<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, 1997
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)
(650) 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, 1997, the number of outstanding shares of the registrants'
common stock was 25,713,075.
<PAGE> 2
THE 3DO COMPANY
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Consolidated Financial Statements 3
Consolidated Balance Sheets at
September 30, 1997 and March 31, 1997 3
Consolidated Statements of Operations for the three and
six months ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for
the six months ended September 30, 1997 and 1996 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE 3DO COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, March 31,
1997 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,742 $ 14,395
Short-term investments 36,350 19,222
Accounts receivable, net 83 429
Prepaid and other current assets 845 1,861
--------------- ---------------
Total current assets 41,020 35,907
Property and equipment, net 3,772 6,681
Deposits and other assets 1,715 2,366
--------------- ---------------
Total assets $ 46,507 $ 44,954
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 424 $ 569
Accrued expenses 2,120 3,251
Deferred revenue 308 11,992
Current portion of capital lease obligations 589 807
Hardware incentive obligations 2,944 2,944
Other current liabilities 972 2,277
--------------- ---------------
Total current liabilities 7,357 21,840
Capital lease obligations, net of current portion 59 611
Other liabilities 1,027 1,104
--------------- ---------------
Total liabilities 8,443 23,555
--------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized; no shares issued -- --
Common stock, $.01 par value; 50,000
shares authorized; 25,660 and 28,369
shares issued and outstanding, respectively 256 284
Additional paid-in capital 148,668 158,489
Cumulative translation adjustment (157) (164)
Accumulated deficit (110,344) (137,210)
Treasury stock, at cost, 100 shares (359) --
--------------- ---------------
Total stockholders' equity 38,064 21,399
--------------- ---------------
Total liabilities and stockholders' equity $ 46,507 $ 44,954
=============== ===============
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
3
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THE 3DO COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the three months For the six months
ended September 30, ended September 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Royalties and license fees $ 10,965 $ 20,822 $ 22,927 $ 35,000
Software publishing 1,848 2,494 4,160 3,386
Developer products and other -- 3,434 89 3,693
-------- -------- -------- --------
Total revenues $ 12,813 $ 26,750 $ 27,176 $ 42,079
-------- -------- -------- --------
Cost of revenues:
Royalties and pressing fees -- 23 -- 209
Software publishing 864 1,762 1,885 1,896
Developer products and other -- 1,060 42 1,872
-------- -------- -------- --------
Total cost of revenues 864 2,845 1,927 3,977
-------- -------- -------- --------
Gross profit 11,949 23,905 25,249 38,102
-------- -------- -------- --------
Operating expenses:
Research and development 3,788 12,127 10,291 21,417
In-process research and -- -- -- 7,700
development
Sales and marketing 1,211 2,583 2,288 3,727
General and administrative 1,932 3,173 4,571 5,953
-------- -------- -------- --------
Total operating expenses 6,931 17,883 17,150 38,797
-------- -------- -------- --------
Operating income (loss) 5,018 6,022 8,099 (695)
Gain on sale of the Systems assets -- -- 18,032 --
Net interest and other income 628 785 817 1,111
-------- -------- -------- --------
Income before income
and foreign withholding taxes 5,646 6,807 26,948 416
Income and foreign
withholding taxes 10 -- 83 4,000
-------- -------- -------- --------
Net income (loss) $ 5,636 $ 6,807 $ 26,865 $ (3,584)
======== ======== ======== ========
Net income (loss) per common and
common equivalent share $ 0.21 $ 0.23 $ 0.92 $ (0.13)
======== ======== ======== ========
Common and common equivalent shares
used in computing per share amounts 26,838 30,243 29,115 27,260
======== ======== ======== ========
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
4
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THE 3DO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the six months
ended September 30,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $ 26,865 $ (3,584)
Adjustments to reconcile net profit (loss) to net
cash used in operating activities:
Net loss on disposition of equipment 76 --
Depreciation and amortization 2,230 3,305
Deferred revenue (11,684) 5,877
Gain on sale of Systems assets (18,032)
In-process research and development -- 7,700
Repurchase of 300 shares (10,965) --
Changes in operating assets and liabilities:
Accounts receivable, net 346 230
Prepaid and other assets 778 (358)
