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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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
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THE 3DO COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3177293
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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 January 31, 1997, the number of outstanding shares of the
registrants' common stock was 27,987,209.
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THE 3DO COMPANY
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.............................................. 3
Consolidated Balance Sheets at December 31, 1996 and March 31, 1996............ 3
Consolidated Statements of Operations for the three and nine months
ended December 31, 1996 and 1995............................................... 4
Consolidated Statements of Cash Flows for the nine months ended
December 31, 1996 and 1995..................................................... 5
Condensed Notes to Consolidated Financial Statements........................... 6
Management's Discussion and Analysis of Financial Condition and
Item 2. Results of Operations.......................................................... 9
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 21
Signatures..................................................................... 22
</TABLE>
2
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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)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------
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Current assets:
Cash and cash equivalents........................................... $ 11,959 $ 9,459
Short-term investments.............................................. 29,335 40,686
Accounts receivable, net............................................ 2,823 2,060
Inventory........................................................... 823 1,270
Prepaid and other current assets.................................... 1,756 942
--------- ---------
Total current assets........................................ 46,696 54,417
Property and equipment, net........................................... 8,841 8,642
Deposits and other assets............................................. 2,472 271
--------- ---------
Total assets................................................ $ 58,009 $ 63,330
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $ 1,988 $ 1,905
Accrued expenses.................................................... 6,394 3,814
Deferred revenue.................................................... 28,499 47,818
Current portion of capital lease obligations........................ 916 1,424
Hardware incentive obligations...................................... 2,944 4,620
Other current liabilities........................................... 1,406 1,787
--------- ---------
Total current liabilities................................... 42,147 61,368
Deferred revenue...................................................... 7,277 44
Capital lease obligations, net of current portion..................... 771 1,287
Other liabilities..................................................... 765 500
--------- ---------
Total liabilities........................................... 50,960 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 shares authorized;
27,978,380 and 26,003,402 shares issued and outstanding,
respectively..................................................... 279 260
Additional paid-in capital.......................................... 158,107 150,541
Cumulative translation adjustment................................... (207) (189)
Accumulated deficit................................................. (151,130) (150,481)
--------- ---------
Total stockholders' equity.................................. 7,049 131
--------- ---------
Total liabilities and stockholders' equity.................. $ 58,009 $ 63,330
========= =========
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
3
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THE 3DO COMPANY AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
-------------------- --------------------
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenues:
Royalties and license fees...................... $17,767 $ 5,582 $52,766 $ 11,758
Software publishing............................. 3,665 1,726 7,052 6,472
Developer products and other.................... 15 1,637 3,708 5,009
------- -------- ------- --------
Total revenues.......................... $21,447 $ 8,945 $63,526 $ 23,239
------- -------- ------- --------
Cost of revenues:
Royalties and pressing fees..................... 197 185 407 848
Software publishing............................. 2,455 2,116 4,351 3,685
Developer products and other.................... 152 1,302 2,023 2,368
------- -------- ------- --------
Total cost of revenues.................. 2,804 3,603 6,781 6,901
------- -------- ------- --------
Gross profit...................................... 18,643 5,342 56,745 16,338
------- -------- ------- --------
Operating expenses:
Research and development........................ 11,248 13,142 32,665 32,096
In-process research and development............. -- -- 7,700 --
Sales and marketing............................. 2,356 1,650 6,083 5,844
General and administrative...................... 2,651 3,045 8,604 7,085
------- -------- ------- --------
Total operating expenses................ 16,255 17,837 55,052 45,025
------- -------- ------- --------
Operating income (loss)........................... 2,388 (12,495) 1,693 (28,687)
Net interest and other income..................... 567 42 1,678 108
------- -------- ------- --------
Income (loss) before income and foreign
withholding taxes............................... 2,955 (12,453) 3,371 (28,579)
Income and foreign withholding taxes.............. 70 6,687 4,070 7,249
------- -------- ------- --------
Net income (loss)................................. $ 2,885 $(19,140) $ (699) $(35,828)
======= ======== ======= ========
Net income (loss) per common and common equivalent
share........................................... $ 0.10 $ (0.74) $ (0.03) $ (1.39)
======= ======== ======= ========
Common and common equivalent shares used in
