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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
March 31, 1998 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 number)
600 Galveston Drive, Redwood City, California 94063
(Address of principal executive offices and zip code)
(650) 261-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of May 31, 1998, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $73,919,059 (based upon the closing sales
price of such stock as reported by the Nasdaq National Market on such date).
Shares of Common Stock held by each officer, director, and holder of 5% or more
of the outstanding Common Stock on that date have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of May 31, 1998, the number of outstanding shares of the Registrants' Common
Stock was 25,969,983.
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PART 1
ITEM 1. BUSINESS
Except for the historical information contained herein, this discussion and
analysis includes certain forward-looking statements that involve risks and
uncertainties. Such statements represent The 3DO Company's ("3DO" or the
"Company") reasonable judgment on the future and are subject to risks and
uncertainties that could cause the Company's actual results and financial
position to differ materially from those projected in the forward-looking
statements as a result of the factors described herein. Such forward-looking
statements include, but are not limited to: all statements concerning future
revenues, expenses, cash flows and capital resources; all statements regarding
CagEnt assisting the Company, as a subcontractor, in completing the remaining
deliverables associated with the M2 Agreement, as amended; 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; the ability of the Company to
adequately distribute its software through various distribution channels 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 contained herein. 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
"Risk Factors," below. The Company assumes no obligation to update any or all of
the forward-looking statements or such factors.
OVERVIEW
3DO develops, publishes and markets interactive entertainment products for
multiple platforms including IBM-compatible personal computers (the "PC"), Sony
PlayStation, Nintendo 64, and Internet platforms. During fiscal year 1997, the
Company also designed and licensed hardware technologies for the 64-bit consumer
and PC markets. In September 1996, the Company announced its intention to exit
the hardware business and focus on publishing interactive entertainment
software. On June 23, 1997, the Company sold and/or licensed most of the assets
of its hardware systems group, including certain technologies and related
intellectual property rights and approximately $1.5 million in equipment, to
Samsung for $20.0 million. See "Risk Factors -- Hardware Systems Group Sale"
on page 10.
The Company was incorporated as SMSG, Inc. under the laws of California in
September 1991, commenced operations in October 1991, and changed its name to
The 3DO Company in September 1992. The Company is a successor to a California
general partnership named Medio, which was formed in October 1990 and dissolved
in September 1991. In April 1993, the Company reorganized as a Delaware holding
company. In April 1993, the Company acquired a California partnership named NTG,
L.P., and one of its partners, NTG, Inc., in exchange for 3DO common stock and
cash. The Company's common stock became publicly traded on the Nasdaq National
Market in May 1993 under the symbol THDO. The Company acquired the business of
Cyclone Studios in November 1995 and of Archetype Interactive Corporation in May
1996. In
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June 1996, the Company acquired certain assets of New World Computing, Inc.
References to "3DO" or the "Company" mean The 3DO Company, a Delaware
corporation, and its subsidiaries and predecessor entities.
The Company's initial business model was as a licensor of technology to hardware
manufacturers and software developers to enable the establishment of a new
interactive video entertainment platform, the 3DO Interactive Multiplayer system
(the "3DO Multiplayer"). The 3DO Multiplayer was launched in October 1993, and
was the first 32-bit, CDROM-based, video game console product to market.
Ultimately, the 3DO Multiplayer failed to achieve significant market acceptance.
All of the Company's hardware licensees have ceased manufacturing and
distribution of the 3DO Multiplayer. In addition, third-party software
development for the platform has stopped for nearly all of the Company's
licensees.
In December 1995, the Company licensed its next generation 64-bit technology
(the "M2 Technology") to Matsushita Electric Industrial Co. Ltd. ("MEI" or
"Matsushita") for an upfront license fee of $100.0 million plus certain ongoing
royalties (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 Licensing Agreement with MEI. As
consideration for providing engineering and certain support services, the
Company received an additional aggregate fee of approximately $4.5 million
received in installments in fiscal 1997 and 1998. 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. The Company
recognized approximately $11.0 million of revenue in connection with this
transaction.
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 Co. 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 due to MEI under
the M2 Agreement.
In September 1996, the Company announced its intention to transition to a
developer and publisher of interactive entertainment software for the PC,
certain video game consoles and the Internet markets. As a result of the sale of
the hardware systems group, the Company has completed this transition. The
Company will focus on developing high-quality software products with a special
emphasis on creating lasting franchise value in each of the titles developed and
published. Because the entertainment software business is a "hits" driven
business, the Company seeks to increase its potential for developing hit
products by focusing on products that take advantage of the Company's in-house
development expertise, have "sequel" potential, and leverage technologies across
multiple products and platforms.
The Company creates software titles for the PC, Sony PlayStation, Nintendo 64
and Internet platforms. The Company released several titles for the PC in fiscal
years 1997 and 1998, including the hit games "Heroes of Might & Magic II"
("Heroes II") and
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"Uprising" from the Company's New World Computing division and Cyclone Studio
division, respectively. Both titles have received numerous industry awards,
including "Best Turn Based Strategy Game of the Year," "Action Game of the
Year," "Editor's Choice" and "Five Stars," from major computer magazine
publishers such as PC Gamer, Computer Games Strategy Plus, PC Gamer and Computer
Gaming World, respectively. In October 1996, the Company launched "Meridian 59,"
the first Internet-based, 3D role-playing game. Meridian 59 has established the
Company as one of the early leaders in the emerging market for Internet-based
entertainment.
The Company is currently organized into three development groups: Studio 3DO,
Cyclone Studios and New World Computing. Studio 3DO is located in Redwood City,
California, Cyclone Studios in San Mateo, California, and New World Computing in
Agoura Hills, California. Each development group includes programmers, artists,
designers, directors, audio/video specialists and production management.
MARKET
The market for interactive entertainment software is characterized by multiple
platforms with no single platform achieving market dominance. Compressed
technology lifecycles have resulted in different personal computer platforms
(including Windows 98, Windows 95, Windows, DOS, and Macintosh), multiple
generations of video game hardware systems (including 16-bit, 32-bit and 64-bit
platforms), and new remote and electronic delivery systems being available
simultaneously. For developers and publishers of interactive entertainment
software products, this availability of numerous platforms for which consumers
may purchase entertainment software has resulted in additional expenses such as
substantial investments in research and development of products for operation on
these advanced platforms, new and increased marketing efforts for the various
platforms and license fees to develop products for certain proprietary
platforms, as well as risks such as the potential for failure of the platforms
in which research and development investments have been made to achieve
sufficient market penetration to allow software developers and publishers to
recoup their increased expenses, the ineffectiveness of efforts to market
products for these platforms and unfavorable terms in the license agreements
governing the development of products for certain proprietary platforms.
The Company is currently developing products for the PC, Sony PlayStation,
Nintendo 64 and Internet platforms. The Company expects that it will make
substantial investments in research and development and marketing of products
for operation on these advanced platforms and in licensing fees for the
development of products for proprietary platforms such as the Sony PlayStation
and Nintendo 64. Development costs for PC, video game and Internet titles are
high due to increased emphasis on video and graphics performance, license fees
associated with proprietary platforms, and research and development costs for
new and rapidly developing platforms. It is not unusual to have a video game
cost over $1.0 million to develop. If the platforms for which the Company has
chosen to develop interactive entertainment software do not sustain or achieve
significant market penetration, the Company's planned revenues from products for
such platforms will not be achieved and the Company may not recover its
research, development and marketing investment. Conversely, if platforms for
which the Company has chosen not to, or could not obtain licenses to, develop
software products achieve significant market success, the Company's revenue
growth may also be adversely affected. Today, the Company does not have a
license to develop products for some of the popular platforms including the
proprietary platforms of Sega Enterprises, Ltd. Although the Company does have
the ability to license its titles to publishers who do have such licenses, the
revenue from such licensing activity is significantly less than the revenue
which could be generated from direct publishing. See "Risk Factors -- Changing
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Product Platforms and Formats" on page 10 and "-- Dependence on the PC Market,"
"-- Dependence on the Proprietary Platform Markets" and "-- Dependence on the
Internet Market" on page 11.
The availability of multiple advanced platforms and the corresponding increase
in the volume of interactive entertainment software available has also raised
the competitiveness of the market. This higher competitiveness has resulted in
an increase in the importance of mass merchant software sales as a distribution
channel, with corresponding increases in price pressure and competition for
limited shelf space to accommodate the abundance of new titles. A number of
factors, including 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 the access to distributors and retailers of interactive entertainment
software developers and publishers. The Internet platform has provided new
distribution opportunities which have come with such corresponding expenses as
fees related to Internet payment services, costs of hardware and software to
allow Internet distribution of interactive entertainment software and costs for
maintaining and advertising on various Internet sites.
There will be intense competition in procuring adequate distribution of the
Company's software products for the PC, Sony PlayStation, Nintento 64 and
Internet markets. Fewer products in such markets are successful and publishers
of these games, including the Company, must incur substantial marketing and
sales expenses to promote retailers' sales of such products. In addition to the
challenges faced by the field of interactive entertainment software developers
and publishers in such markets, the Company faces further challenges because
certain of the markets it is entering with its software products, specifically
the Sony PlayStation and Nintendo 64 markets, are new to the Company. To enter
these new markets, the Company has had or will need to negotiate with
distributors and retailers who, in the past, have not carried the Company's
products, as a result of which, the Company has had or will need to spend
significant amounts beyond the already substantial marketing and sales expenses
to increase new retailers' sales of the Company's products. The Company has also
invested in Internet payment services, Internet-capable hardware and software,
and Internet distribution marketing and sales efforts to increase its chances of
success in the market for interactive entertainment software on the Internet.
See "Risk Factors -- Competition" and "-- Variability of Operating Results" on
page 13 and "-- Dependence on Distributors" on page 14.
The increased importance of mass merchant software sales and the Internet as
distribution channels has been coupled with increased competition for consumer
spending, with consumers considering such factors as pricing, brand history,
advanced product features, quality and reliability, hardware compatibility, ease
of understanding and operation, and availability and quality of support
services, and has been affected by such factors as dealer merchandising and
advertised pricing. Sales of interactive entertainment software have become
increasingly "hits" driven and even such hit software products have only had
lifespans of 3 to 12 months. Accordingly, software developers and publishers
have had to attempt to constantly develop and bring to market new products that
achieve market acceptance quickly, keep pace with competitive offerings, adapt
to new hardware platforms and emerging industry standards and provide additional
functionality.
The Company has published and will continue to publish titles in a number of
different categories or "genres" with the highest consumer interest, including
sports, action, strategy, adventure and role playing. Furthermore, the Company
has and will continue to focus on markets with relatively small installed bases
and limited historical sales, specifically the Internet market, because of its
belief that early investment in new
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platforms is strategically important in order to position the Company as a
leader in these emerging markets. In the short term, this strategy may
negatively affect the Company's financial performance by delaying revenues until
use of the Internet gains market acceptance for interactive entertainment
applications. See "Risk Factors -- Short Product Lifespans" on page 12 and "--
Variability of Operating Results" on page 13.
COMPETITION
See "Risk Factors -- Competition" on page 13.
RESEARCH AND DEVELOPMENT
During fiscal year 1998, the Company significantly expanded its entertainment
software development efforts and continued developing advanced products for the
PC, Sony PlayStation and Internet markets. In addition, the Company began to
develop software titles for the Nintendo 64 in fiscal year 1998 to take
advantage of that growing market segment. The Company contracts with a limited
number of external developers to accommodate its development requirements for
its Sony PlayStation projects. Currently less than 10% of the Company's
development is contracted through external developers and this percentage is
expected to remain low. The Company's agreements with its external developers
usually call for significant advances or prepaid royalties to be paid to the
developer during the development process as well as certain ongoing royalties.
The Company invests in the creation of software tools and utilities that are
used in the development of software products. These tools are being designed to
allow for more cost-effective product development and the ability to more
efficiently convert products from one hardware platform to another.
The Company makes substantial investments in research and development of
software products for new platforms, such as Sony PlayStation, Nintendo 64 and
the Internet. Such investment typically begins one to two years in advance of
the availability of such products. If the Company invests in the development of
products for a platform that does not achieve significant market penetration,
the Company's planned revenues from those products will not be achieved and the
Company may not recover its development investment. Conversely, if the Company
does not choose to develop for a platform that achieves significant market
success or is unable to obtain the rights to develop products for such
platforms, its revenue growth may also be adversely affected. There can be no
assurance that the Company will correctly make such platform choices or will be
able to obtain adequate rights to develop products for such platforms.
SEASONALITY AND VARIABILITY OF OPERATING RESULTS
The market for interactive 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 introductions of and
demand for particular software titles, which the Company 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
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adversely affect the sales of a product if a product is not released in time for
the holiday season.
In addition, 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, the Company's investments in
research and development, and expenditures on marketing and promotional
programs.
Product development schedules, particularly for new platforms such as Sony
PlayStation, Nintendo 64 and the Internet, are difficult to predict because they
involve creative processes, use of new development tools for new platforms, and
the learning process associated with development for new technologies, as well
as other factors. In addition, today's leading-edge entertainment software
products frequently include substantial amounts of content and are complex,
time-consuming and costly to develop, which can cause additional development and
scheduling risks. 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.
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. Although the Company monitors and
manages the volume of its sales to retailers and distributors and their
inventories in an effort to prevent overstocking in the distribution channel,
which can result in high returns or the requirement for substantial price
protection in subsequent periods, there can be no assurance that the Company can
adequately anticipate the demand for its products. 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 will not exceed the Company's reserves.
The distribution channels through which consumer software products are sold have
been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. The bankruptcy or other business
difficulties of a distributor or retailer could render the Company's accounts
receivable from such entity uncollectible, which could have an adverse effect on
the operating results and financial condition of the Company. In addition, an
increasing number of companies are competing for access to these channels. The
Company's arrangements with its distributors and retailers may be terminated by
either party at any time without cause. Distributors and retailers often carry
products that compete with those of the Company. Retailers of the Company's
products typically have a limited amount of shelf space and promotional
resources for which there is intense competition. There can be no assurance that
distributors and retailers will purchase the Company's products or provide the
Company's products with adequate levels of shelf space and promotional support.
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The Company also licenses its products to third parties for international
distribution and marketing. Under these agreements the Company provides
third-party licensees with final software code from which to manufacture, market
and distribute the Company's products outside North America. Such agreements
also provide that the Company receives a minimum guaranteed payment as well as
potential royalties on product sales in the designated territories. The market
for licensing products internationally is highly competitive. There can be no
assurance that the Company will be able to maintain its current international
licensing arrangements or enter into new ones. In the event that the Company
does sign a license for a third party to market and distribute the Company's
titles overseas, there can be no assurance that such products will achieve
market success and generate royalties for the Company. Failure to sign licenses
or achieve market acceptance of licensed products overseas would have a material
adverse affect on the Company's revenues and resulting financial performance.
The percentage breakdown by principal source of the Company's revenues for the
three fiscal years in which the Company earned revenue is as follows:
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1998 1997 1996
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Royalties and license fees 76% 86% 64%
Software publishing 24% 10% 19%
Development systems and other sales -- 4% 17%
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Matsushita and its affiliates represent, in fiscal year 1998, a major customer
of the Company, providing approximately 67% of the Company's revenues. Revenue
from Matsushita and its affiliates is primarily related to the M2 Agreement. All
of the previously unrecognized revenue associated with the M2 Agreement with
Matsushita has been recognized in fiscal year 1998.
ACQUISITIONS
During November 1995, the Company acquired the business of Cyclone Studios, a
software developer located in the greater San Francisco area. The purchase price
consisted of cash, stock and potential future consideration based upon the
financial performance of the new division. On May 31, 1996, the Company acquired
all of the outstanding capital stock of Archetype Interactive Corporation
("Archetype"), a software developer, also based in the greater San Francisco
area. Archetype's only product, "Meridian 59," a multi-user role playing game
designed to be played over the Internet, is now published and distributed by the
Company.
In June 1996, the Company purchased certain assets and assumed certain
liabilities of New World Computing, Inc. ("NWC"), an entertainment software
company located in Agoura Hills, California. As consideration for the purchase,
the Company issued approximately 1 million shares of its common stock to NWC's
parent, NTN Communications, Inc. ("NTN"). In addition, pursuant to the terms of
the purchase agreement, the Company made a cash payment to NTN because the value
of the Company's stock issued in the transaction fell below $10.00 per share
during a certain period following the closing date (the "Purchase Price
Guarantee"). The Company paid approximately $5.0 million in cash to NTN with no
further obligations under the Purchase Price Guarantee. The Company accounted
for the acquisition using the purchase method of accounting.
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These acquisitions place a strain on the Company's management, operational,
financial and administrative resources. There can be no assurance that the
Company will be able to successfully integrate these entities into the Company,
or that such acquisitions will be profitable for the Company.
INTERNATIONAL OPERATIONS
The Company maintains a subsidiary in the United Kingdom, 3DO Europe, Ltd. ("3DO
Europe"). Prior to fiscal year 1998, 3DO Europe focused on licensing the
Company's software products for international distribution. In July 1997, the
Company transitioned most of such activities to the United States to be managed
by employees at the Company's headquarters in Redwood City, California.