Accounts payable (145) 431
Accrued expenses (1,131) 839
Hardware incentives -- (1,236)
Other liabilities (1,382) (265)
-------- --------
Net cash provided by (used in) operating activities (13,044) 12,939
-------- --------
Cash flows from investing activities:
Proceeds from sale of Systems assets 20,000 --
Proceeds from disposition of equipment 74 --
Short-term investments, net (17,128) (11,914)
Capital expenditures (524) (3,897)
-------- --------
Net cash provided by (used in) investing activities 2,422 (15,811)
-------- --------
Cash flows from financing activities:
Repurchase of 3DO shares (359) --
Proceeds from issuance of common stock, net 1,118 1,364
Payments on capital lease obligations (770) (840)
-------- --------
Net cash provided by (used in) financing activities (11) 524
-------- --------
Effect of foreign currency translation (20) 7
-------- --------
Net increase (decrease) in cash and cash equivalents (10,653) (2,341)
Cash and cash equivalents at beginning of period 14,395 9,459
-------- --------
Cash and cash equivalents at end of period $ 3,742 $ 7,118
======== ========
Supplemental cash flow information: Cash paid during the period for:
Interest $ 95 $ 283
Income and foreign withholding taxes $ -- $ 4,000
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital lease obligations $ -- $ 245
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
5
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THE 3DO COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The consolidated financial statements of The 3DO Company, a Delaware
corporation ("3DO" or the "Company"), as of September 30, 1997 and for the
quarter and six months ended September 30, 1997 and 1996 are unaudited. In the
opinion of management, these financial statements 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, 1997. The results of operations
for the quarter and six months ended September 30, 1997 are not necessarily
indicative of the results expected for the entire year.
NOTE 2 - REVENUE RECOGNITION
Revenue from third-party engineering and licensing agreements are recognized
using the percentage-of-completion method. 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. Software licensing revenue is typically
recognized at the point of 3DO's fulfillment of its obligations (e.g., delivery
of the product golden master) under any such licensing agreement. Per copy
royalties on sales that exceed the guarantee are recognized as earned. Revenue
from the Company's on-line service is recognized monthly based on usage.
NOTE 3 - 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 4 - GAIN ON SALE OF SYSTEMS GROUP
On June 23, 1997, the Company sold most of the assets of the Company's former
hardware systems group, including certain technologies and related intellectual
property rights and approximately $1.5 million in equipment, to Samsung
Electronics Company, Ltd. ("Samsung") for $20.0 million, realizing a gain of
approximately $18.0 million. As part of the sales agreement, CagEnt
Technologies, Inc. ("CagEnt"), a subsidiary of Samsung, agreed to assist the
Company, as a subcontractor, with respect to the Company's efforts to complete
the remaining deliverables under the M2 Agreement with Matsushita Electronic
Industrial Co., Ltd. ("MEI" or "Matsushita"). CagEnt also acquired from Samsung
the Company's former video encoder business as part of the Company's transaction
with Samsung.
6
<PAGE> 7
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
(1994, 1995 and 1996 with respect to Japan), respectively. Amounts under this
and certain other incentive programs were accrued as the obligation arose and as
of September 30, 1997, the Company had accrued approximately $2.9 million. The
balance is due to be paid in the third quarter of fiscal 1998.
NOTE 6 - INCOME TAXES
Income tax expense totaled $0.1 million for the three and six months ended
September 30, 1997. Income tax expense was $4.0 million for the six months ended
September 30, 1996. No income tax expense was incurred for the quarter ended
September 30, 1996. Income tax expense represents foreign income and withholding
taxes, and minimum state taxes.
NOTE 7 - NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." SFAS No. 128
requires the presentation of basic earnings per share ("EPS") and, for companies
with potential dilutive securities, such as options and warrants, diluted EPS.
SFAS No. 128 is effective for annual and interim periods ending after December
15, 1997. The Company expects that basic EPS for profitable periods will be
higher than primary earnings per share as presented in the accompanying
financial statements and that diluted EPS for profitable periods will not differ
materially from primary earnings per share as presented in the accompanying
financial statements. Computations for loss periods should not change
significantly.
