware base. There can be no assurance that the M2 Technology will
offer advantages over alternative technologies sufficient to generate market
acceptance.
PRODUCT DEVELOPMENT
The Company's future success is based in substantial part upon its
ability to create software titles for the 64-bit interactive entertainment
markets and design products for the PC, M2 and Internet platforms. Software
product development schedules, particularly for new hardware platforms such as
the M2 and Internet platforms, are difficult to predict because they involve
creative processes, use of new development tools for new platforms, and the
learning processes associated with development for new technologies, as well as
other factors. As a result of their complexity, software products frequently
contain undetected errors or failures, especially when first introduced or when
new versions or enhancements are released. Despite extensive product testing
prior to the release of new products, the Company may discover errors in its
products after their initial release. There can be no assurance that, despite
testing by the Company, errors will not be found in new products and product
revisions released by the Company in the future. The occurrence of such errors
could result in significant losses to the Company. Any such occurrence also
could result in reduced market acceptance of the Company's products, which could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, CD-ROM and Internet multiple-player products
frequently include more content and are more complex, time-consuming and costly
to develop than simpler PC or video game console products and accordingly, cause
additional development and scheduling risk. These development risks can cause
particular difficulties in predicting quarterly results. Failure to meet product
development schedules may cause a shortfall in shipments in any quarter and may
cause the operating results for such quarter to fall significantly below
anticipated levels.
SHORT PRODUCT LIFESPANS
Interactive entertainment software products typically have life spans
of only 3 to 12 months. Accordingly, the Company will need to constantly develop
and bring to market new products that achieve market acceptance quickly. The
Company's future success will depend in large part on its ability to develop and
introduce new products on a timely basis. New products must keep pace with
competitive offerings, adapt to new hardware platforms and emerging industry
standards, and provide additional functionality. If the Company is unable, due
to resource constraints or technological or other reasons, to develop and
introduce such products in a timely manner, this inability would have a material
adverse effect on its operating results and financial condition. There can be no
assurance that the Company will be able to complete the timely development of,
and commercially release, new software products that achieve market acceptance.
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TECHNOLOGICAL CHANGE
The market for interactive multimedia products is characterized by
rapidly changing technology and user preferences, evolving formats for
compression of audio and video data and frequent new product introductions. Even
if the Company's technology and related software titles gain broad market
acceptance, the Company's success will depend, among other things, upon the
ability of the Company and its licensees to achieve and maintain technological
leadership and to remain competitive in terms of price and product performance.
The Company's pursuit of these technical improvements and other technological
goals will require substantial expenditures, and there can be no assurance that
any of these technical improvements will be developed or that the Company or its
licensees will achieve or maintain technological leadership. Any material
failure of the Company or its licensees to develop or incorporate any planned
improvement would adversely affect the widespread adoption of the Company's
technology and the introduction and sale of future products based on the
Company's technology, and would increase the likelihood that competitive
technologies will become broadly accepted. There can be no assurance that
products or technologies developed by others will not render obsolete the
Company's technology and the products based on the Company's technology.
COMPETITION
The Company is entering new markets with its software products,
specifically the PC and Internet markets. This will, to some degree, require
distribution through distributors and retailers who have not, in the past,
carried the Company's products. There will be intense competition in procuring
adequate distribution of the Company's software products. There can be no
assurance that the Company will succeed in obtaining sufficient distribution to
enable its products to achieve market success.
The markets in which 3DO's software products compete are expected to
undergo significant changes, due in part to the introduction, or planned
introduction, of new hardware platforms and electronic delivery systems, and the
entry and participation of new industries and companies. Severe competition
exists for retail shelf space in the consumer software industry. A number of
factors, including the Company's historic performance, discounts to retailers,
inventory and return policies, customer service, product support, brand
recognition, perceived quality and entertainment value of specific titles, and
marketing activities all affect access to distributors and retailers. In
addition, sales of interactive entertainment products are becoming increasingly
"hits" driven. Fewer products in that market are successful and publishers of
these games, including the Company, must incur substantial marketing and sales
expenses to promote retailers' sales of such products.