In December 1995, the Company sold its Japanese developer support business for
the 3DO Multiplayer platform to Matsushita. The Company continues to maintain a
subsidiary in Japan, Studio 3DO K.K. However, as of March 31, 1998, this entity
had no employees and was not conducting any business activities.
PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain and enforce
intellectual property protection for its products and underlying technologies in
the U.S. and other countries. The Company has several United States patent
applications which are presently pending in the United States Patent and
Trademark Office and has filed for protection of certain patents in various
countries under the protection of the Patent Cooperation Treaty.
The Company also relies on its trade secrets and proprietary know-how, which it
seeks to protect in part by confidentiality agreements with its employees,
consultants, vendors and current and prospective licensees. The Company's
license agreements typically prohibit unauthorized disclosure and unauthorized
reverse-engineering of the Company's technologies.
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 and enforcement procedures afford only limited
protection, particularly in certain jurisdictions outside the United States.
The Company has applied for trademark protection in the United States and in
various other countries for the Company's name and logo and, in a limited number
of countries, for the names of certain products. The Company licenses its trade
names, trademarks and logos for use in connection with authorized product
offerings marketed and distributed by its licensees.
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 these products further overlap, the Company believes that
its products should be expected to increasingly become the subject of
infringement claims by third parties. If such claims occur, the Company could
incur substantial costs in defending itself.
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EMPLOYEES
On March 31, 1998, the Company's personnel included 222 full-time employees and
42 independent contractors in the United States. These persons provided services
in the following functional areas: 16 in sales and marketing, 207 in studio, and
41 in finance, administration, distribution and legal services. As of March 31,
1998, the Company's Japanese and European subsidiaries had no employees.
Many of the Company's employees are highly skilled. The Company's business
depends, to a great extent, on its ability to attract and retain skilled
employees. The game software industry is characterized by a high level of
employee mobility and aggressive recruiting of skilled personnel, and, as such,
the Company competes for its employees with entertainment software and
interactive multimedia companies, as well as other high technology companies in
the hardware and software industries, many of which have substantially greater
resources than the Company. There can be no assurance that the Company will be
able to attract and retain skilled employees, and the loss of skilled employees
could have a material, adverse effect on the Company's business. The employees
and the Company are not parties to any collective bargaining agreements. The
Company believes that its relations with its employees are good.
RISK FACTORS
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 otherwise
terminated prior to completion 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 has entered new, rapidly changing 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 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
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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 platform of
Sega. 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 THE 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
changes 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 PROPRIETARY PLATFORM MARKETS
The market for software products for the various proprietary platforms for which
the Company develops software products, including the Sony PlayStation and
Nintendo 64, are currently experiencing rapid growth. The Company's future
success is partly dependent on its ability to successfully take advantage of
these markets and on the continued growth of these markets. There can be no
assurance that the Company will be able to develop products for these markets in
a timely manner to take advantage of these growing markets, that the Company's
software products for these markets will achieve market acceptance, or that
these markets will continue to grow. In the event that the Company fails to
develop products while these markets are expanding or fails to deliver products
that are commercially successful, or if these markets do 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
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<PAGE> 12
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 IN THE INTERNET
The availability of multiple player games on the Internet is a relatively 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 attract players' 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 game, Meridian 59, and has entered into agreements to have
such game distributed through Internet game sites. 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 has 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 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.
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<PAGE> 13
COMPETITION
The Company has entered new markets with certain of its software products and in
particular, those products currently in development for the Sony PlayStation,
Nintendo 64 and Internet markets. This has, to some degree, required
distribution through distributors and retailers who had not previously carried
the Company's products. There is 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., Eidos plc, 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
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 and/or products 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.
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<PAGE> 14
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. However, 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.
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 game
software 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.
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<PAGE> 15
PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain and enforce
intellectual property protection for its products and related 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.
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 products and related technology. There can be no assurance
that the copyright laws will adequately protect the Company's technologies.
The Company licenses its trade names, trademarks and logos 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
its products 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
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<PAGE> 16
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
regarding such 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.
YEAR 2000 ISSUE
Many existing computer systems and related software applications, and other
control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Such
systems, applications and/or devices could fail or create erroneous results
unless corrected so that they can process data related to the Year 2000. The
Company relies on such computer systems, applications and devices in operating
and monitoring all major aspects of its business, including, but not limited to,
its financial systems (such as general ledger, accounts payable and payroll
modules), customer services, internal networks and telecommunications equipment,
and end products. The Company also relies, directly and indirectly, on the
external systems of various independent business enterprises, such as its
customers, suppliers, creditors, financial organizations, and of governments,
both domestically and internationally, for the accurate exchange of data and
related information.
The Company is currently in the process of evaluating the potential impact of
the Year 2000 issue on its business and the related expenses that would
foreseeably be incurred in attempting to remedy such impact (including testing
and implementation of remedial action). Management's current estimate is that
the costs associated with the Year 2000 issue should not have a material adverse
effect on the results of operations or financial position of the Company in any
given year. However, despite the Company's efforts to address the Year 2000
impact on its internal systems, the Company is not certain that it
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<PAGE> 17
has fully identified such impact or that it can resolve it without disruption of
its business and without incurring significant expense. In addition, even if the
internal systems of the Company are not materially affected by the Year 2000
issue, the Company could be affected as a result of any disruption in the
operation of the various third-party enterprises with which the Company
interacts.
RECENT ACQUISITIONS
The Company acquired the business of Cyclone Studios ("Cyclone"), a software
developer, during November of 1995. In May of 1996, the Company acquired all the
outstanding capital stock of Archetype Interactive Corporation ("Archetype"), a
developer of a multi-user role playing game to be played over the Internet. In
June 1996, the Company purchased certain assets and assumed certain liabilities
of New World Computing, Inc. ("NWC"), an entertainment software company. Each of
these acquisitions represented the addition of new products and personnel to the
Company, which has caused changes in the allocation of management and other
resources, marketing strategies and production systems. The Company's ability to
manage these acquired businesses effectively will depend on its ability to hire
additional management and technical personnel and to continue to improve the
operating, financial and management systems and controls in each of its
operating units. There can be no assurance that the Company will be able to
successfully integrate these acquired businesses, or other companies which the
Company may acquire in the future, with the current operations of the Company.
FUTURE ACQUISITIONS
The Company is in the process of establishing operations as a multi-platform
entertainment software developer and publisher and its strategy may involve, in
part, acquisitions of products, technologies or businesses from third parties.
Identifying and negotiating these acquisitions may divert substantial management
time away from the Company's operations. An acquisition could absorb substantial
cash resources, could require the Company to incur or assume debt obligations,
or could involve the issuance of additional equity securities of the Company.
The issuance of additional equity securities could dilute and could represent an
interest senior to the rights of then-outstanding common stock. An acquisition
which is accounted for as a purchase, like the acquisitions of Cyclone and NWC,
could involve significant one-time non-cash write-offs, and could involve the
amortization of goodwill over a number of years, which would adversely affect
earnings in those years. Acquisitions outside the entertainment software area
may be viewed by outside market analysts as a diversion of the Company's focus
on entertainment software. For these reasons, the market for the Company's stock
may react positively or negatively to the announcement of any acquisition. Any
acquisition will require attention from the Company's management to integrate
the acquired entity into the Company's operations, may require the Company to
develop expertise outside its existing businesses and may result in departures
of management of the acquired entity. An acquired entity may have unknown
liabilities, and its business may not achieve the results anticipated at the
time of the acquisition. Any acquisitions that adversely affect the operations
of the Company may have an adverse impact on the Company's stock price.
ITEM 2. PROPERTIES
As of March 31, 1998, the Company leased 25,488 square feet, net of
approximately 25,000 square feet sublet to a third party, of facilities in
Redwood City, California, 7,600 square feet in San Mateo, California, and 10,922
square feet in Agoura Hills, California,
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<PAGE> 18
for an aggregate monthly rent expense of approximately $84,000. These facilities
house the Company's administrative, research, development and sales operations.
The lease with respect to the existing Redwood City facilities expires in August
1998 with an option to extend for three years. The lease for the San Mateo site
expires in May 1999, while the lease for the Agoura Hills facility expires in
January 2001. The Company believes that these facilities are adequate for its
current needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is engaged in certain legal actions arising in the ordinary course
of business. The Company believes it has adequate legal defenses and believes
that the ultimate outcome of these actions will not have a material effect on
the Company's financial position or results of operations, although there can be
no assurance as to the outcome of such litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades publicly on the Nasdaq National Market under
the symbol "THDO." The following table sets forth for the periods indicated the
quarterly high and low closing sales prices of the Common Stock on the Nasdaq
National Market.
<TABLE>
<CAPTION>
Closing Sales Prices
-----------------------------------
High Low
------------- -------------
<S> <C> <C>
Fiscal Year Ended March 31, 1997:
First Quarter $ 12.38 $ 8.25
Second Quarter 11.25 5.63
Third Quarter 6.63 4.63
Fourth Quarter 5.50 2.63
Fiscal Year Ended March 31, 1998:
First Quarter $ 5.19 $ 2.75
Second Quarter 4.50 3.25
Third Quarter 3.75 2.00
Fourth Quarter 3.59 2.00
</TABLE>
As of May 31, 1998, there were approximately 798 holders of record of 25,969,983
shares of outstanding common stock.
DIVIDEND POLICY
The Company has not paid any dividends since its inception and does not intend
to pay any dividends on its common stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands,
except for per share amounts) Fiscal Years Ended March 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Total revenues $ 38,890 $ 92,350 $ 37,918 $ 30,380 $ 10,295
Total cost of revenues 3,959 7,989 7,914 7,177 3,464
-------- -------- -------- -------- --------
Gross profit 34,931 84,361 30,004 23,203 6,831
-------- -------- -------- -------- --------
Operating expenses:
Research and development 19,147 42,077 41,184 36,483 23,412
Sales and marketing 5,612 8,043 6,837 11,777 8,248
General and administrative 7,322 11,310 9,535 7,504 6,175
Market development advertising -- -- 924 4,926 --
Stock incentive -- -- -- 8,359 --
Acquisition of NTG royalty rights -- -- -- -- 21,353
In-process research and development -- 7,700 -- -- --
-------- -------- -------- -------- --------
Total operating expenses 32,081 69,130 58,480 69,049 59,188
-------- -------- -------- -------- --------
Operating income (loss) 2,850 15,231 (28,476) (45,846) (52,357)
Gain from sale of the Systems group 18,032 -- -- -- --
Net interest and other income 1,874 2,115 684 437 976
-------- -------- -------- -------- --------
Income (loss) before provision for
income and foreign withholding taxes 22,756 17,346 (27,792) (45,409) (51,381)
Income and foreign withholding taxes 219 4,075 6,876 853 50
-------- -------- -------- -------- --------
Net income (loss) 22,537 $ 13,271 $(34,668) $(46,262) $(51,431)
======== ======== ======== ======== ========
Basic net income (loss) per share $ 0.85 $ 0.48 $ (1.36) $ (2.04) $ (2.60)
======== ======== ======== ======== ========
Diluted net income (loss) per share $ 0.83 $ 0.46 $ (1.36) $ (2.04) $ (2.60)
======== ======== ======== ======== ========
Shares used to compute basic net
income (loss) per share 26,387 27,662 25,456 22,697 19,747
======== ======== ======== ======== ========
Shares used to compute diluted net
income (loss) per share 27,114 28,935 25,456 22,697 19,747
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(in thousands) March 31,
-------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and available-for-sale securities $ 34,584 $ 33,617 $ 50,145 $ 14,346 $ 14,301
Working capital (deficit) $ 28,769 $ 14,067 $ (6,951) $ 10,826 $ 10,494
Total assets $ 40,447 $ 44,954 $ 63,330 $ 34,161 $ 25,870
Total long-term liabilities -- $ 1,715 $ 1,831 $ 6,529 $ 2,152
Total stockholders' equity $ 33,578 $ 21,399 $ 131 $ 15,685 $ 15,879
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion is intended to assist in the understanding and
assessment of significant changes and trends relating to the results of
operations and financial condition of The 3DO Company, together with its
consolidated subsidiaries (the "Company"). This discussion and analysis should
be read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto.
Private Securities Litigation Reform Act Safe Harbor Statement
Except for the historical information contained herein, this discussion and
analysis includes certain 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, all statements concerning future revenues, expenses,
cash flows and capital resources; all statements regarding CagEnt assisting the
Company, as a subcontractor, in completing the remaining deliverables associated
with the M2 Agreement, as amended; 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; the ability of the Company to adequately distribute its
software products through various distribution channels; 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 contained herein. 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 "Risk
Factors," above. The Company assumes no obligation to update any or all of the
forward-looking statements or such factors.
Overview
Since commencement of its operations in October 1991, the Company has been
developing interactive technologies and software applications. To date, it has
devoted a majority of its resources to research and development activities,
marketing and licensing its technology, recruiting and supporting third-party
licensees. More recently, the Company has sold most of the assets of its former
hardware systems group and devoted its efforts to developing high-quality game
software products with a special emphasis on creating lasting franchise value
for multiple platforms including the IBM-compatible PC CD-ROM platform (the
"PC"), the 32-bit PlayStation platform (the "Sony PlayStation") developed by
Sony Computer Entertainment, Inc., the Nintendo 64 platform (the "N64")
developed by Nintendo Company, Ltd., and the Internet.
Prior to fiscal year 1997, 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. The Company also derived revenue
from the sale of development systems to licensees, software title development
activities whereby the Company developed titles under contract for publishing by
third parties, engineering
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<PAGE> 22
activities under contract to third parties, technology licensing fees, and the
licensing and distribution of software titles published by the Company and
others. Revenue has also been generated from royalties paid by semiconductor
foundries upon their sale of licensed chipsets to hardware system manufacturers
(see "Results of Operations" below).
In fiscal years 1997 and 1998, the Company derived the majority of its revenue
from technology licensing fees and the publishing and distribution of internally
and externally developed software titles. For most of fiscal year 1995 and
fiscal year 1996, the focus of the Company's business was on maximizing royalty
revenues from the pressing and publishing of third-party software CDs that
played on the Company's first generation Interactive Multiplayer (the "3DO
Multiplayer") systems marketed and distributed by Matsushita Electronic
Industrial Co., Ltd. ("MEI" or "Matsushita"), Sanyo Electric Co., Ltd. ("Sanyo")
and LG Precision Co., Ltd. ("Goldstar"), which failed to achieve market
acceptance. As a result, this third-party CD pressing and publishing royalty
stream decreased significantly to less than 1% of revenue in fiscal years 1997
and 1998. The Company has recently reorganized its organization to focus on
entertainment software products for the PC, Sony PlayStation, Nintendo 64 and
Internet platforms.
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 related 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 allowances for returns, price protection
and discounts. 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 is recognized using the percentage-of-completion method.
Revenue from the Company's on-line service is recognized monthly 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. In November 1997,
the Company paid MEI approximately $2.9 million, which represented the entire
outstanding balance due under the incentive programs.
The Company developed a next generation 64-bit technology (the "M2 Technology")
and, in December 1995, the Company and MEI 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 $100.0 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 March 31, 1998, the Company recognized all revenue in
connection with the M2 Agreement under the percentage-of-completion method of
accounting.
22
<PAGE> 23
Concurrent with the execution of the M2 Agreement, Matsushita and the Company
entered into a separate stock purchase and license agreement whereby Matsushita
acquired all of the outstanding capital stock of 3DO Japan Co., Ltd. for
$668,000, the approximate book value of the entity at the date of closing. This
entity of approximately 14 people was responsible for the third-party support
activities of the 32-bit 3DO Multiplayer platform.
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. As of March
31, 1998, the Company has either completed all the required milestone delivery
obligations or has subcontracted the remaining delivery obligations to be
completed to CagEnt, as part of the hardware systems group sales agreement with
Samsung Electronics Company, Ltd. ("Samsung"). As a result, the Company has
received the remaining balance owed by MEI and has recognized the revenue in
full.
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. The Company recognized approximately $11.0 million of revenue
in connection with this transaction.
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 for $20.0 million. The Company recognized a gain of $18.0
million on this transaction. 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 due to MEI under 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
deliverables required pursuant to the M2 Agreement. In the event that CagEnt's
subcontracted engineering services are unsatisfactory or are otherwise
terminated prior to completion or are not timely completed, the Company will
incur substantial expenses to complete its obligations under the M2 Agreement.
The Company believes it has adequately provided for such potential obligations
in the consolidated financial statements. However, such an event could 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, Inc. ("Cirrus") 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
23
<PAGE> 24
technology familiarly known to the parties as the "3DEngine." As partial
consideration under such agreement, the Company received the nonrefundable sum
of $2.5 million. 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 nonrefundable payments made to the Company. The Company 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.
On October 15, 1997, 3DO and Cirrus resolved and settled 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. The Company recognized the payment as revenue in the current
fiscal year.
In November 1995, the Company acquired the business, including all of the assets
and certain of the liabilities, of Cyclone Studios, a software developer.