NOTE 8 - SUBSEQUENT EVENTS
On October 15, 1997, 3DO and Cirrus agreed to resolve and settle the parties'
respective claims with respect to the Cirrus litigation, including, inter alia,
the dismissal with prejudice of the subject litigation, the general release of
both parties from any and all claims relating to the Joint Development and
License Agreement, and the payment by Cirrus to 3DO of a mutually acceptable sum
in satisfaction of the license fees, advance royalties, and payments for
engineering services due to 3DO in connection with the Joint Development and
License Agreement. 3DO and Cirrus executed a written Stipulation For Settlement
of such matters on October 15, 1997. The parties are currently preparing a more
comprehensive form of written settlement agreement which will incorporate the
provisions of the Stipulation For Settlement and such additional terms and
conditions as may be mutually agreed upon by the parties, and which the Company
expects to finalize on or before November 15, 1997.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The 3DO Company ("3DO" or the "Company") primarily develops, publishes and
distributes interactive entertainment software products for multiple platforms
including IBM-compatible personal computers (the "PC") and the Sony PlayStation
and Internet platforms. During fiscal year 1997, the Company also designed,
developed and licensed hardware technologies for the 64-bit consumer and PC
markets. In September 1996, the Company announced its intention to sell certain
assets relating to its hardware systems business in order to focus on publishing
interactive entertainment software.
The Company developed a next generation 64-bit technology (the "M2 Technology")
and, in December 1995, the Company and Matsushita Electronic Industrial Co.,
Ltd. (hereinafter "MEI" or "Matsushita") entered into a licensing agreement
pursuant to which the Company granted MEI 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 Agreement"). The license was originally granted in exchange for an upfront
license payment of $100 million, and for certain royalties that were agreed to
be paid to 3DO with respect to certain software products manufactured after
January 1, 1998, which are compatible with the M2 Technology. Under the terms of
the M2 Agreement, MEI 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 MEI 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 MEI to develop and publish
software products compatible with hardware products that incorporate the M2
Technology. As of September 30, 1997, the Company recognized all revenue in
connection with the M2 Agreement.
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
Agreement with MEI. As consideration for 3DO providing certain engineering and
support services, MEI agreed to pay an additional aggregate fee of approximately
$4.5 million to be received in installments in fiscal 1997 and 1998. The
payments by MEI 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.
On July 23, 1997, the Company and MEI signed a second addendum (the "Second
Addendum") to the M2 Agreement. Under the Second Addendum, the Company
relinquished its rights to develop and distribute software and peripherals that
are compatible with hardware products developed by MEI or its sublicensees that
incorporate the M2 Technology, and gave up its right to develop and distribute
M2-compatible authoring systems. In addition, the Company relinquished its right
to receive royalties with respect to MEI's potential use of the M2 Technology,
as well as certain other rights. In exchange, MEI returned to the Company all of
the approximately 3.2 million shares of the Company's common stock that it
previously owned. During the quarter ended September 30, 1997, the Company
recognized approximately $11.0 million of revenue in connection with this
transaction.
There can be no assurance that the Company will be able to meet its milestone
delivery obligations referenced in the M2 Agreement, as amended, or even at all,
or that, if the Company meets its milestone delivery obligations, MEI will pay
all or any of the reduced and/or deferred payments on time or at all. The
8
<PAGE> 9
failure of the Company to meet its amended milestone delivery obligations or the
failure of MEI to pay the amounts due under the M2 Agreement, as amended, would
have material, adverse effects on the Company's revenues and resulting financial
performance.
On June 23, 1997, the Company sold and/or licensed most of the assets of the
Company's former hardware systems group, including certain technologies and
related intellectual property rights and approximately $1.5 million in
equipment, to Samsung Electronics Company, Ltd. ("Samsung") for $20.0 million.
As part of the sales agreement, CagEnt Technologies, Inc. ("CagEnt"), a
subsidiary of Samsung, agreed to assist the Company, as a subcontractor, with
respect to the Company's efforts to complete the remaining deliverables under
the M2 Agreement with MEI. CagEnt also acquired from Samsung the Company's
former video encoder business as part of the Company's transaction with Samsung.
No agreement with MEI, including, without limitation, any addendum to the M2
Agreement, relieves the Company of its obligation to complete the deliverables
called for in the M2 Agreement. There can be no assurance that the Company, with
or without CagEnt's subcontracted assistance, will successfully complete the
deliverables required pursuant to the M2 Agreement. In the event that CagEnt's
subcontracted engineering services are unsatisfactory or are not timely
completed, the Company will incur substantial expenses to complete its
obligations under the M2 Agreement. This would have a material adverse impact on
the Company, including, but not limited to, diverting funds from the Company's
software publishing business.