A variety of companies offer products that compete directly with one or
more of the Company's products. These direct competitors vary in size from very
small companies with limited resources to companies with financial, managerial
and technical resources substantially greater than those of the Company. The
Company's competitors include manufacturers of hardware platform systems such as
Nintendo, Sega and Sony (together with third-party licensees); diversified media
and entertainment companies such as Walt Disney Company, Viacom International,
Inc. and Time Warner Enterprises, Inc.; large independent multi-platform
software developers such as Electronic Arts Inc., Acclaim Entertainment, Inc.,
Lucas Arts Entertainment Co., and Spectrum HoloByte, Inc.; and publishers of
personal computer software such as Microsoft Corporation, Maxis, Inc., and
Sierra On-line, Inc. In addition, companies in industries such as cable
television and telecommunications, many of which have significant financial
resources, have begun to diversify or have announced plans to enter the
interactive software market. These new entrants have the potential to become
significant competitors.
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VARIABILITY OF OPERATING RESULTS
The Company expects that its operating results will experience
significant fluctuation as a result of changes in the composition of the
Company's revenues, the timing of new video game hardware and software product
introductions by the Company's competitors, the timeliness with which the
Company releases its products to the market, fluctuations in the PC market, the
financial impact of acquisitions of other companies by the Company, and the
Company's investments in research and development, and expenditures on marketing
and promotional programs.
The market for entertainment software is highly seasonal. The Company's
revenues are expected to be affected by the seasonal nature of the market, which
is characterized by increased sales in the fourth calendar quarter coinciding
with the holiday selling season and typically a seasonal low in revenues in the
quarter ending in June. Seasonal trends may also be affected by general economic
or industry factors. The Company's revenues may also reflect substantial
variations as a result of the timing of the introduction of and demand for a
particular software title it has published and/or distributed. Such demand may
increase or decrease as a result of a number of factors, such as consumer
preferences, product announcement by competitors and the popularity of
particular hardware platforms, that cannot be predicted. The software industry
is characterized by frequent product delays which can materially adversely
affect the sales of a product if the product is not released in time for the
holiday season.
The Company's revenues are also affected by the timing of payments
under agreements with companies that license the Company's technologies. These
licenses can represent significant revenues to the Company which can cause
fluctuation in quarterly results. Also, where there are contractual obligations
of the Company to complete certain technology, the Company will recognize
revenues on the "percentage of completion" method based upon the costs incurred
by the Company to fulfill its contractual obligation to deliver technology as
specified in the agreement. The progress made in completing the engineering of
such technology will affect the revenue recognized in any particular quarter.
The Company estimates that it will recognize revenue in connection with the M2
Technology License Agreement with Matsushita through the fourth quarter of the
fiscal year ending March 31, 1998.
The Company has stock-balancing programs for its software products
that, under certain circumstances and up to a specified amount, allow for the
exchange of software products by resellers. The Company also typically provides
for price protection for its software products that, under certain conditions,
allows the reseller a price reduction from the Company for unsold products. The
Company maintains a policy of exchanging products or giving credits, but does
not typically give cash refunds. The risk of price protection requirements is
increasing as a result of the maturing and the increasingly hit-based nature of
the video game market. Moreover, the risk of product returns may increase as new
hardware platforms become more popular or market factors force the Company to
make changes in its distribution system. Overstocking in the distribution
channel can result in high returns or the requirement for substantial price
protection in subsequent periods. The Company provides for reserves for returns
and price protection based on estimated future returns of products, taking into
account promotional activities, the timing of new product introductions,
distributor and retailer inventories of the Company's products and other
factors. There can be no assurance that actual returns or price protection will
not exceed the Company's reserves.
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The Company's efforts to sell its hardware business or contribute its
hardware business to a joint venture may result in recognition of write-offs or
other costs, which could product operating losses.
DEPENDENCE ON DISTRIBUTORS
The distribution channels through which consumer software products are
sold have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The bankruptcy or other business
difficulties of a distributor or retailer could render the Company's accounts
receivable from such entity uncollectible, which could have an adverse effect on
the operating results and financial condition of the Company. In addition, an
increasing number of companies are competing for access to these channels. The
Company's arrangements with its distributors and retailers may be terminated by
either party at any time without cause. Distributors and retailers often carry
products that compete with those of the Company. Retailers of the Company's
products typically have a limited amount of shelf space and promotional
resources for which there is intense competition. There can be no assurance that
distributors and retailers will purchase the Company's products or provide the
Company's products with adequate levels of shelf space.
DEPENDENCE ON THIRD PARTIES
The Company continues to be dependent on the technological,
manufacturing, marketing, financial and other resources of third parties with
which it has established or is attempting to establish commercial relationships.