Consideration for the purchase consisted of upfront cash and stock, and
potential future consideration based upon the financial performance of the
resulting new software development division. The upfront portion of the purchase
price, approximately $880,000, was expensed as acquired in-process research and
development in the third quarter of fiscal year 1996 because the acquired
technology had not yet reached technological feasibility and had no other future
alternative uses.
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"), a PC platform game developer.
Subsequent to the asset purchase, the Company created a production unit using
the NWC brand name. NWC continues to be a wholly-owned subsidiary of NTN
Communications, Inc. ("NTN"). As consideration for the purchase, the Company
issued 1 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 Company stock issued in the transaction fell below an
amount equal to approximately $10.00 per share during a period following the
closing date (the "Purchase Price Guarantee"); as of December 31, 1996, the
Company paid approximately $5.0 million to NTN. This payment represents the
total amount due to NTN under the terms of the asset purchase agreement and, as
such, the Company has no further obligations to NTN under the Purchase Price
Guarantee. The Company recorded the purchase in June 1996 using the purchase
method of accounting. A one-time charge was recorded in the first quarter of
fiscal year 1997 for $7.7 million representing the amount of the purchase price
assigned to in-process research and development because the acquired technology
had not yet
24
<PAGE> 25
reached technological feasibility and had no other future alternative uses. At
the time, the entire purchase was booked at the guaranteed purchase price. As a
result, the one-time payment of approximately $5.0 million has no impact on the
Company's income statement for fiscal year ended March 31, 1997. Also included
as part of the purchase price were intangibles valued at $3.1 million, to be
amortized on a straight-line basis over a period of one to five years.
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 worth 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 March 31, 1998, the Company
has reacquired 233,500 shares. The repurchase plan will remain in effect until
rescinded by the Board.
The Company will continue to incur substantial expenditures to develop its
business throughout fiscal year 1999. 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.
On April 1, 1997, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share," which requires the
presentation of basic earnings per share (EPS) and, for companies with complex
capital structures, dilutive EPS.
RESULTS OF OPERATIONS
The following discussions compare the results of operations for the fiscal year
ended March 31, 1998, to the fiscal year ended March 31, 1997, and the fiscal
year ended March 31, 1997, to the fiscal year ended March 31, 1996. The
operating results for each of the years ended March 31, 1998, 1997 and 1996 are
not necessarily indicative of operating results in future periods. The following
comparative information should be read in conjunction with the Consolidated
Financial Statements and Notes thereto for each period discussed, as well as the
information presented in other sections of Management's Discussion and Analysis.
25
<PAGE> 26
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
<TABLE>
<CAPTION>
(in thousands) Years Ended March 31 Change
-------------------------------- ----------------
1998 %(a) 1997 %(a) Amount %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Royalties and license fees $ 29,371 75.6 $ 79,167 85.7 $(49,796) (62.9)
Software publishing 9,429 24.2 9,540 10.3 (111) (1.2)
Development systems and other 90 0.2 3,643 4.0 (3,553) (97.5)
-------- ----- -------- ----- -------- -----
Total revenues 38,890 100.0 92,350 100.0 (53,460) (57.9)
-------- ----- -------- ----- -------- -----
Cost of revenues:
Royalties and license fees -- -- 456 0.6 (456) (100.0)
Software publishing 3,916 41.5 5,397 56.6 (1,481) (27.4)
Development systems and other 43 47.8 2,136 58.6 (2,093) (98.0)
-------- ----- -------- ----- -------- -----
Total cost of revenues 3,959 10.2 7,989 8.6 (4,030) (50.4)
-------- ----- -------- ----- -------- -----
Gross profit 34,931 89.8 84,361 91.4 (49,430) (58.6)
-------- ----- -------- ----- -------- -----
Operating expenses:
Research and development 19,148 49.2 42,077 45.6 (22,929) (54.5)
Sales and marketing 5,612 14.4 8,043 8.7 (2,431) (30.2)
General and administrative 7,322 18.8 11,310 12.3 (3,988) (35.3)
In-process research and development -- -- 7,700 8.3 (7,700) (100.0)
-------- ----- -------- ----- -------- -----
Total operating expenses 32,082 82.5 69,130 74.9 (37,048) (53.6)
-------- ----- -------- ----- -------- -----
Operating income 2,849 7.3 15,231 16.5 (12,382) (81.3)
Gain on sale of Systems assets 18,033 46.4 -- -- 18,033 --
Net interest and other income 1,874 4.8 2,115 2.3 (241) (11.4)
-------- ----- -------- ----- -------- -----
Income before income and
foreign withholding taxes 22,756 58.5 17,346 18.8 5,410 31.2
Income and foreign withholding taxes 219 0.6 4,075 4.4 (3,856) (94.6)
-------- ----- -------- ----- -------- -----
Net income $ 22,537 58.0 $ 13,271 14.4 $ 9,266 69.8
======== ===== ======== ===== ======== =====
</TABLE>
(a) Percentage of total revenues except cost of revenue components, which are a
percentage of their respective revenue amounts.
Revenue for the year ended March 31, 1998, decreased by approximately $53.5
million (58%) from $92.4 million in fiscal year 1997 to $38.9 million in fiscal
year 1998. Royalties and license fees were the largest component of revenue and
accounted for approximately 76% and 86% for the years ended March 31, 1998, and
1997, respectively, and represented an approximate $49.8 million (63%) decrease
compared to the prior year. Royalties and license fees consisted of technology
license fees, software royalties, pressing fees, semiconductor royalties and MDF
revenue (see Note A of the Notes to the Consolidated Financial Statements).
Included in technology license fees is $12.0 million, $73.5 million and $14.5
million for fiscal years 1998, 1997 and 1996, respectively, revenue recognized
under the M2 Agreement with Matsushita (see "Overview," above). The Company does
not expect to recognize any additional royalties and license fees in the future
relating to its former hardware systems business. The revenue recognition
methodology for the M2 Agreement is based upon the percentage-of-completion
method, as the Company fulfills its commitments to deliver technology as
specified in the agreement. The Company recognized $3.5 million and $2.5 million
in revenue in fiscal year 1998 and 1997, respectively, related to the Cirrus
Agreement. The Company does not expect to recognize any additional revenue
related to the Cirrus Agreement, as all obligations have been met and finalized.
26
<PAGE> 27
Software publishing revenue was approximately $9.4 million for the year ended
March 31, 1998 compared to $9.5 million for the prior year ended March 31, 1997,
a decrease of approximately $0.1 million (1%). Software publishing revenue was
generated by the Company's publishing, distribution, and licensing of externally
and internally developed software titles. Software publishing revenue for the
fiscal years 1998 and 1997 were primarily generated from New World Computing, a
division of 3DO, which was acquired in June 1996. In fiscal year 1999, the
Company expects the revenue mix from each of the Company's three divisions to be
more evenly distributed, as many of the current developing titles from Cyclone
Studios and Studio 3DO approach completion. Software revenue was recorded net of
reserves for price protection and returns and discounts.
Development systems and other revenue of $0.1 million for fiscal year 1998
decreased approximately $3.5 million (98%) compared to the prior fiscal year.
Development systems and other revenue were primarily comprised of revenue from
sales of M2 development systems and video digital encoders. This decrease was
due to the Company's plan to exit the hardware business and the sale of the
Systems group to Samsung in June 1997.
Cost of revenues of approximately $4.0 million decreased by approximately $4.0
million (50%) compared to the prior year. Cost of revenues consisted of direct
costs associated with software titles and development systems products sold and
developer royalties. Internal development costs of software title development
for titles published by the Company or by third-party publishers is recognized
as incurred and included in research and development expenses. Costs of
revenues, as a percentage of revenue, were approximately 10% for the fiscal year
ended March 31, 1998, compared to approximately 9% for fiscal year 1997. The
increase was primarily due to the decreased proportion of royalties and license
fee revenue recognized for the year ended March 31, 1998, which had
significantly lower associated costs of revenues, compared to all other types of
revenues.
Research and development expenses, including in-process research and
development, of approximately $19.1 million decreased by approximately $30.6
million (62%) for the year ended March 31, 1998, compared to fiscal year 1997.
The decrease was primarily due to a one-time $7.7 million charge for in-process
research and development related to the Company's acquisition of the assets of
New World Computing in June 1996, and the sale of the Systems group to Samsung,
realizing a saving of $15.4 million in operating expenses. In addition, research
and development spending for the software publishing and the Internet divisions
were lower in fiscal year 1998 compared to the prior year due to the
restructuring in January 1997 to streamline the Company's operations.
Sales and marketing expenses decreased $2.4 million (30%) from $8.0 million in
fiscal year 1997 to $5.6 million in fiscal year 1998. The decrease was primarily
due to the closing down of the Company's sales office located in the U.K. in the
second quarter of the current fiscal year to reduce costs and to consolidate all
sales and licensing efforts to the Company's headquarters in the U.S. In
addition, since the Company continues to be in the infancy stage of its software
publishing business and only released two original titles in fiscal year 1998,
it has managed to cut down substantially on its sales and marketing overhead.
The Company anticipates that sales and marketing expenses will increase in the
near future as many of the Company's current developing software titles are
expected to be completed in fiscal year 1999.
General and administrative expenses of approximately $7.3 million decreased by
approximately $4.0 million (35%) for the fiscal year 1998, compared to the prior
fiscal
27
<PAGE> 28
year. The decrease was primarily due to the restructuring in January 1997 to
reduce overhead expenses and the provision for bad debt recorded in fiscal year
1997 as the Company prepared to exit the hardware business.
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 for $20.0 million. The Company recognized a gain of $18.0 million on
this transaction. 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 due to MEI under the M2 Agreement.
Net interest and other income decreased from $2.1 million to approximately $1.9
million for the years ended March 31, 1997 and 1998, respectively. The net
decrease was primarily due to a decrease in interest income as a result of lower
average cash balances in fiscal year 1998 compared to fiscal year 1997. The
decrease in average cash balances was due to cash used in operating activities,
offset by cash receipts in connection with the sale of the Systems group and the
Cirrus settlement.
The provision for income and foreign withholding taxes decreased from $4.1
million for fiscal year 1997 to $0.2 million for fiscal year 1998. The decrease
is primarily attributable to $4.0 million in foreign withholding taxes
associated with a payment received under the M2 Agreement with Matsushita for
the prior fiscal year (see "Overview," above). The Company's current fiscal
year's foreign withholding taxes were principally related to withholding taxes
for foreign licensing agreements.
28
<PAGE> 29
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
<TABLE>
<CAPTION>
(in thousands) Years Ended March 31 Change
--------------------------------------- --------------------
1997 %(a) 1996 %(a) Amount %
-------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Royalties and license fees $ 79,167 85.7 $ 24,074 63.5 $ 55,093 228.9
Software publishing 9,540 10.3 7,330 19.3 2,210 30.2
Development systems and other 3,643 4.0 6,514 17.2 (2,871) (44.1)
-------- ----- -------- ----- -------- -----
Total revenues 92,350 100.0 37,918 100.0 54,432 143.6
-------- ----- -------- ----- -------- -----
Cost of revenues:
Royalties and license fees 456 0.6 694 2.9 (238) (34.3)
Software publishing 5,397 56.6 3,989 54.4 1,408 35.3
Development systems and other 2,136 58.6 3,231 49.6 (1,095) (33.9)
-------- ----- -------- ----- -------- -----
Total cost of revenues 7,989 8.6 7,914 20.9 75 1.0
-------- ----- -------- ----- -------- -----
Gross profit 84,361 91.4 30,004 79.1 54,357 181.2
-------- ----- -------- ----- -------- -----
Operating expenses:
Research and development 42,077 45.6 41,184 108.6 893 2.2
Sales and marketing 8,043 8.7 6,837 18.0 1,206 17.6
General and administrative 11,310 12.3 9,535 25.2 1,775 18.6
Market development advertising -- -- 924 2.4 (924) (100.0)
In-process research and
development 7,700 8.3 -- -- 7,700 --
-------- ----- -------- ----- -------- -----
Total operating expenses 69,130 74.9 58,480 154.2 10,650 18.2
-------- ----- -------- ----- -------- -----
Operating income (loss) 15,231 16.5 (28,476) (75.1) 43,707 --
Net interest and other
income 2,115 2.3 684 1.8 1,431 209.2
-------- ----- -------- ----- -------- -----
Income (loss) before income and
foreign withholding taxes 17,346 18.8 (27,792) (73.3) 45,138 --
Income and foreign
withholding taxes 4,075 4.4 6,876 18.1 (2,801) (40.7)
-------- ----- -------- ----- -------- -----
Net income (loss) $ 13,271 14.4 $(34,668) (91.4) $ 47,939 --
======== ===== ======== ===== ======== =====
</TABLE>
(a) Percentage of total revenues except cost of revenue components, which are a
percentage of their respective revenue amounts.
Revenue for the year ended March 31, 1997, increased by approximately $54.4
million (144%) from $37.9 million in fiscal year 1996 to $92.3 million in fiscal
year 1997. Royalties and license fees were the largest component of revenue and
accounted for approximately 86% and 64% for the years ended March 31, 1997, and
1996, respectively, and represented an approximate $55.1 million (229%) increase
compared to the prior year. Royalties and license fees consisted of technology
license fees, software royalties, pressing fees, semiconductor royalties and MDF
revenue (see Note A of the Notes to the Consolidated Financial Statements).
Included in technology license fees are $73.5 million and $14.5 million for
fiscal years 1997 and 1996, respectively, recognized under the M2 Agreement with
Matsushita (see "Overview," above). The revenue recognition methodology for the
M2 Agreement is based upon the percentage-of-completion method, as the Company
fulfills its commitments to deliver technology as specified in the agreement.
Software royalties decreased from $6.7 million in fiscal year 1996 to $0.1
million in fiscal year 1997 due to decreases in sales of software products
compatible with
29
<PAGE> 30
3DO Multiplayer systems being manufactured by third-party publishers. In light
of the fact that the 3DO Multiplayer did not achieve market acceptance, the
Company does not expect to earn additional revenues from software royalties and
pressing fees related to the 3DO Multiplayer platform in the future. The Company
recognized $2.5 million in revenue in fiscal year 1997 related to the Cirrus
Agreement. No revenue was recognized in fiscal year 1996 as the Cirrus Agreement
commenced on February 29, 1996.
Software publishing revenue of approximately $9.5 million for the year ended
March 31, 1997, increased by approximately $2.2 million (30.2%) compared to the
prior fiscal year, which resulted from the Company's increased publishing and
distribution activities. Software publishing revenue is generated by the
Company's publishing, distribution, and licensing of externally and internally
developed software titles. The increase in software publishing revenue is
primarily due to revenues generated from NWC, which was acquired in June 1996.
During fiscal year 1996, the Company recognized approximately $1.4 million in
software publishing revenues under the agreement in which the Company granted
Matsushita the right to license, manufacture and distribute certain software
titles developed by or for 3DO. Software revenue is recorded net of reserves for
price protection and returns.
Development systems and other revenue of $3.6 million for fiscal year 1997
decreased approximately $2.9 million (44%) compared to the prior fiscal year.
This decrease is comprised of a $0.6 million decrease in development systems
revenue and a decrease of approximately $2.1 million in other revenue compared
to the prior year. For the fiscal year ended March 31, 1997, development system
sales of $2.6 million was a decrease compared to the prior fiscal year, which
was a result of a decline in new orders for M2 development systems. Other
revenue for fiscal year 1997 totaled approximately $1.1 million and is primarily
comprised of engineering and development services and encryption and duplication
revenues. The decrease is primarily due to the decision to eliminate software
development activities for other publishers.
Cost of revenues of approximately $8.0 million increased by approximately $0.1
million (1%), compared to the prior year. Cost of revenues consists of direct
costs associated with software titles and development systems products sold,
developer royalties, and hardware systems incentives accrued on all chipsets
shipped into distribution. Internal development costs of software title
development for titles published by the Company or by third-party publishers is
recognized as incurred and included in research and development expenses. Costs
of revenues, as a percentage of revenue, were approximately 9% for the fiscal
year ended March 31, 1997, compared to approximately 21% for fiscal year 1996.
The decrease is primarily due to the increased proportion of royalties and
license fee revenue recognized for the year ended March 31, 1997, which have
significantly lower associated costs of revenues, compared to all other types of
revenues.
30
<PAGE> 31
Research and development expenses, including in-process research and
development, of approximately $49.8 million increased by approximately $8.6
million (21%) for the year ended March 31, 1997, compared to fiscal year 1996.
The increase was primarily due to a one-time $7.7 million charge 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.
The increase was partially offset by the decrease in research and development
spending in the hardware systems division as the M2 development project
approaches completion. The Company anticipates that research and development
expenses will significantly decrease after the sale of its hardware systems unit
to Samsung has been completed.
Sales and marketing expenses, including market development and advertising, of
approximately $8.0 million increased by approximately $0.3 million (3.6%) for
fiscal year 1997, compared to the prior fiscal year, primarily due to marketing
and promotional expenses associated with the Company's Internet game, Meridian
59.