computing per share amounts..................... 29,496 25,782 27,503 25,702
======= ======== ======= ========
</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 NINE MONTHS
ENDED
DECEMBER 31,
--------------------
1996 1995
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (699) $(35,828)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................... 5,079 4,192
Deferred revenue................................................. (12,086) 56,788
In-process research and development.............................. 7,700 --
Changes in operating assets and liabilities:
Accounts receivable, net...................................... 176 (1,619)
Inventory..................................................... 668 (639)
Prepaid and other assets...................................... (399) 1,185
Accounts payable.............................................. (831) (1,134)
Accrued expenses.............................................. 1,602 3,680
Hardware incentives........................................... (1,236) 1,059
Other liabilities............................................. (115) 1,310
------- --------
Net cash provided by (used in) operating activities..................... (141) 28,994
------- --------
Cash flows from investing activities:
Short-term investments, net........................................... 11,395 (45,562)
Capital expenditures.................................................. (4,551) (1,476)
Purchase Price Guarantee Payment...................................... (4,575) --
------- --------
Net cash provided by (used in) investing activities..................... 2,269 (47,038)
------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock, net........................... 1,408 18,066
Payments on capital lease obligations................................. (1,025) (1,221)
------- --------
Net cash provided by (used in) financing activities..................... 383 16,845
------- --------
Effect of foreign currency translation.................................. (11) (488)
------- --------
Net increase (decrease) in cash and cash equivalents.................... 2,500 (1,687)
Cash and cash equivalents at beginning of period........................ 9,459 4,846
------- --------
Cash and cash equivalents at end of period.............................. $11,959 $ 3,159
======= ========
Supplemental cash flow information:
Cash paid during the period for:
Interest........................................................... $ 536 $ 558
Income and foreign withholding taxes............................... $ 4,070 $ 6,378
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital lease obligations.................... $ 116 $ 245
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
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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 December 31, 1996 and for the quarter and
nine months ended December 31, 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 nine months ended December 31, 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, Inc."), a PC platform game
developer. Subsequent to the asset purchase, the Company created a production
unit which uses the New World Computing brand name ("NWC production unit"). NWC,
Inc. continues to be a wholly-owned subsidiary of NTN Communication, Inc.
("NTN"). As consideration for the purchase, the Company issued 1.02 million
shares of its common stock to NTN. In addition, under the terms of the
agreement, the Company was obligated to make a cash payment to NTN because the
value of the 3DO common stock issued in the transaction fell below $10 per share
during a specified period following the closing date (the "Purchase Price
Guarantee"). During the three-month period ending December 31, 1996, the Company
paid approximately $4.6 million to NTN, which represents the payment in full
under the Purchase Price Guarantee.
The Company recorded the purchase 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 purchased in-process research and development.
Additionally, approximately $2.9 million in various intangible assets were
purchased and this amount will be amortized on a straight-line basis over a
period of one to five years. The purchase price was recorded based on the
Guaranteed Purchase Price and, accordingly, the $4.6 million additional payment
made during the three-month period ended December 31, 1996 did not impact the
Company's statement of operations for that period.
The results of operations of the NWC production unit have been included in
the consolidation results of operations of the Company since the date of
acquisition. The following unaudited pro forma information presents the results
of operations of the 3DO Company and the NWC production unit for the three and
nine months ended December 31, 1996 and 1995, with pro forma adjustments, as if
the acquisition had been consummated as of the beginning of the periods
presented.
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THE 3DO COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro forma financial information:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------ ------------------
1996 1995 1996 1995
------ ------- ------ -------
<S> <C> <C> <C> <C>
Revenue............................... 21,447 11,038 64,367 27,912
Net Income (Loss)..................... 2,885 (19,417) (2,280) (36,078)
Income (Loss) per Share............... 0.10 (0.72) (0.08) (1.35)
</TABLE>
NOTE 3 -- 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 4 -- 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 5 -- 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 December 31, 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 December 31, 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 466,826 shares under
such program as of December 31, 1996.
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 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 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
7
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THE 3DO COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
systems in certain markets, to encourage production and reduced pricing of such
systems. All 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 6 -- INCOME TAXES
Income tax expense represents foreign income and withholding taxes, and
minimum state taxes.