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 agreed to develop certain
modifications to its semiconductor technology familiarly known as the
"3DEngine." As partial consideration under such agreement, the Company has
received the non-refundable sum of $2.5 million as of June 30, 1997. This
payment has been recognized as 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 seeking to obtain a repayment of $2.5
million in non-refundable 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
non-refundable license fees, prepaid royalties and termination fees, plus
damages, interest, and attorneys' fees and costs.
On October 15, 1997, 3DO and Cirrus agreed to resolve and settle the parties'
respective claims with respect to the above-referenced litigation, including,
inter alia, the dismissal with prejudice of the subject litigation, the general
release of both parties from any and all claims relating to the Joint
Development and License Agreement, and the payment by Cirrus to 3DO of a
mutually acceptable sum in satisfaction of the license fees, advance royalties,
and payments for engineering services due to 3DO in connection with the Joint
Development and License Agreement. 3DO and Cirrus executed a written Stipulation
For Settlement of such matters on October 15, 1997. The parties are currently
preparing a more comprehensive form of written settlement agreement which will
incorporate the provisions of the Stipulation For Settlement and such additional
terms and conditions as may be mutually agreed upon by the parties, and which
the Company expects to finalize on or before November 15, 1997.
On July 19, 1997, the Board of Directors of the Company approved a stock
repurchase plan pursuant to which the Company was authorized to purchase up to
$5.0 million of the Company's stock on the open market or in block trades, from
time to time as management deems appropriate, if the market price of the
Company's stock remains below certain levels. As of September 30, 1997, the
Company has reacquired 100,000 shares. The repurchase plan will remain in effect
until rescinded by the Board.
9
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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. Software
licensing revenue is typically recognized at the point of 3DO's fulfillment of
its obligations (e.g., delivery of the product golden master) under any such
agreement. Per-copy royalties on sales that exceed the guarantee are recognized
as earned. Revenue from third-party engineering and licensing agreements are
recognized using the percentage-of-completion method. Revenue from the Company's
on-line service is recognized monthly based on usage.
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
(1994, 1995 and 1996 with respect to Japan), respectively. This and certain
other incentive programs were accrued as the obligation arose, and as of
September 30, 1997, the Company had accrued approximately $2.9 million. The
balance is due to be paid in the third quarter of fiscal 1998.
The Company will continue to incur substantial expenditures to develop its
business throughout the remainder of fiscal 1998. The Company expects that its
operating results will fluctuate as a result of a wide variety of factors,
including the timing of software product introductions by the Company 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, and all statements regarding CagEnt assisting the
Company, as a subcontractor, in completing the remaining deliverables associated
with the M2 Agreement, as amended; the ability of the Company to reach a
comprehensive settlement agreement with Cirrus including such additional terms
and conditions as may be acceptable to the Company and Cirrus, by November 15,
1997 or within a reasonable period thereafter; the extent to which the
Company will receive and/or recognize revenue from the sale of software titles
it publishes and distributes and/or from its on-line service; the extent to
which the Company will receive and/or recognize revenue with respect to the sale
of software titles it licenses to third-party publishers; the length of time for
which the Company's existing cash resources, working capital financing and other
sources of funds will fund the Company's activities; the Company's ability to
develop software products for new platforms, and the timeliness, cost, and
market demand for such products created as part of its software development
activities; and the effect of competitive factors in the marketplace, including
the market acceptance of certain formats and the timing and release of
competitors' products. 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 Future Performance," below. The Company assumes
no obligation to update any or all of the forward-looking statements or such
factors.
10
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RESULTS OF OPERATIONS
For the quarter and six months ended September 30, 1997, the Company generated
net profits of $5.6 million and $26.9 million, respectively, compared to a net
profit of $6.8 million and a net loss of $3.6 million for the same periods in
fiscal 1997. Included in the net loss for the six months ended September 30,
1996 was a $7.7 million charge for in-process research and development related
to the acquisition of certain of the assets of New World Computing, Inc.
("NWC"), and $4.0 million in withholding taxes related to the payment of $40.0
million by Matsushita pursuant to the M2 Agreement. Net profit for the six
months ended September 30, 1997 includes a one-time $18.0 million gain from the
sale to Samsung of certain of the assets related to the Company's former
hardware systems group.