General and administrative expenses of approximately $11.3 million increased by
approximately $1.8 million (19%) for fiscal year 1997, compared to the prior
fiscal year, primarily due to goodwill amortization expense related to the New
World Computing acquisition, and additional reserves recorded for bad debt and
other expenses.
Net interest and other income increased from $0.7 million to approximately $2.1
million for the years ended March 31, 1996 and 1997, respectively. The net
increase was primarily due to an increase in interest income, due to increased
cash balances associated with payments received under the M2 Agreement and a
reduction of other expenses, which was partially offset by an increase in
interest expense on capital leases.
The provision for income and foreign withholding taxes decreased from $6.9
million for fiscal year 1996 to $4.1 million for fiscal year 1997. The decrease
is primarily attributable to $4.0 million in foreign withholding taxes
associated with a payment received under the M2 Agreement with Matsushita for
the current year compared to $6.0 million for the prior fiscal year (see
"Overview," above).
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash and cash equivalent
balances and short-term investments, which totaled approximately $34.6 million
and $33.6 million as of March 31, 1998 and 1997, respectively. The increase in
fiscal year 1998 was attributable to cash received in connection with the sale
of the Systems group to Samsung and the Cirrus settlement (See Note H and Note I
of the Notes to the Consolidated Financial Statements), offset by cash used in
operating activities. The current ratio (current assets to current liabilities)
was 5.19 to 1 as of March 31, 1998, compared to 1.64 to 1 as of March 31, 1997.
This improvement is primarily due to decreases in deferred revenue, decrease in
current portion of the capital lease obligations and current hardware incentive
obligations balances at March 31, 1998, which were partially offset by decreased
inventory and other prepaid expense balances. Net cash used in operating
activities was $17.3 million for the fiscal year ended March 31, 1998, which
compares with net cash used in operating activities of $8.1 million for fiscal
year 1997. For the fiscal year ended March 31, 1998, the Company invested
approximately $1.3 million ($4.3 million in the prior year) in fixed assets,
excluding assets acquired under capital lease obligations, which were primarily
purchases of computer equipment, software applications and office furnishings.
31
<PAGE> 32
The Company anticipates that existing cash resources and working capital
financing should be sufficient to fund the Company's activities through the end
of fiscal year 1999. There can be no assurance that additional capital will not
be required in fiscal year 2000 since cash flows will be affected by the rate at
which the Company develops, publishes and distributes software titles and the
resulting sale of these products, the market acceptance of such products and the
levels of advertising and promotions required to promote market acceptance. The
level of financing required beyond fiscal year 1999 will depend on these and
other factors. If the Company needs to raise additional funds through public or
private financing, no assurance can be given that additional financing will be
available or that, if available, it will be available on terms acceptable to the
Company or its stockholders. Additional financing 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Independent Auditors' Report, Consolidated Financial Statements and Notes to
Consolidated Financial Statements follow on Pages 33 through 55.
32
<PAGE> 33
INDEPENDENT AUDITORS' REPORT
The Board of Directors
The 3DO Company:
We have audited the accompanying consolidated balance sheets of The 3DO Company
and subsidiaries as of March 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the three-year period ended March 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The 3DO Company and
subsidiaries as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended March
31, 1998, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Mountain View, California
May 11, 1998
33
<PAGE> 34
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
March 31,
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,209 $ 14,395
Short-term investments 18,375 19,222
Accounts receivable, net 216 429
Prepaid and other current assets 838 1,861
--------- ---------
Total current assets 35,638 35,907
Property and equipment, net 3,336 6,681
Deposits and other assets 1,473 2,366
--------- ---------
Total assets $ 40,447 $ 44,954
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 495 $ 569
Accrued expenses 2,468 3,251
Deferred revenue 352 11,992
Current portion of capital lease obligations 335 807
Hardware incentive obligations -- 2,944
Other current liabilities 3,219 2,277
--------- ---------
Total current liabilities 6,869 21,840
Capital lease obligations, net of current portion -- 611
Other liabilities -- 1,104
--------- ---------
Total liabilities 6,869 23,555
--------- ---------
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000 shares
authorized; no shares issued -- --
Common stock, $0.01 par value; 50,000 shares authorized;
25,570 and 28,369 shares issued and outstanding, respectively 256 284
Additional paid-in capital 159,938 158,489
Cumulative translation adjustment (290) (164)
Accumulated deficit (114,673) (137,210)
Treasury stock, at cost, 3,448 shares (11,653) --
--------- ---------
Total stockholders' equity 33,578 21,399
--------- ---------
Total liabilities and stockholders' equity $ 40,447 $ 44,954
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
34
<PAGE> 35
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Royalties and license fees $ 29,371 $ 79,167 $ 24,074
Software publishing 9,429 9,540 7,330
Development systems and other 90 3,643 6,514
-------- -------- --------
Total revenues 38,890 92,350 37,918
-------- -------- --------
Cost of revenues:
Royalties and license fees -- 456 694
Software publishing 3,916 5,397 3,989
Development systems and other 43 2,136 3,231
-------- -------- --------
Total cost of revenues 3,959 7,989 7,914
-------- -------- --------
Gross profit 34,931 84,361 30,004
-------- -------- --------
Operating expenses:
Research and development 19,147 42,077 40,356
Sales and marketing 5,612 8,043 7,761
General and administrative 7,322 11,310 9,535
In-process research and development -- 7,700 828
-------- -------- --------
Total operating expenses 32,081 69,130 58,480
-------- -------- --------
Operating income (loss) 2,850 15,231 (28,476)
Gain on sale of Systems assets 18,032 -- --
Net interest and other income 1,874 2,115 684
-------- -------- --------
Income (loss) before income and foreign withholding taxes 22,756 17,346 (27,792)
Income and foreign withholding taxes 219 4,075 6,876
-------- -------- --------
Net income (loss) 22,537 $ 13,271 $(34,668)
======== ======== ========
Basic net income (loss) per share $ 0.85 $ 0.48 $ (1.36)
======== ======== ========
Diluted net income (loss) per share $ 0.83 $ 0.46 $ (1.36)
======== ======== ========
Shares used to compute basic net income (loss) per share 26,387 27,662 25,456
======== ======== ========
Shares used to compute diluted net income (loss) per share 27,114 28,935 25,456
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
35
<PAGE> 36
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1997 AND 1996
(in thousands)
<TABLE>
<CAPTION>
Additional Treasury Cumulative
Common Stock Paid-in Stock, Translation Accumulated Stockholders
Shares Amount Capital at Cost Adjustment Deficit Equity
-------- --------- --------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1995 23,482 $235 $ 130,965 $ -- $ 298 $(115,813) $ 15,685
Sales of Common stock, net of issuance
costs of $5 1,580 16 16,537 16,553
Issuance of common stock for acquisition 50 506 506
Sale of common stock through employee
stock plans and other plans 491 5 2,537 2,542
Common stock issued under stock
incentive program 400 4 (4) --
Foreign currency translation (487) (487)
Net loss (34,668) (34,668)
-------- --------- --------- ---------- -------- --------- ---------
Balances as of March 31, 1996 26,003 260 150,541 -- (189) (150,481) 131
Issuance of common stock for acquisition 1,610 16 5,664 5,680
Sale of common stock through employee
stock plans and other plans 709 7 1,844 1,851
Common stock issued under stock
incentive program 47 1 440 441
Foreign currency translation 25 25
Net income 13,271 13,271
-------- --------- --------- ---------- -------- --------- ---------
Balances as of March 31, 1997 28,369 $284 $ 158,489 -- $ (164) $(137,210) $ 21,399
Sale of common stock through employee
stock plans and other plans 649 6 1,449 1,455
Repurchase of 3DO shares (3,448) (34) (11,653) (11,687)
Foreign currency translation (126) (126)
Net income 22,537 22,537
-------- --------- --------- ---------- -------- --------- --------
Balances as of March 31, 1998 25,570 $256 $ 159,938 $(11,653) $ (290) $(114,673) $ 33,578
=== ==== ======== ========= ========= ======== ======== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
36
<PAGE> 37
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 22,537 $ 13,271 $(34,668)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,744 7,446 5,630
Deferred revenue (11,640) (35,870) 46,713
Gain on sale of Systems assets (18,032) -- --
Revenue recognized in exchange for 3DO shares (10,965) -- --
In-process research and development -- 7,700 828
Changes in operating assets and liabilities:
Accounts receivable, net 213 2,571 3,751
Prepaid and other assets 803 733 902
Accounts payable (74) (2,249) (1,531)
Accrued expenses (783) (1,540) (618)
Hardware incentives (2,944) (1,236) 975
Other liabilities (162) 1,095 547
-------- -------- --------
Net cash provided by (used in) operating activities (17,303) (8,079) 22,529
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of Systems assets 20,000 -- --
Proceeds from disposition of equipment 74 -- --
Short-term investments, net 735 21,500 (31,155)
Capital expenditures (1,328) (4,304) (3,265)
Acquisition of businesses -- (4,575) (442)
-------- -------- --------
Net cash provided by (used in) investing activities 19,481 12,621 (34,862)
-------- -------- --------
Cash flows from financing activities:
Repurchase of 3DO shares (722) -- --
Proceeds from issuance of common stock, net 1,455 1,851 19,095
Payments on capital lease obligations (1,083) (1,446) (1,631)
-------- -------- --------
Net cash provided by (used in) financing activities (350) 405 17,464
-------- -------- --------
Effect of foreign currency translation (14) (11) (518)
-------- -------- --------
Net increase in cash and cash equivalents 1,814 4,936 4,613
Cash and cash equivalents at beginning of year 14,395 9,459 4,846
-------- -------- --------
Cash and cash equivalents at end of year 16,209 14,395 $ 9,459
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year
Interest $ 135 $ 628 $ 757
Income and foreign withholding taxes $ -- $ 4,075 $ 6,776
Noncash investing and financing transactions:
Assets acquired under capital lease obligations $ -- $ 152 $ 245
Common stock issued in connection with
business acquisitions $ -- $ 5,680 $ 506
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
37
<PAGE> 38
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
In April 1993, The 3DO Company was incorporated as a Delaware holding company.
The accompanying Consolidated Financial Statements include the accounts of The
3DO Company and its wholly owned subsidiaries (the "Company"). The 3DO Company
develops, publishes and markets interactive entertainment products for multiple
platforms. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain prior-year amounts have been reclassified
to conform to the current year's presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported results of operations
during the reporting period. Actual results could differ from those estimates.
Cash Equivalents and Short-term Investments
Cash equivalents include highly liquid investments with remaining maturities of
90 days or less at the date of purchase.
The Company has classified its investments in certain debt securities as
"available-for-sale." Such investments are recorded at fair value, with material
unrealized gains and losses reported as a separate component of stockholders'
equity. Fair value is based on quoted market prices for these or similar
investments. Realized gains and losses are recorded in the accompanying
Consolidated Statements of Operations and were immaterial during the periods
presented. The cost of securities sold is based upon the specific identification
method (see Note B, "Available-for-sale Securities").
Property and Equipment
Property and equipment are recorded at cost. Depreciation and amortization are
calculated using the straight-line method over the shorter of the estimated
useful lives or lease terms, if applicable, of the assets, which range from one
to five years.
Accounting for Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost to sell.
Stock-Based Compensation
Effective April 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based
38
<PAGE> 39
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
Compensation," which requires pro forma disclosure of net income and earnings
per share as if SFAS No. 123's fair value method had been applied. The Company
continues to apply the provisions of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," for the preparation of its
basic consolidated financial statements. (See Note F, "Stock Plans").
Revenue Recognition
The Company recognizes software revenue in accordance with the Statement of
Position (SOP) 91-1, "Software Revenue Recognition." Revenue pertaining to the
license fees, including that from the M2 Technology Agreement (the"M2
Agreement"), is being recognized using the percentage-of-completion method based
on the costs incurred to fulfill the Company's commitments to deliver technology
as specified in the agreement. Revenue from the sales of software titles
published and distributed by the Company, and revenue from the sales of
development systems is recognized at the time of shipment, provided the Company
has no significant 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 to retailers on certain unsold merchandise. Software publishing
revenue is reflected net of an allowance for returns, price protection and
discounts. Revenue from software title development agreements with third-party
publishers and third-party engineering agreements is recognized upon the
attainment of contractual milestones (approximating the percentage-of-completion
method) and is included in "Development systems and other revenues" in the
accompanying Consolidated Statements of Operations. 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 software maintenance, including
maintenance bundled with the development systems, is recognized on a
straight-line basis over the term of the agreement, generally one year, and is
included in other revenue.
Deferred revenue consists primarily of payments received in advance of revenue
being earned under the M2 Agreement (see Note G, "Matsushita Electric Industrial
Co., Ltd. Agreements," for further information), engineering and development
agreements, certification fees, software licensing agreements and deposits.
Other Assets
Intangible assets, primarily goodwill from the acquisition of New World
Computing, are stated at cost less accumulated amortization and are included in
other assets. The Company periodically reviews the net realizable value of its
intangible costs and adjusts the carrying amount accordingly.
Advertising Expenses
Advertising costs are expensed as incurred. Cooperative advertising with
distributors and retailers is accrued when spending is committed. Cooperative
credits are reimbursed when qualifying claims are submitted. For fiscal year
ended March 31, 1998, 1997, and 1996, advertising expenses totaled approximately
$3,511,000, $3,682,000, and $3,657,000, respectively.
39
<PAGE> 40
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. A valuation allowance is recorded to reduce deferred
tax assets to an amount whose realization is more likely than not.
Foreign Currency Translation
The functional currencies of the Company's foreign subsidiaries are their local
currencies. The Company translates assets and liabilities to U.S. dollars at the
current exchange rate as of the applicable balance sheet date. Revenue and
expenses are translated at the average exchange rates prevailing during the
period. Adjustments resulting from the translation of the foreign subsidiaries'
financial statements are reported as a separate component of stockholders'
equity. Gains and losses from foreign currency transactions are a result of the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currencies. Net gains and losses resulting from foreign
exchange transactions were immaterial during the periods presented.
Net Income (Loss) Per Share
For fiscal year 1998, the Company adopted 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.
Share information used to compute basic and diluted earnings per share are as
follows:
<TABLE>
<CAPTION>
For the years ended March 31,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Shares used to compute basic net income
(loss) per share - Weighted-average number of
common shares outstanding 26,387 27,662 25,456
Effect of common equivalent shares - stock
options outstanding using the treasury stock
method 727 1,273 --
------ ------ ------
Shares used to compute diluted net income
(loss) per share 27,114 28,935 25,456
====== ====== ======
</TABLE>
Options to purchase 932,823, 109,406 and 5,328,529 shares of common stock were
excluded from the Company's dilutive net income (loss) per share calculations in
1998,
40
<PAGE> 41
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
1997 and 1996, respectively because their effect was anti-dilutive. These
anti-dilutive shares had weighted average exercise prices of $4.13, $11.49 and
$9.28 in 1998, 1997 and 1996, respectively.
Recent Accounting Pronouncements
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2 Software Revenue Recognition, which supercedes
SOP 91-1. SOP 97-2 is effective for transactions entered into after March 31,
1998. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. If a vendor does not have evidence
of the fair value for all elements in a multiple-element arrangement, all
revenue from the arrangement is deferred until such evidence exists or until all
elements are delivered. The Company is still considering the effect of adopting
SOP 97-2, however the Company generally does not anticipate that it will have a
material impact on the Company's consolidated results of operations or financial
position.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which is effective beginning in 1998. SFAS No.
130 establishes standards for reporting and disclosure of comprehensive income
and its components which will be presented in association with the Company's
consolidated financial statements. Comprehensive income is defined as the change
in an enterprise's equity during a reporting period arising from transactions,
events or circumstances relating to nonowner sources, such as foreign currency
translation adjustments and unrealized gains or losses on available-for-sale
securities. It includes all changes in equity during a period except those
resulting from investments by or distributions to owners. SFAS No. 130 is not
expected to have a material effect on the Company's consolidated results of
operations or financial position.
41
<PAGE> 42
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
B. AVAILABLE-FOR-SALE SECURITIES
The Company has accounted for investments in equity securities as
"available-for-sale" and has stated applicable investments at fair value. The
marketable securities included an immaterial gross unrealized loss at March 31,
1998 and 1997.