NOTE 7 -- SUBSEQUENT EVENT
On January 29, 1997, the Company announced that it had reached agreement in
principle with Samsung Electronics Co., Ltd. ("Samsung") to form a new joint
venture company to design, market and sell custom semiconductors. Consummation
of the joint venture is dependent upon execution of a definitive agreement and
receipt of required government approvals. According to the agreement in
principle, Samsung will contribute approximately $30 million, a preferential
six-year semiconductor fabrication agreement, engineering talent and its
multimedia signal processor ("MSP") technology, and 3DO will contribute advanced
interactive 3-D, digital video and audio technologies, hardware and software
design expertise, engineering talent from the Company's hardware group and
certain fixed assets and computer equipment. The Company will own approximately
49% of the joint venture upon closing and will account for its stake in the
joint venture using the equity method.
8
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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.
On January 29, 1997, the Company announced that it had reached agreement in
principle with Samsung Electronics Co., Ltd. ("Samsung") to form a new joint
venture company to design, market and sell custom semiconductors. Consummation
of the joint venture is dependent upon execution of a definitive agreement and
receipt of required government approvals. According to the agreement in
principle, Samsung will contribute approximately $30 million, a preferential
six-year semiconductor fabrication agreement, engineering talent and its
multimedia signal processor ("MSP") technology, and 3DO will contribute advanced
interactive 3-D, digital video and audio technologies, hardware and software
design expertise, engineering talent from the Company's hardware group and
certain fixed assets and computer equipment. The Company will own approximately
49% of the joint venture upon closing and will account for its stake in the
joint venture using the equity method. The Company anticipates that operating
expenses will decrease following the completion of the joint venture as the
employees in its hardware group accept employment with the joint venture.
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 "M2 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 M2 Licensing Agreement, Matsushita granted 3DO a
non-exclusive license to use the M2 Technology for the development, manufacture
and distribution of (i) hardware products designed for use in the computer
field, (ii) software and peripherals compatible with hardware products developed
by Matsushita or its sublicensees that incorporate the M2 Technology, and (iii)
development systems to be used by 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 M2 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 M2
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
M2 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 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 its "3-D Engine," which is a component of the proprietary
semiconductor technology that is part of the M2 Technology. As partial
consideration under such agreement, the Company has received the
9
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non-refundable sum of $2.5 million as of December 31, 1996. This payment has
been recognized into revenue under the percentage of completion method.
On October 3, 1996, 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 regarding Cirrus'
breach of the Cirrus Agreement and seeking to enforce its rights under said
agreement, including procurement of Cirrus' payment of $4.5 million in
nonrefundable license fees, prepaid royalties and termination fees, plus
damages, interest, and attorneys' fees and costs. Although 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,
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 has derived a majority of its revenue from the recognition
of income from the M2 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 M2 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 December 31, 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 December 31, 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 has issued 466,826 shares
under such program as of December 31, 1996.
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
592,000 shares of its common stock to the Archetype shareholders. The Company
accounted for this acquisition using the "pooling of interests" method.
In June 1996, the Company purchased certain assets and assumed certain
liabilities of New World Computing, Inc. ("NWC, Inc."), a PC platform game
developer. Subsequent to the asset purchase, the Company created a production
unit which uses the New World Computing brand name ("NWC production unit"). NWC,
Inc. continues to be a wholly-owned subsidiary of NTN Communications, Inc.
("NTN"). As consideration for the purchase, the Company issued 1.02 million
shares of its common stock to NTN. In addition, under the terms of the
agreement, the Company was obligated to make a cash payment to NTN because the
value of the 3DO common stock issued in the transaction fell below $10 per share
during a specified period following the closing date (the "Purchase Price
Guarantee"). During the three-month period
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ending December 31, 1996, the Company paid approximately $4.6 million to NTN,
which represents the payment in full under the Purchase Price Guarantee.
This payment had no impact on the Company's income statement for the quarter as
the full purchase price was booked in the quarter ended September 30, 1996. 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, the proposed joint venture of its
hardware business with Samsung Electronics Co., Ltd., the timing of new hardware
and software product introductions by the Company, its licensees and 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 revenues 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.
RESULTS OF OPERATIONS
For the quarter ended December 31, 1996, the Company incurred a net income
of $2.9 million compared to a net loss of $19.1 million for the same quarter in
fiscal 1995. For the nine months ended December 31, 1996 and 1995, the Company
incurred net losses of $0.7 million and $35.8 million, respectively. Included in
the net loss for the nine months ended December 31, 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 M2 Licensing
Agreement.