The Company relies on third parties to develop, manufacture, market and
distribute products that incorporate technology licensed from 3DO, such as
Matsushita and Cirrus Logic with respect to the M2 technology. The Company's
licensees may choose not to utilize the Company's technology and could develop
products or technologies that compete directly with products based upon the
Company's technology. In addition, there can be no assurance that these third
parties will commit any resources to the commercialization of the Company's
technology. Further, a licensee's financial or other resource limitations may
prevent such licensee from commercializing products based on the Company's
technology. The Company's various units also depend upon third-party
developers. Any failure of a third-party developer to complete its contractual
obligations to the Company would adversely affect Studio 3DO's ability to
complete and release titles, which in turn would adversely affect the Company's
operating results.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued
service of its key technical, marketing, sales and management personnel. Given
the Company's early stage of development, the Company is dependent on its
ability to recruit, retain and motivate high-quality personnel, especially
highly-skilled engineers, programmers and artists involved in the ongoing
hardware and software development required to define future interactive hardware
systems, refine existing interactive technologies, introduce enhancements for
future applications, and develop novel software titles. The Company is
particularly dependent on the skills and contributions of several key
individuals, any one of whom may voluntarily terminate employment with the
Company at any time and whose departure would have a material adverse effect on
the Company's business. The Company is particularly dependent upon its Chief
Executive Officer, Trip Hawkins, who is also acting as creative director. The
Company does not have "key person" life insurance policies on any of its
employees. The interactive multimedia industry is characterized by a
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high level of employee mobility and aggressive recruiting of skilled personnel.
The Company competes with computer hardware, software and entertainment
companies for the recruitment of skilled personnel. There can be no assurance
that the Company's current employees will continue to work for the Company or
that the Company will be able to obtain the services of additional personnel
necessary for the Company's growth.
RECENT ACQUISITIONS
The Company acquired the business of Cyclone Studios ("Cyclone"), a
software developer, during November of 1995. In May of 1996, the Company
acquired all the outstanding capital stock of Archetype Interactive Corporation
("Archetype"), a developer of a multi-user role playing game to be played over
the Internet, and in June of 1996, the Company acquired the assets and assumed
certain liabilities of New World Computing, Inc. ("NWC"), an entertainment
software company. Each of these acquisitions represented the addition of new
products and personnel to the Company, which has caused changes in the
allocation of management and other resources, marketing strategies and
production systems. The Company's ability to manage its acquired businesses
effectively will depend on its ability to hire additional management and
technical personnel and to continue to improve the operating, financial and
management systems and controls in each of its operating units. There can be no
assurance that the Company will be able to successfully integrate these acquired
businesses or other companies which the Company may acquire in the future with
the current operations of the Company.
FUTURE ACQUISITIONS
The Company is in the process of establishing operations as a
multi-platform entertainment software developer and its strategy may involve, in
part, acquisitions of products, technologies or businesses from third parties.
Identifying and negotiating these acquisitions may divert substantial management
time away from the Company's operations. An acquisition could absorb substantial
cash resources, could require the Company to incur or assume debt obligations,
or could involve the issuance of additional equity securities of the Company.
The issuance of additional equity securities could dilute and could represent an
interest senior to the rights of then-outstanding common stock. An acquisition
which is accounted for as a purchase, like the acquisitions of Cyclone and NWC,
could involve significant one-time non-cash write-offs, and could involve the
amortization of goodwill over a number of years, which would adversely affect
earnings in those years. Acquisitions outside the entertainment software area
may be viewed by outside market analysts as a diversion of the Company's focus
on entertainment software. For these reasons, the market for the Company's stock
may react positively or negatively to the announcement of any acquisition. Any
acquisition will require attention from the Company's management to integrate
the acquired entity into the Company's operations, may require the Company to
develop expertise outside its existing businesses, and may result in departures
of management of the acquired entity. An acquired entity may have unknown
liabilities, and its business may not achieve the results anticipated at the
time of the acquisition. Any acquisitions that adversely affect the operations
of the Company may have an adverse impact on the Company's stock price.
PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain and
enforce intellectual property protection for its technology in both the United
States and other countries. The Company has filed a number of patent
applications with the United States Patent and Trademark Office ("U.S. Patent
Office") and international counterparts of certain of these applications with
the United States Receiving Office pursuant to the Patent
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Cooperation Treaty. The Company intends to file additional applications as it
deems appropriate for patents covering its technology. The process of obtaining
patent protection is expensive and absorbs substantial management and
engineering time. No assurance can be given that any patents will issue from
these applications or that, if any patent does issue, the claims allowed will be
sufficiently broad to protect the key aspects of the Company's technology or
that the patent laws will provide effective legal or injunctive remedies to stop
any infringement of the Company's patents. In addition, no assurance can be
given that any patent issued to the Company will not be challenged, invalidated
or circumvented, that the rights granted under patents will provide competitive
advantages to the Company, or that the Company's competitors will not
independently develop or patent technologies that are substantially equivalent
or superior to the Company's technology.
The Company also relies on trade secrets and proprietary know-how which
it seeks to protect, in part, by confidentiality agreements with its employees,
consultants, developers, vendors, and current and prospective licensees. The
Company's license agreements prohibit unauthorized disclosure or unauthorized
reverse-engineering of the Company's licensed technology. However, the Company
expects that third parties may attempt to reverse-engineer its technology
without authorization and there can be no assurance that the Company's
confidentiality and license agreements will not be breached or that the Company
would have adequate remedies for any breach. As a result, the Company may not
have an adequate remedy if a competitor disassembles or reverse-engineers
products based on the Company's proprietary technology, even if the technology
is protected by trade secret or copyright law. There can be no assurance that
the Company's trade secrets will not otherwise become known or be independently
discovered by competitors.
The Company relies in part on copyright laws to prevent unauthorized
duplication or distribution of its software, written materials and audiovisual
works. The Company is also considering seeking protection of its semiconductor
circuit designs under applicable mask work right laws. Existing copyright and
mask work right laws afford only limited protection, particularly in certain
jurisdictions outside the United States where the Company may seek to license
its technology. There can be no assurance that the copyright laws or mask work
right laws will adequately protect the Company's technology.
The Company licenses its name and logo for use in connection with
authorized products. The Company has experienced difficulty in registering some
of its marks in various jurisdictions, including Japan. There can be no
assurance that the Company will obtain sufficient trademark protection for these
marks, that these marks will not be duplicated without authorization, or that
the Company will have adequate remedies for trademark infringement in any
country.
From time to time, the Company receives communications from third
parties asserting that features or content of certain of the Company's or its
licensees' products infringe upon intellectual property rights held by such
third parties. The Company has been notified by a third party that such third
party believes that the Company's initial hardware design, the 3DO Multiplayer
system, infringes upon one or more of such third party's patents. The Company is
evaluating this claim in the event litigation is instigated. As the number of
patents and products in the Company's industry increases and as the
functionality of these products further overlaps, the Company believes that
products based on its technology will increasingly become the subject of
infringement claims. The Company could incur substantial costs in defending
itself or its licensees in litigation brought by others, or in prosecuting
infringement claims against third parties. The Company could also incur
substantial costs in interference proceedings declared by the U.S. Patent Office
in connection with one or more of the Company's or a third party's
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patents or patent applications. Those proceedings could result in an adverse
decision as to the priority of the Company's inventions. A third party claiming
infringement may be able to obtain an injunction or other equitable relief,
which could effectively block the ability of the Company's licensees to import
into the United States or to distribute and sell hardware or software products
licensed by the Company. This would materially adversely affect the Company.
Such a third party could also assert claims for substantial damages against the
Company, its licensees or distributors of such licensees' products, which could
inhibit the manufacture or sale of licensed products. In the event of a claim of
infringement, the Company or its licensees may be required to obtain one or more
licenses from third parties. There can be no assurance that the Company or its
hardware and software licensees will be able to obtain from third parties any
required license to technology at a reasonable cost or at all. Failure by the
Company or its hardware and software licensees to obtain any such license would
have a material adverse impact on the Company.
VOLATILITY OF STOCK PRICE
Market prices of securities of companies engaged in the entertainment
software industry have been highly volatile. Factors such as announcements of
the introduction of new products by the Company or its competitors,
announcements of joint development efforts or corporate partnerships in the
entertainment software field, market conditions in the technology,
entertainment, cable, telecommunications and other emerging growth company
sectors, and rumors relating to the Company or its competitors, have had and may
in the future have a significant impact on the market price of the Company's
common stock. Further, the stock market has experienced volatility that has
particularly affected the market prices of equity securities of many high
technology and development-stage companies, such as those in the entertainment
software and semiconductor industries that has often been unrelated to the
operating performance of such companies. These market fluctuations may adversely
affect the price of the Company's common stock.