Available-for-sale securities classified as current assets as of March 31, 1998
and 1997 included the following:
<TABLE>
<CAPTION>
March 31,
----------------------
1998 1997
---------- ----------
(in thousands) Aggregate Aggregate
Fair Value Fair Value
---------- ----------
<S> <C> <C>
Short-term investments:
U. S. Treasury and other
government agency obligations $11,553 $15,710
Commercial debt securities 6,822 3,512
------- -------
Total short-term investments 18,375 19,222
Cash equivalents:
Money market funds 15,128 7,963
Asset backed repurchase agreements -- 4,946
------- -------
Total cash equivalents 15,128 12,909
------- -------
Total available-for-sale securities $33,503 $32,131
======= =======
</TABLE>
The aggregate fair value of the Company's investment in available-for-sale
securities as of March 31, 1998, by contractual maturity, consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) Aggregate
Fair Value
---------------
<S> <C>
Due in one year or less 22,709
Due in one to three years 10,794
---------------
33,503
===============
</TABLE>
The aggregate fair value approximates amortized cost.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS, RETURNS AND PRICE PROTECTION
The following summarizes the activity for the allowance for doubtful accounts,
returns and price protection for the years ended March 31, 1998, 1997 and 1996:
42
<PAGE> 43
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
(in thousands) March 31,
-------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 3,108 $ 2,329 $ 249
Additions 2,113 4,873 4,540
Deductions (3,333) (4,094) (2,460)
------- ------- -------
Balance at end of year $ 1,888 $ 3,108 $ 2,329
======= ======= =======
</TABLE>
D. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1998 and 1997, consisted of:
<TABLE>
<CAPTION>
(in thousands) March 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Computer and manufacturing equipment $ 6,578 $ 18,616
Furniture, fixtures and leasehold improvements 2,567 3,828
Computer software 2,563 4,824
-------- --------
Property and equipment, at cost 11,708 27,268
Less accumulated depreciation and amortization (8,372) (20,587)
-------- --------
Property and equipment, net $ 3,336 $ 6,681
======== ========
</TABLE>
As of March 31, 1998 and 1997, property and equipment includes approximately
$1.6 and $5.5 million of assets acquired under capital lease obligations,
respectively. Accumulated amortization related to these lease obligations was
approximately $1.5 million and $5.2 million as of March 31, 1998 and 1997,
respectively.
Depreciation and amortization expense associated with property and equipment
amounted to approximately $2.9 million and $6.6 million for the fiscal years
ended March 31, 1998 and 1997, respectively.
E. ACCRUED EXPENSES
Accrued expenses as of March 31, 1998 and 1997, consisted of the following:
<TABLE>
<CAPTION>
(in thousands) March 31,
----------------
1998 1997
------ ------
<S> <C> <C>
Accrued compensation $ 614 $ 909
Accrued royalties 643 871
Other 1,211 1,471
------ ------
$2,468 $3,251
====== ======
</TABLE>
43
<PAGE> 44
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
F. STOCK PLANS
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan whereby eligible employees may
authorize payroll deductions of up to 15% of their compensation to purchase
shares at 85% of the lower of the fair market value of the common stock on the
date of commencement of the two-year offering period, or on the last day of each
six-month purchase period. The Employee Stock Purchase Plan commenced in
September 1994. In fiscal years 1998, 1997 and 1996, 127,596, 204,254 and
179,059 shares, respectively, were issued by the Company to employees at a price
ranging from $2.18 to $2.98, $3.98 to $6.80 and $8.02 to $8.50 per share,
respectively. The weighted-average fair value of the rights issued to employees
to purchase a share of stock under the Stock Purchase Plan was $1.44, $2.93 and
$4.65 at March 31, 1998, 1997 and 1996, respectively. As of March 31, 1998, 1997
and 1996, the Company had 422,959, 550,555 and 754,809 shares, respectively, of
common stock reserved for future issuance under the Employee Stock Purchase
Plan.
Stock Option Plan
The Company's 1993 Incentive Stock Plan (the "Plan") authorizes the granting of
incentive and non-qualified stock options and stock purchase rights to
employees. Incentive stock options must be granted with exercise prices at least
equal to the fair market value of the common stock on the date of grant, as
determined by the Company's Board of Directors. Non-qualified stock options and
stock purchase rights must be granted with exercise prices at least equal to 85%
of the fair market value of the common stock on the grant date, as determined by
the Board of Directors. Stock options generally vest over a 60-month period.
Unexercised options generally expire 10 years from date of grant.
As of March 31, 1998, 1997 and 1996, 18,229,625, 13,211,136 and 9,618,275
shares, respectively, of common stock have been authorized for issuance under
the Plan.
Director Option Plan
The Company's 1995 Director Option Plan (the "Director Plan") authorizes the
granting of non-qualified stock options to each Outside Director on the date
such person first becomes an Outside Director. The exercise price of the
options is the fair market value per share of the common stock on the grant
date. The stock options vest over a 60-month period. Unexercised options expire
ten years from the date of grant.
As of March 31, 1998 and 1997, 700,000 and 300,000 shares, respectively, of
common stock have been authorized for issuance under the Director Plan.
44
<PAGE> 45
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
Transactions for the years ended March 31, 1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------
Options Weighted
Available Average
for Grant Shares Exercise Prices
----------- ----------- ---------------
<S> <C> <C> <C>
Outstanding as of March 31, 1995 1,164,716 4,048,448 $ 7.57
Authorized 3,848,705 -- --
Granted (2,627,704) 2,627,704 11.60
Terminated 1,057,208 (1,035,031) 10.22
Exercised -- (312,592) 3.53
----------- -----------
Outstanding as of March 31, 1996 3,442,925 5,328,529 9.28
Authorized 3,000,000 -- --
Granted (16,005,702) 16,005,702 6.79
Terminated 13,306,657 (13,306,657) 8.82
Exercised -- (438,085) 1.64
----------- -----------
Outstanding as of March 31, 1997 3,743,880 7,589,489 5.27
Authorized 3,992,861 -- --
Granted (12,063,610) 12,063,610 3.14
Terminated 10,656,742 (10,656,742) 4.75
Exercised -- (521,287) 2.20
----------- -----------
Outstanding as of March 31, 1998 6,329,873 8,475,070 $ 3.07
=========== ===========
</TABLE>
The weighted-average fair values of options granted during 1998, 1997 and 1996
with exercise price equal to market value were $1.07, $2.41 and $6.13,
respectively.
As of March 31, 1998, 1997 and 1996, 1,564,301, 1,618,167 and 1,486,055 options,
respectively, were exercisable under the Plan. The weighted-average exercise
price for the shares exercisable at March 31, 1998, 1997 and 1996 were $3.12,
$4.84, and $6.54, respectively. Fiscal year 1998 and 1997 shares granted and
shares terminated as shown in the table above included options which were
repriced.
45
<PAGE> 46
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
The following table summarizes information about fixed stock options outstanding
at March 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- -----------------------------------
Weighted-
average Weighted- Weighted-
Remaining average average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Outstanding Price
- -------------------- ---------------- -------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$0.05 to $0.40 40,541 4.26 $ 0.18 40,541 $ 0.18
$0.41 to $2.00 102,222 4.83 $ 2.00 102,222 $ 2.00
$2.01 to $3.00 1,336,150 9.85 $ 2.13 -- --
$3.01 to $4.00 6,961,034 9.17 $ 3.27 1,400,210 $ 3.25
$4.01 to $7.00 31,217 6.63 $ 5.41 19,361 $ 5.46
$7.01 to $10.25 3,906 5.71 $ 8.33 1,967 $ 8.51
================ =================
$0.05 to $10.25 8,475,070 9.19 $ 3.07 1,564,301 $ 3.12
================ =================
</TABLE>
In November 1993, December 1993, May 1994, December 1994, April 1996, October
1996 and April 1997, the Board of Directors approved the repricing of options
granted at prices in excess of $34.00, $23.50, $9.875, $10.75, $8.25, $5.50 and
$3.25 per share, respectively, for all employees, including executive officers.
46
<PAGE> 47
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
Pro Forma Net Income (Loss)
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company
is required to disclose the pro forma effects on net income (loss) and net
income (loss) per share data as if the Company had elected to use the fair value
approach to account for all its employee stock-based compensation plans. Had
compensation cost for the Company's plans been determined consistent with the
fair value approach enumerated in SFAS No. 123, the Company's pro forma net
income and pro forma net income per share for the year ended March 31, 1998 and
1997 would have been as indicated below:
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) as reported $ 22,537 $ 13,271 $ (34,668)
Pro forma $ 16,483 $ 7,230 $ (36,064)
Net income (loss) per basic share as reported $ 0.85 $ 0.48 $ (1.36)
Pro forma $ 0.62 $ 0.26 $ (1.42)
Net income (loss) per diluted share as reported $ 0.83 $ 0.46 $ (1.36)
Pro forma $ 0.61 $ 0.25 $ (1.42)
</TABLE>
The effects of applying SFAS No. 123 may not be representative of the effects on
reported operating results for future years as the pro forma calculations are
based on grants made in fiscal years 1998, 1997 and 1996 only. The fair value of
employee stock options and employee stock purchase plan rights are estimated on
the date of grant using the Black Scholes option-pricing model with the
following weighted-average assumptions used for fiscal years 1998, 1997 and
1996:
<TABLE>
<CAPTION>
Option Plan ESPP
------------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
---------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average risk free rate 6.31% 6.01% 5.93% 5.63% 6.04% 5.59%
Expected life of options/rights (in years) 2 years with 6 month
3.5 3.5 3.5 increments
Expected stock price volatility 78% 68% 68% 78% 68% 68%
Dividend yield -- -- -- -- -- --
Forfeiture rate 60% 60% 60% 60% 60% 60%
</TABLE>
G. MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AGREEMENTS
On December 7, 1995, the Company and Matsushita Electronic Industrial Co., Ltd.
("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
$100.0 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.
47
<PAGE> 48
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
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. The Company recognized approximately $12.0
million, $73.5 million and $14.5 million of revenue in connection with the M2
Agreement in fiscal years 1998, 1997 and 1996, respectively. As of March 31,
1998, all revenue related to the M2 Agreement has been recognized.
Concurrent with the execution of the M2 Agreement, Matsushita and the Company
entered into a separate stock purchase and license agreement whereby Matsushita
acquired all of the outstanding capital stock of 3DO Japan Co., Ltd. for
$668,000, the approximate book value of the entity at the date of closing. This
entity of approximately 14 people was responsible for the third-party support
activities of the 32-bit 3DO Multiplayer platform.
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 years 1997 and 1998. As of
March 31, 1998, the Company has either completed all the required milestone
delivery obligations or has subcontracted the remaining delivery obligations to
be completed to CagEnt, as part of the hardware systems group sales agreement
with Samsung Electronics Company, Ltd. ("Samsung") (see Note H "Sale of Systems
Group"). As a result, the Company has received the remaining balance owed by MEI
and has recognized the revenue in full.
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. The Company recognized approximately $11.0 million of non-cash
revenue in connection with this transaction.
H. 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 MEI. In the event that
CagEnt's subcontracted engineering services are unsatisfactory or are otherwise
terminated prior to completion or are not timely completed, the Company will
incur substantial expenses to complete its obligations under the M2 Agreement.
The Company believes it has adequately provided for such potential obligations
in the consolidated financial statements. However, such an event could have a
material adverse impact on the Company, including, but not limited to, diverting
funds from the Company's software publishing business. CagEnt also acquired from
Samsung the Company's former video encoder business as part of the Company's
transaction with Samsung.
48
<PAGE> 49
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
I. CIRRUS LOGIC, INC.
On February 29, 1996, the Company and Cirrus Logic, Inc. ("Cirrus") entered into
a Joint Development and License Agreement (the "Cirrus Agreement") regarding the
Company's development and license to Cirrus of certain modifications to the "3-D
Engine," which is a component of the Company's proprietary semiconductor
technology. As consideration under the Cirrus Agreement, the Company is to
receive a nonrefundable amount not to exceed $7.8 million. The Company
recognized $3.5 million and $2.5 million of revenue in fiscal years 1998 and
1997, respectively, under the percentage-of-completion method of accounting.
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 nonrefundable payments made to the Company. The Company 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.
On October 15, 1997, 3DO and Cirrus resolved and settled 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. The Company recognized the payment as revenue in the current
fiscal year.
J. INCENTIVE AND PROMOTIONAL PROGRAMS
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
(or 1994, 1995 and 1996 for units distributed within the Japanese domestic
market), respectively. Amounts under the Manufacturing Incentive Program and
certain other incentive programs were accrued as the obligation arose. 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
total cash payment of $1.2 million was paid on April 1, 1996. In November 1997,
the Company paid MEI approximately $2.9 million, which represented the entire
outstanding balance due under the incentive programs.
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 (the Stock Incentive Program). The Stock Incentive Program was
extended through December 31, 1994, for one of the licensees. As of March 31,
1998, the Company had issued 466,826 shares under this program.
49
<PAGE> 50
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
Promotional Program
In October 1994, the Company established a Market Development Fund ("MDF")
program under which a pressing fee was charged to authorized CD pressing
facilities for the manufacture of compact discs compatible with the 3DO
Multiplayer format. Under the MDF program, a pressing fee was charged for each
copy of any such software title that was 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 Multiplayer format and related
product family. Beginning January 1, 1995, a portion of the MDF funds was used
by the Company for advertising and promotions based on hardware systems shipped
in certain markets, to encourage Licensees' production and the reduction of the
pricing of such systems. All such pressing fees are recognized as revenue, and
the amount due to hardware systems licensees is accrued and recorded as an
offset to revenue, as the applicable CDs are pressed. The related advertising
and promotions expenditures under the program are recorded as incurred and are
separately reflected as an operating expense in the accompanying Consolidated
Statements of Operations.
50
<PAGE> 51
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
K. NET INTEREST AND OTHER INCOME
Other income for fiscal year 1998 included an $18.0 million gain from the sale
of the Systems group (see Note H "Sale of Systems Group"). Net interest and
other income for the fiscal years ended March 31, 1998, 1997 and 1996, consisted
of the following:
<TABLE>
<CAPTION>
(in thousands) Years Ended March 31,
----------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Interest income $ 2,108 $ 2,720 $ 1,422
Interest expense (135) (628) (757)
Other income (expense), net 17,933 23 19
-------- -------- --------
$ 19,906 $ 2,115 $ 684
======== ======== ========
</TABLE>
L. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(in thousands) Years Ended March 31,
--------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $ 120 $ 75 $ 502
State and local 1 1 1
Foreign 98 3,999 6,373
------ ------ ------
Total current 219 4,075 6,876
------ ------ ------
Total deferred -- -- --
------ ------ ------
Total income taxes $ 219 $4,075 $6,876
====== ====== ======
</TABLE>
51
<PAGE> 52
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
The differences between the statutory income tax rate and the Company's
effective tax rate, expressed as a percentage of income before provision for
income taxes, for the years ended March 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Statutary federal tax rate 34.0% 34.0% (34.0%)
Valuation allowance (36.05) (33.6) 32.2
Foreign tax withholding and other 3.05 23.1 (22.9)
----- ---- ----
1% 23.5% (24.7%)
===== ==== ====
</TABLE>
The tax effect of temporary differences that give rise to significant portions
of deferred tax assets as of March 31, 1998 and 1997, are presented as follows:
<TABLE>
<CAPTION>
(in thousands) March 31,
---------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred tax asset:
Depreciation and amortization $ 2,479 $ 2,452
Deferred revenue 151 4,813
Deferred research and development costs 7,819 5,260
Net operating loss carryforwards 30,554 30,581
Tax credit carryforwards 22,257 21,340
Other (2,260) 2,880
-------- --------
Total gross deferred tax assets 61,000 67,326
Less valuation allowance (61,000) (67,326)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
The valuation allowance decreased $6.3 million in the year ended March 31, 1998.
Approximately $0.3 million of the valuation allowance is related to benefits
associated with employee stock options, which will be allocated to equity when
realized.
As of March 31, 1998, the Company had cumulative federal net operating loss
carryforwards of approximately $89.0 million for federal income tax purposes,
which if not offset against future taxable income, will expire in fiscal years
2008 through 2013. As of March 31, 1998, the Company has cumulative California
net operating loss carryforwards of approximately $1.8 million, which if not
offset against future taxable income, will expire in the fiscal year 2003.
As of March 31, 1998, the Company had unused research and development tax
credits of approximately $5.7 million and $4.2 million available to reduce
future federal and California income taxes, respectively, expiring through
fiscal year 2013. The Company also had foreign tax credits of approximately
$11.3 million available to reduce future federal income taxes, expiring through
fiscal year 2003. There are also minimum tax credits of approximately $0.5
million available to reduce future federal income taxes, which will carry
forward indefinitely.
52
<PAGE> 53
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
M. LEASE COMMITMENTS
The Company leases its facilities under several operating lease agreements. The
Company also leases certain office equipment under non-cancelable operating
leases. Lease payments for the periods ended March 31, 1998, 1997, and 1996,
were $1.2 million, $2.0 million and $1.7 million, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(in thousands)
Operating
March 31, Leases
---------
<S> <C>
1999 $ 1,804
2000 1,851
2001 1,659
2002 475
-------
Total minimum lease payments $ 5,789
=======
</TABLE>
N. RELATED PARTY TRANSACTIONS
During the years ended March 31, 1998, 1997, and 1996, the Company recognized
$25.9 million, $78.2 million and $26.2 million of revenue, respectively, from
certain stockholders, primarily Matsushita. At March 31, 1997, $0.8 million was
due from these stockholders. No outstanding balance was due at March 31, 1998.
As of March 31, 1997, the Company had deferred revenue of $12.0 million from
certain stockholders. No such balance existed at March 31, 1998.