Revenue for the three months ended December 31, 1996 and 1995 totaled $21.4
million and $8.9 million, respectively. Revenue for the nine months ended
December 31, 1996 totaled $63.5 million compared to $23.2 million for the nine
months ended December 31, 1995. Royalties and license fees of $17.8 million and
$52.8 million were the largest component of revenue for the three and nine
months ended December 31, 1996, respectively, compared to $5.6 million and $11.8
million for the prior comparable periods. The increase was due primarily to the
revenue recognition of the M2 Licensing Agreement with Matsushita, which totaled
$17.7 million and $50.1 million for the quarter and nine months ended December
31, 1996, respectively. This revenue was recognized using the
percentage-of-completion method.
Software publishing revenue totaled $3.7 million and $7.1 million for the
three and nine months ended December 31, 1996, respectively, compared to $1.7
million and $6.5 million for the three and nine months ended December 31, 1995,
respectively. Revenue for this fiscal year was derived primarily from the
company's 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 $0.02 million and $3.7 million
for the quarter and nine months ended December 31, 1996, respectively, compared
to $1.6 million and $5.0 million for the prior comparable periods. Revenue for
the quarter and nine months ended December 31, 1996 was comprised primarily of
shipments of M2 development systems to MEI and other M2 developers. Revenue for
the prior comparable periods was comprised primarily of shipments of 3DO 32-bit
platform and M2 development systems, and of revenue recognized for engineering
and software development services. The decrease in
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revenue was attributable to the recognition of engineering and software
development services in the prior periods. No revenue of this type was recorded
in the current periods.
Cost of revenues of $2.8 million and $6.8 million for the quarter and nine
months ended December 31, 1996, respectively, compared to $3.6 million and $6.9
million for the quarter and nine months ended December 31, 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 nine
months ended December 31, 1996, compared to the same periods in fiscal 1995. The
decrease is primarily due to the revenue from the M2 Licensing Agreement with
Matsushita recognized in the current fiscal year, which has no associated cost
of revenue.
Research and development expenses for the quarter ended December 31, 1996
totaled $11.2 million, compared to $13.1 for the same fiscal period in the prior
year. The decrease was primarily due to reduced research and development
spending in the hardware systems unit. Research and development expenses,
including in-process research and development, for the nine months ended
December 31, 1996 totaled $40.0 million, compared to $32.1 million for the prior
comparable period. The increase was primarily due to a 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 World Computing, which were acquired by the Company in November 1995, May
1996 and June 1996, respectively. This increase was offset by lower research and
development spending in the Company's hardware systems division as the M2
development project approaches completion.
Sales and marketing expenses increased from $1.7 million and $5.8 million
for the quarter and nine months ended December 31, 1995, respectively, to $2.4
million and $6.1 million for the quarter and nine months ended December 31,
1996, respectively. The increase was attributable to marketing expenses
associated with the Company's software shipped for the holiday selling season.
This was offset by the disposition of 3DO Japan Co., Ltd. in December 1995 that
resulted in $0.4 million and $1.7 million expense reduction for the quarter and
nine months comparisons, respectively.
General and administrative expenses decreased from $3.0 million for the
quarter ended December 31, 1995 to $2.7 million for same period in 1996, but
increased from $7.1 million for the nine months ended December 31, 1995 to $8.6
million for the current comparable period. The decrease for the current quarter
was attributable to reserves recorded in the prior comparable quarter for bad
debt and other expenses related to the 3DO 32-bit Interactive Multiplayer
system. The increase in expenses for the nine months comparison was 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 $0.04 million and $0.1 million
for the quarter and nine months ended December 31, 1995, respectively, to $0.6
million and $1.7 million for the same periods this year, due primarily to
interest earned on higher cash balances as a result of proceeds collected from
the M2 Licensing Agreement with Matsushita.
The decrease in the provision for income and foreign withholding taxes for
the quarter and nine months ended December 31, 1996, compared to the same
periods last year, was attributable to the 10% foreign withholding taxes on the
$40 million payment received from Matsushita in fiscal 1996 compared to the 10%
foreign withholding taxes on the $60 million payment received from Matsushita
last fiscal year in connection with the M2 Licensing Agreement.
The Company anticipates that operating expenses will decrease as it
continues to streamline its organization to fully integrate acquisitions and
reduce expenses by reducing redundant headcounts and canceling certain
development projects and as employees in the Company's hardware group accept
employment with the joint venture following the formation of the joint venture.