22
<PAGE> 23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On October 3, 1996, Cirrus Logic, Inc. ("Cirrus"), filed a complaint
in the Superior Court of the State of California for the Southern Division of
the County of Alameda to rescind a Joint Development and License Agreement
("Agreement") entered into between Cirrus and the Company on February 29, 1996,
on the grounds of frustration of purpose, mistake, failure of consideration,
concealment, and non-disclosure; and to obtain a repayment of $2.5 million in
nonrefundable payments made to the Company. The Company has responded to
Cirrus' complaint and filed a cross-complaint for Cirrus' breach of the
Agreement to enforce its rights under the Cirrus Agreement, including
procurement of the payment by Cirrus of $4.5 million in nonrefundable license
fees, prepaid royalties, and termination fees; and to recover damages, collect
interest, and obtain attorneys' fees and costs. There can be no assurance that
the Company will prevail in the litigation or receive the additional $4.5
million that it believes Cirrus owes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 20, 1996, at the Company's Annual Meeting of Stockholders,
the holders of the Common Stock of the Company elected directors of the Company,
approved an increase in the number of shares reserved for issuance under the
1993 Incentive Stock Plan by 3,548,705 shares, and confirmed the appointment of
KPMG Peat Marwick as independent auditors for the fiscal year ending March 31,
1997. The voting on each matter is set forth below.
1. Votes cast for election of the directors for Class A of the Company's Board
of Directors:
<TABLE>
<CAPTION>
Nominee Votes for Each Nominee Votes Withheld from Each Nominee
- ------- ---------------------- --------------------------------
<S> <C> <C>
Charles S. Paul 24,531,321 214,985
Robert W. Pittman 24,532,470 213,836
</TABLE>
2. Votes cast for approval of an increase in the number of shares of Common
Stock reserved for issuance under the 1993 Incentive Stock Plan by 3,548,705
shares:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
- --- ------- ------- ---------------
<S> <C> <C> <C>
11,020,683 5,157,100 434,980 8,133,543
</TABLE>
3. Votes cast to confirm the appointment of KPMG Peat Marwick as independent
auditors for the fiscal year ending March 31, 1997:
<TABLE>
<CAPTION>
For Against Abstain Broker Non-Vote
- --- ------- ------- ---------------
<S> <C> <C> <C>
24,602,946 78,074 65,286
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
(b) Reports on Form 8-K for the quarter covered by this report:
Current Report on Form 8-K filed September 18, 1996
Amended Current Report on Form 8-K/A filed August 22, 1996
Current Report on Form 8-K filed July 12, 1996
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE 3DO COMPANY
Dated: November 14, 1996 /s/ PAUL J. MILLEY
------------------
Paul J. Milley
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
(Duly authorized officer)
24
<PAGE> 25
EXHIBIT INDEX
11.01 Computation of Net Loss Per Share
27.01 Financial Data Schedule
<PAGE> 1
EXHIBIT 11.01
THE 3DO COMPANY
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ --------------------------------
1996 1995 1996 1995
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income (loss) $ 6,807 ($ 8,759) ($ 3,584) ($ 16,687)
=========== ============ ============ ============
Weighted average number of common shares
outstanding 27,901 25,622 27,260 25,051
----------- ------------ ------------ ------------
Common equivalent shares from options to
purchase common stock 2,342 -- -- --
----------- ------------ ------------ ------------
Common and common equivalent shares 30,243 25,622 27,260 25,051
=========== ============ ============ ============
Net income (loss) per common and common
equivalent share $ 0.23 ($ 0.34) ($ 0.13) ($ 0.67)
=========== ============ ============ ============
</TABLE>
(1) This schedule should be read with Note 5 - Net Loss Per Share in the
Condensed Notes to Consolidated Financial Statements.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,118
<SECURITIES> 52,666
<RECEIVABLES> 6,493
<ALLOWANCES> 3,723
<INVENTORY> 910
<CURRENT-ASSETS> 65,760
<PP&E> 26,710
<DEPRECIATION> 17,031
<TOTAL-ASSETS> 78,192
<CURRENT-LIABILITIES> 61,548
<BONDS> 0
0
0
<COMMON> 279
<OTHER-SE> (188)
<TOTAL-LIABILITY-AND-EQUITY> 78,192
<SALES> 42,079
<TOTAL-REVENUES> 42,079
<CGS> 3,977
<TOTAL-COSTS> 38,798
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 433
<INCOME-PRETAX> 416
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,584)
<EPS-PRIMARY> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