During the years ended March 31, 1997 and 1996, the Company acquired $0.5
million and $1.1 million, respectively, in inventory, prototype materials and
engineering services from certain stockholders. No inventory or services were
acquired from such stockholders in fiscal year 1998. Additionally, at March 31,
1997, $2.9 million was due to certain stockholders under incentive programs,
described in Note J, "Incentive and Promotional Programs." That balance was paid
in November 1997.
O. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk are primarily cash, cash equivalents, short-term investments, and
accounts receivable. The Company's investment portfolio consists of diversified
investment-grade securities. The Company's policy limits the amount of credit
exposure to investments in any one issue, and the Company believes no
significant concentration of credit risk exists with respect to these
investments.
Credit risk in receivables is limited to distributors, software developers,
software licensees and affiliated labels. The Company performs ongoing credit
evaluations of its customers' financial condition and requires prepayments when
deemed necessary.
53
<PAGE> 54
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
P. ACQUISITIONS
New World Computing, Inc.
In June 1996, the Company purchased certain assets and assumed certain
liabilities of New World Computing, Inc. ("NWC"), a PC platform game developer
located in Agoura Hills, California. Subsequent to the asset purchase, the
Company created a production unit using the New World Computing brand name. As
consideration for the purchase, the Company issued approximately 1 million
shares of its common stock to the parent of NWC, NTN Communications, Inc.
("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 Company's stock
issued in the transaction fell below an amount equal to approximately $10 per
share during a period following the closing date (the "Purchase Price
Guarantee"); as of March 31, 1998, the Company paid approximately $5.0 million
to NTN. This payment represents the total amount due to NTN under the terms of
the asset purchase agreement and, as such, the Company has no further
obligations to NTN under the Purchase Price Guarantee. The Company recorded the
purchase in June 1996 using the purchase method of accounting. A one-time charge
was recorded in the first quarter of fiscal year 1997 for $7.7 million
representing the amount of the purchase price assigned to in-process research
and development because the acquired technology had not yet reached
technological feasibility and had no other future alternative uses. At the time,
the entire purchase was booked at the guaranteed purchase price. As a result,
the one time payment of approximately $5.0 million has no impact on the
Company's income statement for the fiscal year ended March 31, 1997. Also
included as part of the purchase price were intangibles valued at $3.1 million,
to be amortized on a straight line basis over a period of one to five years. As
of March 31, 1998 and 1997, intangible assets, net of amortization, were $1.5
million and $2.2 million, respectively.
The results of operations of NWC have been included in the Company's results of
operations since the date of acquisition. The following unaudited pro forma
information presents the results of operations of the Company and New World
Computing for the years ended March 31, 1997, and 1996, with pro forma
adjustments as if the acquisition had been consummated as of the beginning of
the periods presented.
Pro forma financial information:
<TABLE>
<CAPTION>
For Years Ended March 31,
------------------------------
1997 1996
----------- ----------
<S> <C> <C>
Revenue $ 93,191 $ 43,836
Net income (loss) $ 11,678 $ (35,208)
Net income (loss) per basic share $ 0.42 $ (1.33)
Net income (loss) per diluted share $ 0.40 $ (1.33)
</TABLE>
54
<PAGE> 55
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998, 1997, AND 1996
Archetype Interactive Corporation
In May 1996, the Company acquired all the outstanding stock of Archetype
Interactive Corporation, a software developer of a multi-user role playing game
designed to be played over the internet, from its shareholders in a tax-free
reorganization which has been accounted for using the "pooling-of-interests"
method of accounting. The Company issued 592,000 shares of its common stock in
connection with this transaction.
The results of operations of Archetype Interactive Corporation prior to the
acquisition date are not considered material to the consolidated results of
operations of the Company and, accordingly, the Company's consolidated
financial statements have not been restated for all periods.
Cyclone Studios
In December 1995, the Company acquired all the assets and assumed certain
liabilities of Cyclone Studios, a software developer. Consideration for the
purchase consisted of cash, stock, other consideration, and potential future
consideration based upon the financial performance of the resulting new
division. A portion of the purchase price was expensed as acquired in-process
research and development because the acquired technology had not yet reached
technological feasibility and had no other future alternative uses. This
transaction has been accounted for using the purchase method of accounting. In
addition, the Board of Directors granted options to purchase 200,000 shares of
the Company's common stock to former employees and officers of Cyclone Studios.
These options were granted under the 1993 Incentive Stock Plan and become vested
upon the earlier of (a) the achievement of certain financial performance
milestones or (b) December 31, 2005. These options have an exercise price of
$10.125 per share (see Note F, "Stock Plans," for subsequent repricing
information), equal to the fair market value of the Company's common stock on
the date of grant.
The results of operations of Cyclone Studios prior to the acquisition date are
not considered material to the consolidated results of operations of the Company
and, accordingly, pro forma financial statement information has not been
disclosed.
Q. EXPORT SALES
The Company had export sales, primarily to Japan and the United Kingdom, of
approximately $2.1 million, $0.6 million, and $7.0 million for the fiscal years
ended March 31, 1998, 1997, and 1996, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
55
<PAGE> 56
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of the Company and their ages as
of March 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Trip Hawkins 44 Chairman of the Board and
Chief Executive Officer
William A. Hall(1) 66 Director
H. William Jesse, Jr. 46 Director
Hugh C. Martin(1) 44 Director
James Alan Cook 48 Executive Vice President, General Counsel and Secretary
John Adams 35 Chief Financial Officer
Stephen E. Fowler 39 Senior Vice President, Sales & Operations
Greg Richardson 31 Vice President, Marketing & Business Development
</TABLE>
Mr. Hawkins, the founder of the Company, has been Chairman of the Board
and Chief Executive Officer of the Company since September 1991. He also served
as President of the Company from September 1991 until October 1995, and he
served as Secretary from September 1991 through February 1993. From August 1982
to December 1990, Mr. Hawkins served as president of Electronic Arts. He served
as the chief executive officer of Electronic Arts from August 1982 until May
1991, and was chairman of its board of directors from August 1982 until July
1994. Prior to founding Electronic Arts, Mr. Hawkins was a director of marketing
at Apple. Mr. Hawkins' term as a director expires at the 1998 Annual Meeting of
Stockholders.
Mr. Hall has been a director of the Company since June 1997. He founded
Sight & Sound Distributing Company in December 1984 and has been its President
and CEO since that time. Since 1988 he has also been owner of W.A.H.
Management/Consulting, and since 1993 he has been Vice Chairman and majority
stockholder of U.S. Animation, Inc. He has been a partner in Lincolnshire
Management, Inc. since June 1994. Mr. Hall is also a director of Chromium
Graphics, Inc.; Credentials (TRW Credit); Northword Press; and Lincolnshire
Management, Inc. Mr. Hall's term as a director expires at the 1999 Annual
Meeting of Stockholders.
Mr. Jesse has been a director of the Company since September 1997. He
joined Cybermeals, Inc. in 1997 and was elected its Chairman and Chief Executive
Officer in March 1998. From 1986 through March 1998, he was Chairman, President
and Chief Executive Officer of Jesse Hansen & Co. and remains as Chairman. He
also serves as Chairman and Chief Executive Officer of Vineyard Properties of
California, Inc. Mr. Jesse has previously served as Chief Executive Officer of
American Hawaii Cruises; Vice President of The Getz Corporation; Chief Executive
Officer of the Delta Queen Steamboat Co. and Vice President of its parent, The
Coca Cola Bottling Company of New York; and Vice President of Prudential Lines,
Inc. and General Manager of its Mediterranean/Mideast Division. Mr. Jesse serves
on the board of directors of The Wine Group, Inc., Stanislaus Food Products
Company, Wired Ventures, Inc., ExTerra Credit
56
<PAGE> 57
Recovery, and Online Partners, Inc. Mr. Jesse's term as a director expires at
the 2000 Annual Meeting of Stockholders.
Mr. Martin was appointed a director of the Company in April 1996. Since
January 1998, he has been CEO of Optical Networks, Inc. Until his resignation
from the 3DO in June 1997, he served as President of the Company from October
1995; Chief Operating Officer from January 1993 until October 1995; and Senior
Vice President, Engineering and Operations from May 1992 until January 1993.
From March 1988 to April 1992, he served as a director and then a senior
director of Apple Computer, Inc. Previously, Mr. Martin co-founded and served as
the vice president and chief development officer of Ridge Computers, where he
co-designed one of the industry's first commercial RISC processors. Mr. Martin's
term as a director expires at the 1998 Annual Meeting of Stockholders.
Mr. Cook became Executive Vice President, General Counsel and Secretary
of the Company in April 1996. He had been Senior Vice President, General Counsel
and Secretary since July 1994, and from January 1993 until July 1994, he served
as Vice President, General Counsel and Secretary of the Company. From January
1990 until January 1993, he was a partner in the law firm of Cook and Lefevre.
From June 1985 to December 1989, he was a sole practitioner operating as the Law
Offices of James Alan Cook.
Mr. Fowler was appointed as the Company's Senior Vice President, Sales
& Operations in April 1998. Previously, he served as Senior Vice President,
Operations from May 1997; Vice President, Operations from October 1995; Vice
President, Developer & Customer Services from June 1994; and Senior Director,
Developer Services from January 1993. From September 1990 to January 1993 he
served as Vice President, Technical Services at Gupta Corporation. From April
1984 to August 1990, he served in various senior management positions including
Director, Worldwide Services at Application Development Systems.
Mr. Adams became the Company's Chief Financial Officer in March 1998.
Previously, he served as Vice President, Planning & Analysis and Director of
Operations at International Thomson Publishing from 1996 to 1998; Senior
Manager, Financial Planning from 1995 to 1996 and Manager, Financial Planning &
Analysis from 1994 to 1995 at The Walt Disney Company; Manager, Business
Planning at The Gap Incorporated from 1993 to 1994; and he held various planning
positions at the Pepsi-Cola Company from 1986 to 1993.
Mr. Richardson was named Vice President, Marketing of the Company in
April 1998. He previously served as Vice President, Sales and Marketing from
August 1997; Vice President and Executive Producer, Studio 3DO from April 1997;
Vice President Software Publishing & Licensing from July 1996; Director,
Software Business Development from June 1995; and various marketing and business
development positions from October 1992.
The members of the Board of Directors, the executive officers of the
Company and persons who hold more than ten percent (10%) of the Company's
outstanding Common Stock are subject to the reporting requirements of Section
16(a) of the Securities and Exchange Act of 1934, as amended, which require them
to file reports with respect to their ownership of the Company's Common Stock
and their transactions in such Common Stock. Based upon (i) the copies of
Section 16(a) reports that the Company received from such persons for their
transactions in the Common Stock and their Common Stock holdings for the fiscal
year ending March 31, 1998, and (ii) the written representations received from
one or more of such persons that no annual Form 5
57
<PAGE> 58
reports were required to be filed by them for the 1996 fiscal year, the Company
believes that all reporting requirements under Section 16(a) for such fiscal
year were met in a timely manner by its executive officers, Board members and
greater than ten percent (10%) stockholders.
Officers are appointed by the Board of Directors and serve at the
discretion of the Board. There are no family relationships among the directors
and executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION TABLES
Summary Compensation Table. The following table sets forth the
compensation paid by the Company to the Chief Executive Officer and the four
most highly compensated executive officers of the Company other than the Chief
Executive Officer (collectively the "Named Officers") during the last fiscal
year.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION ALL OTHER
ANNUAL COMPENSATION OPTIONS/SARS COMPENSATION
FISCAL --------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS # (1)
- -------------------------------- ------ --------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Trip Hawkins 1998 $ 295,792 -0- 1,760,000(3) $ 660
Chairman and Chief 1997 $ 295,000 $ 35,128 2,620,000(4) $ 660
Executive Officer (2) 1996 $ 290,042 -0- 500,000 $ 660
Hugh C. Martin 1998 $ 96,176 $147,500 773,000(5) $ 304,027 (6)
Director & 1997 $ 288,750 $ 27,611 1,096,000(7) $ 421,033 (8)
President (through June 1997) 1996 $ 270,800 -0- 80,000 $ 197,206 (9)
James Alan Cook 1998 $ 275,504 $100,000 704,000(10) $ 660
Executive Vice President, 1997 $ 243,552 $ 20,408 738,000(11) $ 660
General Counsel, and 1996 $ 226,237 -0- 68,000 $ 630
Secretary
Stephen E. Fowler 1998 $ 199,473 -0- 307,000(12) $ 3,265 (13)
Senior Vice President,
Sales & Operations
Greg Richardson 1998 $ 160,945 -0- 223,700(14) $ 438
Vice President, Marketing
John Adams 1998 $ 8,654 -0- 150,000 -0-
Chief Financial Officer
(from March 1998)
Terrence Schmid 1998 $ 140,523 -0- 160,000(15) $ 339
Chief Financial Officer
(May 1997 to February 1998)
</TABLE>
(1) The amounts include premiums paid by the Company for group term life
insurance.
(2) See "Employment Contract" below.
(3) Includes 1,560,000 options granted in previous fiscal years that in
fiscal 1998 were exchanged for new options at $3.25 per share after Mr.
Hawkins agreed to certain adjustments to the option vesting schedules.
(4) Includes 500,000 options that were originally granted in fiscal 1994,
10,000 options that were originally granted in fiscal 1995 at $11.00
per share, and 50,000
58
<PAGE> 59
options that were originally granted in fiscal 1996 at $11.875 per
share that in fiscal 1997 were twice exchanged for new options, first
at $8.25 per share and later at $5.50 per share, after Mr. Hawkins
agreed to certain adjustments to the option vesting schedules.
(5) Includes 673,000 options granted in previous fiscal years that in
fiscal 1998 were exchanged for new options at $3.25 per share after
Mr. Martin agreed to certain adjustments to the option vesting
schedules.
(6) Includes a gain of $303,964 realized upon the sale of shares acquired
through the exercise of incentive stock options.
(7) Includes 75,000 options granted in fiscal 1995 at $9.875 per share (see
footnote 8), 8,000 options granted in fiscal 1995 at $10.75 per share
(see footnote 8), 10,000 options granted in fiscal 1995 at $11.00 per
share, 20,000 options granted in fiscal 1996 at $11.875 per share, and
60,000 options granted in fiscal 1996 at $11.50 per share that in
fiscal 1997 were twice exchanged for new options, first at $8.25 per
share and later at $5.50 per share, after Mr. Martin agreed to certain
adjustments to the option vesting schedules. Also includes 250,000
options granted in fiscal 1997 at $8.25 per share that were exchanged
for new options at $5.50 per share, after Mr. Martin agreed to certain
adjustments to the option vesting schedule.
(8) Includes a gain of $420,313 realized upon the sale of shares acquired
through the exercise of incentive stock options.
(9) Includes a gain of $196,500 realized upon the sale of shares acquired
through the exercise of incentive stock options.
(10) Includes 594,000 options granted in previous fiscal years that in
fiscal 1998 were exchanged for new options at $3.25 per share after
Mr. Cook agreed to certain adjustments to the option vesting schedules.
(11) Includes 4,000 options granted in fiscal 1995 at $9.875 per share (see
footnote 10), 12,000 options granted in fiscal 1995 at $10.75 per share
(see footnote 10), 10,000 options granted in fiscal 1995 at $11.00 per
share, 28,000 options granted in fiscal 1996 at $11.875 per share, and
40,000 options granted in fiscal 1996 at $11.50 per share that in
fiscal 1997 were twice exchanged for new options, first at $8.25 per
share and later at $5.50 per share, after Mr. Cook agreed to certain
adjustments to the option vesting schedules. Also includes 150,000
options granted in fiscal 1997 at $8.25 per share that were exchanged
for new options at $5.50 per share, after Mr. Cook agreed to certain
adjustments to the option vesting schedule.
(12) Includes 150,000 options granted in previous fiscal years that in
fiscal 1998 were exchanged for new options at $3.25 per share after
Mr. Fowler agreed to certain adjustments to the option vesting
schedules.
(13) Includes a gain of $2,739 realized upon the sale of shares acquired
through the Employee Stock Purchase Plan.
(14) Includes 147,200 options granted in previous fiscal years that in
fiscal 1998 were exchanged for new options at $3.25 per share after
Mr. Richardson agreed to certain adjustments to the option vesting
schedules.
(15) Includes 100,000 options granted in previous fiscal years that in
fiscal 1998 were exchanged for new options at $3.25 per share after Mr.
Schmid agreed to certain adjustments to the option vesting schedules.
Employment Contract. On or about February 1, 1993, Mr. Hawkins
entered into a five-year employment agreement with the Company. This employment
agreement provided for an annual base salary of $295,000, a bonus payable in the
discretion of the Board of Directors, and salary and bonus reviews at least
annually. The employment agreement provided that Mr. Hawkins' optioned shares
would continue to vest in accordance with their applicable vesting schedules,
provided that Mr. Hawkins devoted at least fifty percent (50%) of his business
efforts and time to the Company, and provided further that
59
<PAGE> 60
he was not employed by any third party during that time period. In the event
Mr. Hawkins' employment was terminated without cause after a change in control
of the Company, Mr. Hawkins would have become fully vested in his shares.