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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 $41.3 million at December 31, 1996. At March 31, 1996, cash and
short-term investments totaled $50.1 million. This decrease was primarily due to
operating losses, capital expenditures and a one time payment of approximately
$4.6 million to NTN Communications, Inc. for the New World Computing
acquisition, offset by the net proceeds of $36 million received from Matsushita
in this fiscal year under the M2 Licensing Agreement. Net cash used in operating
activities for the nine months ended December 31, 1996 was approximately $0.3
compared to net cash provided by operating activities of $29.0 million for the
same period in 1995. The decrease was due principally to the $36 million payment
from Matsushita in this fiscal year, compared to $54 million received from
Matsushita in the prior fiscal year. For the nine months ended December 31,
1996, the Company invested approximately $4.6 million ($1.5 million in the same
period in 1995) in fixed assets, excluding stock or asset acquisitions, or
assets acquired under capital lease obligations. Fixed assets acquired during
the period were primarily 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. 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 activities through the end of calendar year 1997. There can be no
assurance that additional capital will not be required in calendar 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 calendar year 1997 will depend on these and other factors. If the Company
needs to raise additional funds through public or private financings, 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.
On January 29, 1997, the Company announced that it had reached agreement in
principle with Samsung Electronics Co., Ltd. ("Samsung") to form a new joint
venture company to design, market and sell custom semiconductors. According to
the agreement in principle, Samsung will contribute approximately $30 million, a
preferential six-year semiconductor fabrication agreement, engineering talent
and its multimedia signal processor ("MSP") technology, and 3DO will contribute
advanced interactive 3-D, digital video and audio technologies, hardware and
software design expertise, engineering talent from the Company's hardware group
and certain fixed assets and computer equipment. Consummation of the joint
venture is dependent upon execution of a definitive agreement and receipt of
required government approvals. In addition, transactions such as a joint venture
are subject to a range of contingencies including final negotiations of
structure, the Company's ability to retain its technical personnel pending
completion of the transaction, and shifts in competitive conditions in the
industry prior to establishing the joint venture. There can be no assurance that
the Company will be able to complete the joint venture, or, following
establishment of the joint venture, that the Company will be able to retain a
significant equity interest in the joint venture or reduce expenses related to
its hardware business. 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.
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FACTORS AFFECTING FUTURE PERFORMANCE
REORGANIZATION AND CHANGE IN STRATEGY
The Company is in the process of restructuring its organization to focus on
entertainment software products for PC CD-ROM, M2 hardware, the Internet, and
other consumer entertainment platforms. As part of its reorganization, the
Company intends to contribute its hardware business to a joint venture (or
pursue the opportunity to sell its hardware business), and has organized its
software business into four 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, the publication and distribution of internally- and
externally- developed software titles, and fees generated from subscriptions to
the Company's Internet products. 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 relating to 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 Licensing 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. Additionally, 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 such
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.
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, nor can there be any 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.
CONTRIBUTION OF HARDWARE BUSINESS TO A JOINT VENTURE
On January 29, 1997, the Company announced that it had reached agreement in
principle with Samsung Electronics Co., Ltd. ("Samsung") to form a new joint
venture company to design, market and sell custom semiconductors. Consummation
of the joint venture is dependent upon execution of a definitive agreement and
receipt of required government approvals. In addition, transactions such as a
joint venture are subject to a range of contingencies including final
negotiations of structure, the Company's ability to retain its technical
personnel pending completion of the transaction, and shifts in competitive
conditions in the industry prior to establishing the joint venture. There can be
no assurance that the Company will be able to complete the joint venture, or,
following establishment of the joint venture, that the Company will be able to
retain a significant equity interest in the joint venture or reduce expenses
related to its hardware business. 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.
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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
technical and financial 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 and software
accessories. Any changes in 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. Meridian 59, the Company's debut Internet product, is a
multi-user, role-playing game designed to be played over 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 products developed for the
Internet. If the use of the Internet does not grow, or if the Internet
infrastructure
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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 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, 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 entertainment 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 that product to be priced
competitively. The video game hardware platform market is extremely competitive
and the Company's previous experience with the 3DO Interactive Multiplayer
system, the first 32-bit, CDROM-based, video game console in the market,
demonstrated 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 and Internet platforms. Software product development
schedules, particularly for new hardware platforms such as the 64-bit 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 or new versions of current products that
achieve market acceptance quickly. The Company's future success will depend in
large part on
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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.