Revenue for the three and six months ended September 30, 1997 totaled $12.8
million and $27.2 million compared to $26.8 million and $42.1 million for the
same periods in fiscal 1997. Royalties and license fees of $11.0 million and
$22.9 were the largest components of revenue for the three and six months ended
September 30, 1997, compared to $20.8 million and $35.0 million for the prior
comparable periods. The decline was due principally to the shift of the
Company's business strategy from hardware design and licensing to focus
primarily on entertainment software publishing. The Company anticipates that
hardware related revenue will continue to decline in future quarters.
Software publishing revenue for the quarters ended September 30, 1997 and 1996
totaled $1.8 million and $2.5 million, respectively. The decrease was due
primarily to fewer new product releases this fiscal year compared to the prior
comparable period, as the Company transitioned its software publishing strategy
and focused on developing and releasing franchisable "hit" titles. Software
publishing revenue for the six months ended September 30, 1997 and 1996 totaled
$4.2 million and $3.4 million, respectively. The increase was attributable to
revenue generated by the NWC division for the full six months of this fiscal
year compared to only three months for the prior comparable period, as the
Company acquired NWC in June 1996.
Developer products and other revenue totaled $3.4 million and $3.7 million for
the quarter and six months ended September 30, 1996, respectively, compared to
$0.1 million for the six months ended September 30, 1997. No such revenue was
earned for the quarter ended September 30, 1997. Revenue for the current fiscal
year periods was comprised primarily of shipments of digital video products.
Revenue for the prior comparable period was comprised primarily of shipments of
M2 development systems.
Cost of revenues totaled $0.9 million and $2.8 million for the quarters ended
September 30, 1997 and 1996, respectively. Software publishing revenue includes
the sale of software products and the licensing of rights to sell such software
products. Cost of publishing revenue as a percentage of publishing revenue was
47% for the current quarter compared to 71% for the prior comparable period. The
decrease was attributable to a change in revenue mix to higher licensing
revenue, which has no associated cost, from higher product revenue in fiscal
1997. Cost of revenues for the six months ended September 30, 1997 and 1996 were
$1.9 million and $4.0 million, respectively. Cost of publishing revenue as a
percentage of publishing revenue was 45% for the six months of this fiscal year
compared to 56% for the prior same period in fiscal 1997. The decrease was due
primarily to higher average wholesale prices charged for products shipped in the
current fiscal year compared to last year, as the Company incurred additional
research and development costs to include more complex gameplay, better graphics
and sound and advanced technological features in the titles it published in the
current year. Cost of revenues consists of direct costs associated with
development systems products, software titles sold and royalties paid to
third-party software developers. Internal development costs on software title
development for the Company's published titles are recognized as incurred and
included in research and development expenses.
11
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Research and development expenses, including in-process research and
development, decreased to $3.8 million and $10.3 million for the three and six
months ended September 30, 1997, respectively, from $12.1 million and $29.1
million for the three and six months ended September 30, 1996, respectively. The
decrease was primarily due to reduced research and development spending in the
Company's former hardware systems division as the majority of the M2 development
project approached completion and as the Company transferred certain assets and
personnel relating to its former hardware systems group to Samsung.
Additionally, a one-time $7.7 million expense for in-process research and
development related to the Company's acquisition of certain assets of NWC was
incurred in June 1996. Moreover, the Company has substantially reduced the
operating expenses of its international operations, as it gradually transitions
the international operations located in the United Kingdom to its headquarters
in the U.S. The decrease was partially offset by higher 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.
Sales and marketing expenses for the three and six months ended September 30,
1997 were $1.2 million and $2.3 million, respectively, compared to $2.6 million
and $3.7 million, respectively, for the same periods in fiscal 1997. The
decrease of 53% and 39% for the three and six months periods was attributable to
fewer new title releases and lower sales and marketing personnel in the current
fiscal year compared to fiscal 1997, as the Company streamlines its operations
and focuses on the development of fewer titles featuring more complex gameplay,
better graphics and sound and advanced technological features. Sales and
marketing expenses incurred during this fiscal year principally consisted of
expenses related to software for the PC platform. Sales and marketing expenses
during the six months ended September 30, 1996 primarily consisted of expenses
related to the 32-bit 3DO Interactive Multiplayer systems, digital video
products and software products for the PC platform titles.
General and administrative expenses decreased from $3.2 million and $6.0 million
for the quarter and six months ended September 30, 1996 to $1.9 million and $4.6
million for the same periods in the current fiscal year. The decrease was
attributable to reduced overhead expenses as the Company transitioned from a
hardware systems licensing company to an entertainment software publishing
company, offset by the amortization of goodwill associated with the acquisition
of certain assets of NWC.