Option Grants in Last Fiscal Year. The following table sets forth
certain information concerning grants of stock options to each of the Named
Officers during the fiscal year ended March 31, 1998. The table also sets forth
hypothetical gains or "opinion spreads" for the options at the end of their
respective ten-year terms. These gains are based on the assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted over the full option term. Actual gains, if any, on option exercises are
dependent on the future performance of the Company's Common Stock and overall
market conditions.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
% of Total Annual Rate of
Options Stock Price
Granted to Appreciation
Employees Exercise for Options Term(4)
Date Options in Fiscal Price Expiration -----------------------------
Name Granted Granted(1)(2) Year Per Share(2) Date 5% 10%
- ---------------- -------- ------------- ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
John Adams
New Options 2/ 6/98 150,000 1.2445 $2.1250 2/6/08 $200,460.16 $508,005.41
------- ------ ----------- -----------
Total 150,000 1.2445 $200,460.16 $508,005.41
James Alan Cook
New Options 4/11/97 160,000 1.3274 $3.2500 4/11/07 $327,025.21 $828,746.08
2/ 6/98 20,000 0.1659 $2.1250 2/6/08 $26,728.02 $ 67,734.05
2/ 6/98 30,000 0.2489 $2.1250 2/6/08 $40,092.03 $ 101,601.08
Repriced Options 4/11/97 5,381 0.0446 $3.2500 4/11/07 $10,998.27 $27,871.77
4/11/97 29,718 0.2466 $3.2500 4/11/07 $60,740.84 $153,929.22
4/11/97 12,000 0.0996 $3.2500 4/11/07 $24,526.89 $62,155.96
4/11/97 8,000 0.0664 $3.2500 4/11/07 $16,351.26 $41,437.30
4/11/97 2,000 0.0166 $3.2500 4/11/07 $4,087.82 $10,359.33
4/11/97 10,282 0.0853 $3.2500 4/11/07 $21,015.46 $53,257.29
4/11/97 2,400 0.0199 $3.2500 4/11/07 $4,905.38 $12,431.19
4/11/97 150,000 1.2445 $3.2500 4/11/07 $306,586.13 $776,949.45
4/11/97 8,000 0.0664 $3.2500 4/11/07 $16,351.26 $41,437.30
4/11/97 14,619 0.1213 $3.2500 4/11/07 $29,879.88 $75,721.49
4/11/97 31,466 0.2611 $3.2500 4/11/07 $64,313.59 $162,983.28
4/11/97 1,600 0.0133 $3.2500 4/11/07 $3,270.25 $8,287.46
4/11/97 218,534 1.8130 $3.2500 4/11/07 $446,663.29 $1,131,932.47
------ ------ ---------- -----------
Total 704,000 5.8407 $1,403,535.58 $3,556,834.72
Stephen E. Fowler
New Options 4/11/97 110,000 0.9126 $3.2500 4/11/07 $224,829.83 $569,762.93
2/ 6/98 28,000 0.2323 $2.1250 2/6/08 $37,419.23 $94,827.68
2/ 6/98 12,000 0.0996 $2.1250 2/6/08 $16,036.81 $40,640.43
Repriced Options 4/11/97 40,000 0.3319 $3.2500 4/11/07 $81,756.30 $207,186.52
4/11/97 2,500 0.0207 $3.2500 4/11/07 $ 5,109.77 $12,949.16
4/11/97 7,500 0.0622 $3.2500 4/11/07 $15,329.31 $38,847.47
4/11/97 7,000 0.0581 $3.2500 4/11/07 $14,307.35 $36,257.64
4/11/97 10,000 0.0830 $3.2500 4/11/07 $20,439.08 $51,796.63
4/11/97 10,000 0.0830 $3.2500 4/11/07 $20,439.08 $51,796.63
4/11/97 50,472 0.4187 $3.2500 4/11/07 $103,160.10 $261,427.95
4/11/97 29,528 0.2450 $3.2500 4/11/07 $58,979.47 $148,692.07
------ ------ ---------- ----------
Total 307,000 2.5470 $597,806.33 $1,514,185.11
William A. Hall
New Options 6/24/97 100,000 0.8296 $3.6250 6/24/07 $227,974.30 $577,731.64
------- ------ ----------- -----------
Total 100,000 0.8296 $227,974.30 $577,731.64
</TABLE>
60
<PAGE> 61
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Trip Hawkins
New Options
2/ 6/98 40,000 0.3319 $2.1250 2/6/08 $53,456.04 $135,468.11
2/ 6/98 160,000 1.3274 $2.1250 2/6/08 $213,824.17 $541,872.44
Repriced Options 4/11/97 68,067 0.5647 $3.2500 4/11/07 $139,122.65 $352,564.12
4/11/97 8,000 0.0664 $3.2500 4/11/07 $11,822.79 $28,070.44
4/11/97 8,500 0.0705 $3.2500 4/11/07 $14,133.39 $34,295.71
4/11/97 500,000 4.1482 $3.2500 4/11/07 $632,987.27 $1,464,883.66
4/11/97 18,000 0.1493 $3.2500 4/11/07 $36,790.34 $93,233.93
4/11/97 2,000 0.0166 $3.2500 4/11/07 $4,087.82 $10,359.33
4/11/97 1,500 0.0124 $3.2500 4/11/07 $3,065.86 $7,769.49
4/11/97 22,000 0.1825 $3.2500 4/11/07 $44,965.97 $113,952.59
4/11/97 431,933 3.5835 $3.2500 4/11/07 $882,831.11 $2,237,267.38
4/11/97 500,000 4.1482 $3.2500 4/11/07 $1,021,953.77 $2,589,831.50
--------- ------- ------------- -------------
Total 1,760,000 14.6016 $3,059,041.18 $7,609,568.70
H. William Jesse
New Options 9/19//97 100,000 0.8296 $3.6250 9/19/07 $227,974.30 $577,731.64
------- ------ ----------- -----------
Total 100,000 0.8296 $227,974.30 $577,731.64
Hugh C. Martin
New Options(4) 6/30/97 100,000 0.8296 $3.5000 6/30/07 $220,113.12 $557,809.86
Repriced Options 4/11/97 75,000 0.6222 $3.2500 4/11/07 $153,293.07 $388,474.72
4/11/97 6,000 0.0498 $3.2500 4/11/07 $12,263.45 $31,077.98
4/11/97 42,000 0.3484 $3.2500 4/11/07 $85,844.12 $217,545.85
4/11/97 10,000 0.0830 $3.2500 4/11/07 $20,439.08 $51,796.63
4/11/97 250,000 2.0741 $3.2500 4/11/07 $510,976.88 $1,294,915.75
4/11/97 35,533 0.2948 $3.2500 4/11/07 $72,626.17 $184,048.97
4/11/97 18,000 0.1493 $3.2500 4/11/07 $36,790.34 $93,233.93
4/11/97 2,000 0.0166 $3.2500 4/11/07 $4,087.82 $10,359.33
4/11/97 18,000 0.1493 $3.2500 4/11/07 $36,790.34 $93,233.93
4/11/97 2,000 0.0166 $3.2500 4/11/07 $4,087.82 $10,359.33
4/11/97 214,467 1.7793 $3.2500 4/11/07 $438,350.72 $1,110,866.78
------- ------ ----------- -------------
Total 773,000 6.4131 $1,595,662.93 $4,043,723.06
Greg Richardson
New Options 4/11/97 51,500 0.4272 $3.2500 4/11/07 $105,261.24 $266,752.64
2/ 6/98 25,000 0.2074 $2.1250 2/6/08 $33,410.03 $84,667.57
Repriced Options 4/11/97 1,400 0.0116 $3.2500 4/11/07 $2,861.47 $7,251.53
4/11/97 5,600 0.0465 $3.2500 4/11/07 $11,445.88 $29,006.11
4/11/97 340 0.0028 $3.2500 4/11/07 $694.93 $1,761.09
4/11/97 60,410 0.5012 $3.2500 4/11/07 $123,472.45 $312,903.44
4/11/97 39,590 0.3285 $3.2500 4/11/07 $80,918.30 $205,062.86
4/11/97 6,360 0.0528 $3.2500 4/11/07 $12,999.25 $32,942.66
4/11/97 10,000 0.0830 $3.2500 4/11/07 $20,439.08 $51,796.63
4/11/97 14,000 0.1161 $3.2500 4/11/07 $28,614.71 $72,515.28
4/11/97 6,000 0.0498 $3.2500 4/11/07 $12,263.45 $31,077.98
4/11/97 3,500 0.0290 $3.2500 4/11/07 $7,153.68 $18,128.82
------ ------ ---------- ----------
Total 223,700 1.8559 $439,534.47 $1,113,866.61
Terrence Schmid
New Options 4/11/97 60,000 0.4978 $3.25 4/11/07 $122,634.45 $310,779.78
Repriced Options 4/11/97 15,067 0.1250 $3.25 4/11/07 $30,795.55 $78,041.98
4/11/97 69,933 0.5802 $3.25 4/11/07 $142,936.59 $362,229.37
4/11/97 15,000 0.1244 $3.25 4/11/07 $30.658.61 $77.694.94
------ ------ ---------- ----------
Total 160,000 1.3274 $327,025.20 $828,746.07
</TABLE>
(1) The options referenced in the foregoing table are intended to be incentive
stock options to the extent permitted by applicable law. The Company's
1993 Incentive Stock Plan (the "Incentive Plan") also provides for the
grant of non-qualified stock options. Incentive stock options may be
granted under the Incentive Plan at an
61
<PAGE> 62
exercise price no less than market value on the date of grant. For so
long as the Company's Common Stock is listed on the Nasdaq National
Market, the fair market value is the closing sale price for the Common
Stock. Non-qualified options may be granted at an exercise price of no
less than 85% of market value on the date of grant. Options generally
become exercisable as to 20% of the shares subject to the option one
year after commencement of employment, and as to the remainder in equal
monthly installments (accrued on a monthly basis) over the succeeding
48 months. In addition, options accelerate in full and become
immediately exercisable upon a merger, unless such options are assumed
or replaced by equivalent options by the successor corporation. Options
generally terminate on the earlier of three months after termination of
the optionee's employment by or services to the Company, or ten years
after grant.
(2) On April 11, 1997, the Board of Directors authorized the exchange of
all options (including those held by the individuals listed in the
above table) with an exercise price exceeding $3.25 per share for
options with an exercise price of $3.25 per share, provided the
optionee agreed to certain adjustments to the option vesting schedule.
(3) The 5% and 10% assumed annualized rates of compound stock price
appreciation are based on the exercise prices shown in the table, are
mandated by the rules of the Securities and Exchange Commission and do
not represent the Company's estimate or a projection by the Company of
future Common Stock prices.
(4) Mr. Martin's employment with the Company ended on June 30, 1997, and
his unvested employee stock options were cancelled on that date. Upon
his change of status to an outside director, he was granted 100,000
options pursuant to the terms of the 1995 Director Option Plan.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
At March 31, 1998 At March 31, 1998
-------------------------- ------------------------
Acquired Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Adams, John 0 $ 0.00 0 150,000 $ 0.00 $ 84,375.00
Cook, James Alan 0 $ 0.00 199,000 605,000 $ 68,750.00 $ 28,125.00
Fowler, Stephen E 0 $ 0.00 43,844 278,156 $ 34,312.50 $ 22,500.00
Hawkins, Trip 0 $ 0.00 619,834 1,140,166 $ 0.00 $112,500.00
Martin, Hugh C 156,300 $303,963.87 0 100,000 $ 0.00 $ 0.00
Richardson, Greg 0 $ 0.00 25,125 198,975 $ 687.20 $ 14,062.5
Schmid, Terrence 0 $ 0.00 0 0 0 0
GRAND TOTAL 156,300 $303,963.87 887,803 2,672,297 $ 103,749.7 $261,562.50
</TABLE>
OPTION REPRICING
The following report is provided to stockholders by the members of the
Compensation Committee of the Board of Directors.
The Compensation Committee (the "Committee") grants stock options in
order to directly link a significant portion of each executive's total
compensation to the long-term interests of shareholders. The Committee believes
that stock options encourage superior performance over time. In order to attract
and retain qualified employees, the Committee felt it necessary to adjust the
exercise price on previously granted options so that the new exercise price
would more closely approximate the market price, and therefore provide
62
<PAGE> 63
greater incentive to the Company's employees. Consequently, on April 11, 1997,
the Committee exchanged all outstanding options with an exercise price greater
than $3.25 (the then prevailing market price) for options with an exercise price
of $3.25, provided the optionee agreed to adjustments in the vesting schedule.
The following table sets forth certain information concerning option repricing
activity.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
Market Price Length of
Number of of Stock at Exercise Price Original Option
Date of Options Time of at Time of New Exercise Term at Time of
Name Repricing Repriced Repricing Repricing Price Repricing
- ------------------- ---------- -------- ------------ -------------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
James Alan Cook 5/20/94 4,000 $9.8750 $25.7500 $9.8750 9 Years 279 Days
4/ 9/96 4,000 $8.2500 $9.8750 $8.250 7 Years 320 Days
12/14/94 12,000 $10.750 $14.5000 $10.7500 9 Years 231 Days
4/ 9/96 12,000 $8.2500 $10.7500 $8.2500 8 Years 249 Days
4/ 9/96 10,000 $8.2500 $11.0000 $8.2500 8 Years 251 Days
4/ 9/96 8,000 $8.2500 $11.8750 $8.2500 9 Years 47 Days
4/ 9/96 20,000 $8.2500 $11.8750 $8.2500 9 Years 47 Days
4/ 9/96 40,000 $8.2500 $11.5000 $8.2500 9 Years 124 Days
10/10/96 150,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 2,400 $5.5000 $8.2500 $5.5000 7 Years 136 Days
10/10/96 8,000 $5.5000 $8.2500 $5.5000 9 Years 67 Days
10/10/96 12,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 29,718 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 8,000 $5.5000 $8.2500 $5.5000 8 Years 228 Days
10/10/96 5,381 $5.5000 $8.2500 $5.5000 9 Years 181 Days
4/11/97 5,381 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 29,718 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 12,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 8,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 2,400 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 150,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 8,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 14,619 $3.2500 $5.5000 $3.2500 4 Years 182 Days
4/11/97 10,282 $3.2500 $5.5000 $3.2500 8 Years 122 Days
4/11/97 2,000 $3.2500 $5.5000 $3.2500 7 Years 249 Days
4/11/97 1,600 $3.2500 $5.5000 $3.2500 6 Years 318 Days
4/11/97 31,466 $3.2500 $5.0000 $3.2500 9 Years 299 Days
4/11/97 218,534 $3.2500 $5.0000 $3.2500 9 Years 299 Days
Stephen E. Fowler 5/20/94 2,500 $9.8750 $25.7500 $9.8750 9 Years 279 Days
4/ 9/96 2,500 $8.2500 $9.8750 $8.2500 8 Years 41 Days
12/14/94 7,500 $10.7500 $14.5000 $10.7500 9 Years 231 Days
4/ 9/96 7,500 $8.2500 $10.7500 $8.2500 8 Years 249 Days
4/ 9/96 10,000 $8.2500 $11.0000 $8.2500 8 Years 251 Days
4/ 9/96 7,000 $8.2500 $11.8750 $8.2500 9 Years 47 Days
4/ 9/96 10,000 $8.2500 $11.8750 $8.2500 9 Years 173 Days
10/10/96 40,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 2,500 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 7,500 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 7,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 10,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 10,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
4/11/97 40,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 2,500 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 7,500 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 7,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 10,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 10,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 50,472 $3.2500 $5.0000 $3.2500 9 Years 299 Days
4/11/97 29,528 $3.2500 $5.0000 $3.2500 9 Years 299 Days
Trip Hawkins 5/20/94 500,000 $9.8750 $25.7500 $9.8750 9 Years 232 Days
4/ 9/96 500,000 $8.2500 $9.8750 $8.2500 7 Years 273 Days
4/ 9/96 10,000 $8.2500 $11.0000 $8.2500 8 Years 251 Days
4/ 9/96 40,000 $8.2500 $11.8750 $8.2500 9 Years 47 Days
4/ 9/96 10,000 $8.2500 $11.8750 $8.2500 9 Years 173 Days
10/10/96 500,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 500,000 $5.5000 $8.2500 $5.5000 7 Years 89 Days
10/10/96 8,000 $5.5000 $8.2500 $5.5000 8 Years 67 Days
10/10/96 8,500 $5.5000 $8.2500 $5.5000 8 Years 354 Days
10/10/96 18,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
4/11/97 8,000 $3.2500 $5.5000 $3.2500 7 Years 249 Days
4/11/97 18,000 $3.2500 $5.5000 $3.2500 8 Years 45 Days
4/11/97 8,500 $3.2500 $5.5000 $3.2500 8 Years 171 Days
</TABLE>
63
<PAGE> 64
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
4/11/97 500,000 $3.2500 $5.5000 $3.2500 8 Years 363 Days
4/11/97 500,000 $3.2500 $5.5000 $3.2500 6 Years 271 Days
4/11/97 2,000 $3.2500 $5.5000 $3.2500 7 Years 249 Days
4/11/97 1,500 $3.2500 $5.5000 $3.2500 8 Years 171 Days
4/11/97 22,000 $3.2500 $5.5000 $3.2500 8 Years 45 Days
4/11/97 68,067 $3.2500 $5.0000 $3.2500 9 Years 299 Days
4/11/97 431,933 $3.2500 $5.0000 $3.2500 9 Years 299 Days
Hugh C. Martin 5/20/94 75,000 $9.8750 $25.7500 $9.8750 9 Years 279 Days
4/ 9/96 75,000 $8.2500 $9.8750 $8.2500 8 Years 41 Days
12/14/94 8,000 $10.7500 $14.5000 $10.7500 9 Years 231 Days
4/ 9/96 8,000 $8.2500 $10.7500 $8.2500 8 Years 249 Days
4/ 9/96 10,000 $8.2500 $11.0000 $8.2500 8 Years 251 Days
4/ 9/96 20,000 $8.2500 $11.8750 $8.2500 9 Years 47 Days
4/ 9/96 60,000 $8.2500 $11.5000 $8.2500 9 Years 124 Days
10/10/96 250,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 75,000 $5.5000 $8.2500 $5.5000 7 Years 136 Days
10/10/96 6,000 $5.5000 $8.2500 $5.5000 7 Years 296 Days
10/10/96 10,000 $5.5000 $8.2500 $5.5000 8 Years 67 Days
10/10/96 18,000 $5.5000 $8.2500 $5.5000 8 Years 228 Days
10/10/96 42,000 $5.5000 $8.2500 $5.5000 8 Years 305 Days
4/11/97 75,000 $3.2500 $5.5000 $3.2500 6 Years 315 Days
4/11/97 6,000 $3.2500 $5.5000 $3.2500 7 Years 112 Days
4/11/97 42,000 $3.2500 $5.5000 $3.2500 8 Years 122 Days
4/11/97 18,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 10,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 250,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 2,000 $3.2500 $5.5000 $3.2500 7 Years 247 Days
4/11/97 18,000 $3.2500 $5.5000 $3.2500 8 Years 122 Days
4/11/97 2,000 $3.2500 $5.5000 $3.2500 8 Years 45 Days
4/11/97 35,533 $3.2500 $5.0000 $3.2500 9 Years 299 Days
4/11/97 214,467 $3.2500 $5.0000 $3.2500 9 Years 299 Days
Greg Richardson 5/20/94 6,700 $9.8750 $25.7500 $9.8750 9 Years 232 Days
4/ 9/96 6,700 $8.2500 $9.8750 $8.2500 8 Years 41 Days
4/ 9/96 7,000 $8.2500 $11.0000 $8.2500 8 Years 251 Days
4/ 9/96 3,500 $8.2500 $11.8750 $8.2500 9 Years 47 Days
4/ 9/96 10,000 $8.2500 $11.8750 $8.2500 9 Years 173 Days
10/10/96 14,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 6,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 6,360 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 5,600 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 3,500 $5.5000 $8.2500 $5.5000 9 Years 181 Days
10/10/96 10,000 $5.5000 $8.2500 $5.5000 9 Years 181 Days
4/11/97 3,500 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 6,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 5,600 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 6,360 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 10,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 14,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 1,400 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 340 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 60,410 $3.2500 $5.0000 $3.2500 9 Years 299 Days
4/11/97 39,590 $3.2500 $5.0000 $3.2500 9 Years 299 Days
Terrence Schmid 10/10/96 15,000 $5.5000 $8.7500 $5.5000 9 Years 212 Days
4/11/97 15,000 $3.2500 $5.5000 $3.2500 9 Years 182 Days
4/11/97 69,933 $3.2500 $5.0000 $3.2500 9 Years 299 Days
4/11/97 15,067 $3.2500 $5.0000 $3.2500 9 Years 299 Days
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
with respect to beneficial ownership of the Company's Common Stock as of March
31, 1998, by (i) each stockholder known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock, (ii) each director, (iii)
the Company's Chief Executive Officer and the Company's four other most highly
compensated executive officers serving in that capacity as of March 31, 1998
(together, the "Named Officers"), and (iv) all executive officers and directors
as a group.