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 obligations to deliver technology as
specified in the relevant 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 Licensing 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 reserves established by the Company.
The Company's efforts to contribute its hardware business to a joint
venture or, alternatively, to sell its hardware business, may result in
recognition of write-offs or other costs, which could produce 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.
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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 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 software
production 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 development of novel
software titles, hardware and software development required to define future
interactive systems, refine existing interactive technologies, and introduce
enhancements for future applications. 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 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.
SOFTWARE PRODUCTION UNITS
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 designed 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, Inc."), an
entertainment software company. Each of these acquisitions represented the
addition of new products and personnel to the Company, which has caused 3DO to
allocate much of its management and other resources to its four software
production units and to devise new marketing strategies and production systems.
The Company's ability to manage its acquired businesses effectively will depend
on its ability to retain its 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.
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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,
Inc., 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 its intellectual property rights for its technologies 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 Cooperation Treaty.
The Company intends to file additional applications as it deems appropriate for
patents covering its technologies. 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 technologies 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
technologies.
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 technologies. However, the Company
expects that third parties may attempt to reverse-engineer its technologies
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 technologies, even if the
technologies are 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. Existing copyright and other laws protecting proprietary rights afford
only limited protection, particularly in certain jurisdictions outside the
United States where the Company may seek to license its technologies. There can
be no assurance that the copyright laws or other laws will adequately protect
the Company's technologies.
20
<PAGE> 21
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, content or trademarks of certain of the Company's or
its licensees' products infringe upon intellectual property rights held by such
third parties. 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 technologies 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 (i) interference proceedings declared by the U.S.
Patent Office in connection with one or more of the Company's or a third party's
patents or patent applications, (ii) opposition or cancellation proceedings in
the U.S. Trademark Office pertaining to one or more of the Company's or a third
party's trademarks or trademark applications, or (iii) other proceedings related
to one or more of the Company's or a third party's intellectual property rights.
Those proceedings could result in adverse decisions as to the priority of the
Company's inventions, the registrability of the Company's marks, or the validity
of the Company's other intellectual property rights. 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
such required licenses at reasonable costs or at all, as failure by the Company
or its hardware and software licensees to obtain any such licenses 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.
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
11.01 Computation of Net Income (Loss) Per Share
27.01 Financial Data Schedule
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 13, 1997
THE 3DO COMPANY
/s/ HUGH MARTIN
--------------------------------------
Hugh Martin
President
(Principal Financial Officer
and Principal Accounting Officer)
(Duly authorized officer)
22
<PAGE> 23
EXHIBIT INDEX
Exhibit
No. Document
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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1996 1995 1996 1995
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net income (loss)................................. $ 2,885 $(19,140) $ (699) $(35,828)
======= ======== ======= ========
Weighted average number of common shares
outstanding..................................... 27,990 25,782 27,503 25,702
------- -------- ------- --------
Common equivalent shares from options to purchase
common stock.................................... 1,506 -- -- --
------- -------- ------- --------
Common and common equivalent shares............... 29,496 25,782 27,503 25,702
======= ======== ======= ========
Net income (loss) per common and common equivalent
share........................................... $ 0.10 $ (0.74) $ (0.03) $ (1.39)
======= ======== ======= ========
</TABLE>
- ---------------
(1) This schedule should be read with Note 4 -- Net Loss Per Share in the
Condensed Notes to Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 11,959
<SECURITIES> 29,334
<RECEIVABLES> 7,134
<ALLOWANCES> 4,311
<INVENTORY> 823
<CURRENT-ASSETS> 46,695
<PP&E> 27,363
<DEPRECIATION> 18,522
<TOTAL-ASSETS> 58,009
<CURRENT-LIABILITIES> 42,147
<BONDS> 0
0
0
<COMMON> 279
<OTHER-SE> (207)
<TOTAL-LIABILITY-AND-EQUITY> 58,009
<SALES> 63,526
<TOTAL-REVENUES> 63,526
<CGS> 6,781
<TOTAL-COSTS> 55,052
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 536
<INCOME-PRETAX> 3,371
<INCOME-TAX> 4,070
<INCOME-CONTINUING> 3,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (699)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