Net interest and other income decreased from $0.8 million for the three months
ended September 30, 1996 to $0.6 for the current comparable period. The decrease
was due to lower average available cash and short-term investment balances in
the current year. Net interest and other income increased from $1.1 million for
the six months ended September 30, 1996 to $18.8 million for the same period in
the current year due primarily to the $18.0 million gain on the sale of certain
assets of the Company's former hardware systems division to Samsung.
Income and foreign withholding taxes were $0.1 million for the three and six
months ended September 30, 1997 compared to $4.0 million for the six months
ended September 30, 1996. No income and foreign withholding taxes were incurred
for the quarter ended September 30, 1996. The decrease was attributable to the
fact that foreign withholding taxes calculated at a rate of 10% were incurred in
the prior year on a $40.0 million payment received from MEI in June 1996 in
connection with the M2 Agreement.
12
<PAGE> 13
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 $40.1
million at September 30, 1997. At March 31, 1997, cash and short-term
investments totaled $33.6 million. This increase was primarily due to the net
proceeds of $20.0 million received from Samsung in connection with the sale of
certain assets of the Company's former hardware systems business.
The Company will incur negative cash flow for the remainder of fiscal year 1998
from the continued investment in the internal development of entertainment
software titles scheduled to be released in the third and fourth quarters of
fiscal year 1998 and beyond. The Company anticipates that its existing cash
resources, future lease and working capital financing, and other sources of
funds should be sufficient to fund the Company's activities through the end of
fiscal year 1998. There can be no assurance that additional capital will not be
required in fiscal year 1999 since cash flows will be affected by the rate at
which the Company releases its products, the market acceptance of such products,
and the levels of advertising and promotions required to promote market
acceptance of the Company's products. The level of financing required beyond
fiscal year 1998 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 seek funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights to
certain of its technologies, products and/or potential markets.
FACTORS AFFECTING FUTURE PERFORMANCE
HARDWARE SYSTEMS GROUP SALE
On June 23, 1997, the Company sold certain assets of its former hardware systems
group to Samsung pursuant to an Asset Purchase Agreement (the "Samsung
Agreement"). As part of the Samsung Agreement, CagEnt, a subsidiary of Samsung,
agreed to assist the Company, as a subcontractor, in its efforts to complete the
remaining deliverables associated with the M2 Agreement. No agreement with MEI,
including, without limitation, any addendum to the M2 Agreement, relieves the
Company of its obligation to complete the deliverables called for in the M2
Agreement. There can be no assurance that the Company, with or without CagEnt's
subcontracted assistance, will successfully complete the deliverable items
required pursuant to the M2 Agreement, as amended. In the event that CagEnt's
subcontracted engineering services are unsatisfactory or are not timely
completed, the Company will incur substantial expenses to complete its
obligations under the M2 Agreement. This would have a material adverse impact on
the Company, including, but not limited to, diverting funds from the Company's
software publishing business.
CHANGING PRODUCT PLATFORMS AND FORMATS
The Company is entering new markets with its software products, specifically the
enhanced graphics card portion of the PC market, and the Sony PlayStation and
Internet markets. The markets for entertainment software and entertainment
13
<PAGE> 14
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 attempt to 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 proprietary
platforms of Sega and Nintendo. 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 current installed base of PCs and the
Company's technology and products obsolete. There can be no assurance that unit
sales of PCs or the number of entertainment software users in the PC market 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 or the number of entertainment software users in the PC market
would have a material adverse effect on the Company's operating results.
DEPENDENCE ON THE SONY PLAYSTATION MARKET
The market for software products for the Sony PlayStation is currently
experiencing rapid growth. The Company's future success is partly dependent on
its ability to successfully take advantage of this market and on the continued
growth of the Sony PlayStation market. There can be no assurance that the
Company will be able to develop products for the Sony PlayStation in a timely
manner to take advantage of this growing market, that the Company`s Sony
PlayStation software products will achieve market acceptance, or that the Sony
PlayStation market will continue to grow. In the event that the Company fails to
develop products while the Sony PlayStation market is expanding or fails to
14
<PAGE> 15
deliver products that are commercially successful, or if the Sony PlayStation
market does not continue to grow, the Company's operating results would be
adversely affected.
DEPENDENCE ON THE INTERNET MARKET
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 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 regulations. 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.
INTERACTIVE MULTIPLE PLAYER GAMES ON THE INTERNET
The availability of multiple player games on the Internet is a recent
phenomenon. The limited history of multiple player games on the Internet has
been characterized by numerous companies entering the market in a short span of
time and competing for a limited number of players of multiple player games by
providing incentives to get the player interest and by entering into agreements
with the few companies providing Internet game sites that have developed some
player following. However, there has been little evidence of success in this
area and a profitable business model to capitalize on the Internet multiple
player game market has not yet been established. In addition, multiple player
games on the Internet require the implementation of newly developed software to
accept and process payments from players which may contain errors in the program
which have not yet been discovered or corrected. The Company provides free play
time and other incentives such as discounts and contests to interest the limited
number of players in the market into trying the Company's Internet games and has
entered into agreements to have its games distributed through Internet game
sites. The Company is testing various pricing models to determine the most
profitable models and has tested and implemented different software applications
for the acceptance and processing of payment from players of its games. There
can be no assurance that any of the incentives provided by the Company or the
availability of the Company's games on Internet game sites will result in
increased player interest in the Company's games, that the costs of providing
such incentives or entering into agreements with Internet game site providers
will be compensated for by increased payments from use of the Company's games,
that the Company will be able to continue to offer the incentives it does in
accordance with the applicable laws of the jurisdictions in which the Company's
games are distributed, or that the Company will be able to continue to offer its
games through various Internet game sites. In addition, so far none of the
pricing models implemented by the Company for Internet multiple player games
have yielded profit for the Company, and there can be no assurance that any such
model will do so in the future. Furthermore, the Company has experienced
problems with certain of the Internet hardware and software it has put into
15
<PAGE> 16
operation and there can be no assurance that such problems or other problems
will not reoccur in the future.
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 and commercial
release of new software products that achieve market acceptance.
COMPETITION
The Company is entering new markets with certain of its software products,
specifically the Sony PlayStation and Internet markets. This will, to some
degree, require distribution through distributors and retailers who have not
previously 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' efforts to sell such products.
A variety of companies offer products that compete directly with one or more of
the Company's software 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 large independent multi-platform software
developers such as Electronic Arts Inc., Acclaim Entertainment, Inc., Lucas Arts
Entertainment Co., and GT Interactive Software, as well as publishers of
personal computer software such as Microsoft Corporation and Broderbund
Software.
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
16
<PAGE> 17
Company's competitors, the timeliness with which the Company is able to release
its products to the market, fluctuations in the PC market, the financial impact
of acquisitions of other companies by the Company, 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 announcements 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 and adversely
affect the sales of a product if the product is not released in time for the
holiday season.
The Company has stock-balancing programs for its software products that, under
certain circumstances and up to a specified amount, allow for the return and
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 establishes 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
requirements will not exceed the Company's reserves.
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.
Distributors and retailers often carry numerous 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 prominent
display or even with adequate levels of shelf space.
17
<PAGE> 18
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 required
to define future interactive technologies, 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. 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.
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 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 significant 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 apparent 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 typically prohibit unauthorized disclosure and
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 will 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 that incorporate the Company's proprietary
technology, even if such 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.
18
<PAGE> 19
The Company relies in part on copyright laws to prevent unauthorized duplication
or distribution of its software, written materials and audiovisual works.
Existing copyright laws afford only limited protection, particularly in certain
jurisdictions outside the United States where the Company has licensed and may
seek to license its technology. There can be no assurance that the copyright
laws will adequately protect the Company's technologies.
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.
As the number of patents and products in the Company's industry increases and as
the functionality of such products further overlaps, the Company believes that
products based on its technology may 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 before the U.S. Patent Office in
connection with one or more of the Company's or a third party's 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 or its licensees to import into
various jurisdictions, including the United States, or to distribute and sell
products within particular jurisdictions. Such a result would materially and
adversely affect the Company. Such a third party could also assert claims for
substantial damages against the Company, its licensees or distributors of such
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 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 licensees to obtain any such license would have a
material adverse impact on the Company's business, results of operations and
financial condition.
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 companies, such as
those in the entertainment software industry 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.
19
<PAGE> 20
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
(the "Cirrus 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
repayment of $2.5 million in non-refundable 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 right under the Cirrus
Agreement, including procurement of the payment by Cirrus of $4.5 million
in non-refundable license fees, prepaid royalties, and termination fees;
and to recover damages, collect interest, and obtain attorney's fees and
costs.
On October 15, 1997, 3DO and Cirrus agreed to resolve and settle the
parties' respective claims with respect to the above-referenced
litigation, including, inter alia, the dismissal with prejudice of the
subject litigation, the general release of both parties from any and all
claims relating to the Joint Development and License Agreement, and the
payment by Cirrus to 3DO of a mutually acceptable sum in satisfaction of
the license fees, advance royalties, and payments for engineering services
due to 3DO in connection with the Joint Development and License
Agreement. 3DO and Cirrus executed a written Stipulation For Settlement of
such matters on October 15, 1997. The parties are currently preparing a
more comprehensive form of written settlement agreement which will
incorporate the provisions of the Stipulation For Settlement and such
additional terms and conditions as may be mutually agreed upon by the
parties, and which the Company expects to finalize on or before November
15, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 19, 1997, at the Company's Annual Meeting of Stockholders,
the holders of the Common Stock of the Company approved an increase in the
number of shares reserved for issuance under the 1993 Incentive Stock Plan by
3,592,861 shares, amended the Procedure for Grants in the 1995 Director Option
Plan, approved an increase in the number of shares of Common Stock reserved for
issuance under the 1995 Director Option Plan by 400,000 shares, and confirmed
the appointment of KPMG Peat Marwick LLP as independent auditors for the fiscal
year ending March 31, 1998. The voting on each matter is set forth below.
1. 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 3,592,861
shares:
For Against Abstain Broker Non-Vote
- --- ------- ------- ---------------
8,722,718 4,779,911 109,893 10,352,389
2. Votes cast for amendment of the Procedure for Grants in the 1995 Director
Option Plan:
For Against Abstain Broker Non-Vote
- --- ------- ------- ---------------
9,839,134 4,933,847 163,002 9,028,928
3. Votes cast for approval of an increase in the number of shares of Common
Stock reserved for issuance under the 1995 Director Option Plan by 400,000
shares:
For Against Abstain Broker Non-Vote
- --- ------- ------- ---------------
8,294,640 6,130,372 121,638 9,418,261
20
<PAGE> 21
4. Votes cast to confirm the appointment of KPMG Peat Marwick LLP as
independent auditors for the fiscal year ending March 31, 1998:
For Against Abstain Broker Non-Vote
- --- ------- ------- ---------------
23,703,820 161,089 100,002 --
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
(b) The following report on Form 8-K was filed during the quarter
covered by this report:
Current report on Form 8-K filed August 8, 1997
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.
THE 3DO COMPANY
Dated: November xx, 1997 /s/ TERRENCE SCHMID
------------------------------------------
Terrence Schmid
Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
(Duly authorized officer)
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- -------- -----------
<S> <C>
11.01 Computation of Net Income (Loss) Per Share
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.01
THE 3DO COMPANY
COMPUTATION OF NET INCOME (LOSS) PER SHARE(1)
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,636 $ 6,807 $ 26,865 $ (3,584)
======== ======== ======== ========
Weighted average number of
common shares outstanding 25,936 27,901 27,198 27,260
Common equivalent shares from
options to purchase common stock 902 2,342 1,917 --
-------- -------- -------- --------
Common and common equivalents
shares 26,838 30,243 29,115 27,260
======== ======== ======== ========
Net income (loss) per common
and common equivalents share $ 0.21 $ 0.23 $ 0.92 $ (0.13)
======== ======== ======== ========
</TABLE>
(1) This schedule should be read with Note 3 - Net Income (Loss) Per Share
in the Condensed Notes to Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,742
<SECURITIES> 36,350
<RECEIVABLES> 2,467
<ALLOWANCES> 2,384
<INVENTORY> 47
<CURRENT-ASSETS> 41,020
<PP&E> 11,021
<DEPRECIATION> 7,249
<TOTAL-ASSETS> 46,507
<CURRENT-LIABILITIES> 7,357
<BONDS> 0
0
0
<COMMON> 256
<OTHER-SE> (157)
<TOTAL-LIABILITY-AND-EQUITY> 46,507
<SALES> 27,176
<TOTAL-REVENUES> 27,176
<CGS> 1,927
<TOTAL-COSTS> 17,150
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94
<INCOME-PRETAX> 26,948
<INCOME-TAX> 83
<INCOME-CONTINUING> 26,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,865
<EPS-PRIMARY> 0.92
<EPS-DILUTED> 0.92
</TABLE>