64
<PAGE> 65
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED (1)
FIVE PERCENT STOCKHOLDERS, ---------------------------------
DIRECTORS AND EXECUTIVE OFFICERS NUMBER PERCENT
- ----------------------------------- --------- -------
<S> <C> <C>
J & W Seligman & Co., Incorporated 2,994,800 11.6%
100 Park Avenue
New York, New York 10017
Trip Hawkins 3,032,735 (2) 11.8%
600 Galveston Drive
Redwood City, California 94063
Electronic Arts, Inc. 1,400,168 5.4%
1450 Fashion Island Boulevard
San Mateo, California 94404
William A. Hall 1,400 *
H. William Jesse, Jr. 2,000 *
Hugh C. Martin 0 *
John Adams 0 *
James Alan Cook 309,603 (3) 1.2%
Stephen E. Fowler 88,740 (4) *
Greg Richardson 63,218 (5) *
All executive officers and directors
as a group (8 persons) 3,497,696 (6) 13.6%
</TABLE>
- -----------------
*Less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons and entities named in
the table have sole voting and sole investment power with respect to
all shares of Common Stock beneficially owned.
(2) Includes 778,832 shares subject to an option exercisable within 60 days
of March 31, 1998.
(3) Includes 301,011 shares subject to an option exercisable within 60 days
of March 31, 1998.
(4) Includes 85,289 shares subject to an option exercisable within 60 days
of March 31, 1998.
(5) Includes 61,998 shares subject to an option exercisable within 60 days
of March 31, 1998.
(6) Includes shares held beneficially by executive officers and directors
as shown in the foregoing table.
65
<PAGE> 66
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated herein by reference to the
Company's Proxy Statement for the 1998 annual meeting of stockholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
Page(s) in
1. Index to Consolidated Financial Statements Form 10-K
<S> <C>
Independent Auditors' Report 33
Consolidated Balance Sheets as of March 31, 1998 and 1997 34
Consolidated Statements of Operations for the years ended
March 31, 1998, 1997 and 1996. 35
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1998, 1997 and 1996. 36
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996. 37
Notes to Consolidated Financial Statements 38-55
2. Financial Statement Schedules
Information required by this Item is included in the Notes to
Consolidated Financial Statements
3. Exhibits
</TABLE>
The following exhibits are filed as part of, or incorporated by reference
into, this report:
<TABLE>
<CAPTION>
Number Exhibit Title
<S> <C> <C>
2.01 -- Contribution Agreement dated as of March 4, 1993, by and among the Registrant, the 3DO
Company, a California corporation, 3DO Merger Sub, Technology West Partners, L.P., the
shareholders of NTG, Inc. and NTG Engineering, Inc.(2)
3.03 -- Registrant's Restated Certificate of Incorporation.
3.04 -- Registrant's Delaware Bylaws, as amended.
4.01 -- Form of Specimen Certificate for Registrant's Common Stock.(2)
4.02 -- Fourth Stockholders' Rights Agreement, dated as of February 1, 1995, between the Registrant
and various investors.
10.01 -- Series A Preferred Stock Exchange Agreement between the Registrant and Electronic Arts Inc.
dated as of September 30, 1991.(2)
10.02 -- Series A Preferred Stock Purchase Agreement by and among the Registrant and Kleiner Perkins
Caufield & Byers V, KPCB Zaibatsu Fund I, Technology Partners West, Fund IV, and Time
Warner Enterprises, Inc. dated as of September 30, 1991.(2)
</TABLE>
66
<PAGE> 67
<TABLE>
<S> <C> <C>
10.03 -- Series A Preferred Stock Purchase Agreement between the Registrant and Matsushita Electric
Industrial Co., Ltd. dated as of March 24, 1992.(2)
10.04 -- Series B Preferred Stock Purchase Agreement between the Registrant and a group of investors
including American Telephone & Telegraph Company, Electronic Arts Inc., Toby Farrand, Trip
Hawkins, David Horowitz, Kleiner Perkins Caufield & Byers V, Matsushita Electric Industrial
Co., Ltd., and Time Warner Entertainment Company, L.P., dated as of January 5, 1993.(1)(2)
10.05 -- Medio Development System License Agreement between the Registrant and Electronic Arts Inc.
dated as of September 30, 1991, as amended.(1)(2)
10.06 -- Publishing Option Agreement between the Registrant and Electronic Arts Inc. dated as of
September 30, 1991.(1)(2)
10.07 -- Equipment Transfer and Security Agreement between Electronic Arts Inc. and the Registrant
dated as of September 30, 1991.(2)
10.08 -- Secured Promissory Note between the Registrant and Electronic Arts Inc. dated as of
September 30, 1991.(2)
10.09 -- Strategic Contribution and Medio Cable Agreement between the Registrant and Time Warner
Enterprises, Inc. as amended through March 31, 1992.(1)(2)
10.10 -- Strategic Contribution Agreement between the Registrant and Matsushita Electric Industrial
Co., Ltd. dated April 9, 1992.(1)(2)
10.11 -- Technology Purchase Agreement between the Registrant and Kleiner Perkins Caufield & Byers V, NTG
Engineering, Inc., David Needle and RJ Mical dated as of September 30, 1991.(2)
10.12 -- KPCB Option Agreement among the Registrant and Electronic Arts Inc., Kleiner Perkins Caufield &
Byers V and KPCB Zaibatsu Fund I dated as of September 30, 1991, as amended.(2)
10.13 -- 1991 Incentive Stock Plan of the Registrant.(2)
10.14 -- 1993 Incentive Stock Plan of the Registrant.(2)
10.15 -- Form of Restricted Stock Purchase Agreement of the Registrant.(2)
10.16 -- Form of Incentive Stock Option Agreement of the Registrant.(2)
10.17 -- Form of Nonstatutory Stock Option Agreement of the Registrant.(2)
10.18 -- 401(k) Plan of the Registrant.(2)
10.19 -- Sublease between NCR Comten, Inc. and the Registrant, for office space at 1820 Gateway
Drive, Suite 109, San Mateo, California.(2)
10.20 -- Form of Lease between Golden Century Investment Company, Inc. and the Registrant for office
space at 1820 Gateway Drive, San Mateo, California.(2)
10.21 -- Employment Agreement between the Registrant and William M. Hawkins III dated as of February
1993.(2)
10.21A -- Amendment to Employment Agreement between the Registrant and William M. Hawkins III, dated
as of March 22, 1994.(5)
10.22 -- Form of Indemnity Agreement.(2)
10.23 -- Consumer Interactive Multiplayer License Agreement between the Registrant and Matsushita
Electric Industrial Co., Ltd. dated March 5, 1993.(1)(2)
10.24 -- Covenant Not to Compete and Non-Solicitation Agreement between the Registrant and Dave
Needle dated as of March 4, 1993.(2)
</TABLE>
67
<PAGE> 68
<TABLE>
<S> <C> <C>
10.25 -- Covenant Not to Compete and Non-Solicitation Agreement between the Registrant and Dave
Morse dated as of March 4, 1993.(2)
10.26 -- Covenant Not to Compete and Non-Solicitation Agreement between the Registrant and RJ Mical
dated as of March 4, 1993.(2)
10.27 -- Stock Restriction Agreement between the Registrant and Dave Needle dated as of March 4,
1993.(2)
10.28 -- Stock Restriction Agreement between the Registrant and Dave Morse dated as of March 4,
1993.(2)
10.29 -- Stock Restriction Agreement between the Registrant and RJ Mical dated as of March 4,
1993.(2)
10.30 -- Form of Software License Agreement.(2)
10.31 -- Form of Stock Purchase Agreement between the Registrant and William M. Hawkins III.(2)
10.32 -- Form of Stock Purchase Agreement between the Registrant and Namco Limited.(2)
10.33 -- Letter of Intent dated January 5, 1993, between the Registrant and American Telephone &
Telegraph Company.(1)(2)
10.34 -- Lease between Seaport Centre Venture Phase I and the Registrant for office space at 600
Galveston Drive, Building 5, Redwood City, California.(6)
10-34A -- First Amendment to Lease between Seaport Centre Venture Phase I and the Registrant for
office space at 600 Galveston Drive, Building 5, Redwood City, California.(5)
10.34B -- Second Amendment to Lease between Seaport Centre Venture Phase I and the Registrant
for office space at 600 Galveston Drive, Building 5, Redwood City, California.(8)
10.35 -- Letter of Intent dated June 1, 1993, between the Registrant and American Telephone &
Telegraph Company.(3)
10.36 -- Letter between the Registrant and MCA Entertainment, Inc. dated September 29, 1993. (1)(5)
10.37 -- Memorandum of Understanding between the Registrant and Creative Technology, Ltd. dated
March 8, 1994.(1)(5)
10.38 -- Memorandum of Understanding between the Registrant and Scientific-Atlanta, Inc. dated
December 9, 1993.(1)(5)
10.39 -- Letter of Intent between the Registrant and Matsushita Electric Industrial Co., Ltd. dated
effective March 3, 1994.(1)(5)
10.40 -- Letter of Agreement between the Registrant and Creative Technology Ltd., dated May 10,
1994.(1)(6)
10.41 -- Supplemental Letter of Agreement between the Registrant and Creative Technology Ltd., dated
May 27, 1994. (1)(6)
10.42 -- Compact Disc Pressing License Agreement between the 3DO Company and Matsushita Electric
Industrial Co., Ltd.(1)(7)
10.43 -- Technology Licensing Agreement between the Registrant and Matsushita Electric Industrial
Co., Ltd., dated December 7, 1995.(1)(9)
10.44 -- Joint Development and License Agreement between Registrant and Cirrus Logic, Inc., dated
February 29, 1996.(1)(10)
10.45 -- Addendum dated April 24, 1996, to Technology Licensing Agreement between the Registrant and
Matsushita Electric Industrial Co., Ltd., dated December 7, 1995. (1)(10)
10.46 -- 1994 Employee Stock Purchase Plan of the Registrant (11)
10.47 -- 1995 Director Option Plan of the Registrant (11)
10.48 -- Asset Purchase Agreement between the Registrant and Samsung Electronics Co., Ltd. (1)(11)
</TABLE>
68
<PAGE> 69
<TABLE>
<S> <C> <C>
10.49 -- Second Addendum dated July 23, 1997, to Technology Licensing Agreement between the Company
and Matsushita Electronic Industrial Co., Ltd., dated December 7, 1995 (1) (11)
21.01 -- List of Subsidiaries of the Registrant.
23.01 -- Consent of Independent Auditors.
24.01 -- Power of Attorney.
27.01 -- Financial Data Schedule.
</TABLE>
(1) Confidential treatment has been granted with respect to
certain portions of this document.
(2) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Registration Statement on Form S-1 No.
33-59166.
(3) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1993.
(4) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Quarterly Report on Form 10-Q for the
period ended June 30, 1993.
(5) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Registration Statement on Form S-1 No.
33-71364.
(6) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1994.
(7) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Quarterly Report on Form 10-Q/A for the
period ended December 31, 1994.
(8) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1995.
(9) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Quarterly Report on Form 10-Q/A2 for the
period ended December 31, 1995.
(10) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1996.
(11) Incorporated by reference to the same-numbered exhibit filed
with the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1997.
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended March 31,
1998.
(c) Exhibits:
The registrant hereby incorporates as part of this Form 10-K the
exhibits listed in Item 14(a)3, as set forth above.
(d) Financial Statement Schedules:
Information required by this Item is included in Notes to Consolidated
Financial Statements.
69
<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
a Delaware Corporation
By: /s/ JOHN ADAMS
------------------------------------
John Adams
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
(Duly Authorized Officer)
Date: June 25, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------------- --------------------------------------------- -------------
<S> <C> <C>
/s/ WILLIAM M. HAWKINS, III Chairman of the Board of Directors and Chief June 25, 1998
- ----------------------------------- Executive Officer (Principal Executive
William M. Hawkins, III Officer)
/s/ JOHN ADAMS Chief Financial Officer (Principal Financial June 25, 1998
- ----------------------------------- Officer and Principal Accounting Officer)
John Adams
/s/ WILLIAM A. HALL Director June 25, 1998
- -----------------------------------
William A. Hall
/s/ HUGH C. MARTIN Director June 25, 1998
- -----------------------------------
Hugh C. Martin
/s/ H. WILLIAM JESSE, JR. Director June 25, 1998
- -----------------------------------
H. William Jesse, Jr.
</TABLE>
70
<PAGE> 71
THE 3DO COMPANY
Report on form 10-K for
the year ended March 31, 1998
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
Exhibit Sequentially
Number Exhibit Name Numbered Page
<S> <C> <C>
21.01 List of Subsidiaries of the Registrant.
23.01 Consent of Independent Auditors.
24.01 Power of Attorney.
27.01 Financial Data Schedule.
</TABLE>
* Only exhibits actually filed are listed. Exhibits incorporated by reference
are set forth in the exhibit listing included in Item 14 of the Report on
Form 10-K.
71
<PAGE> 1
Exhibit 21.01
THE 3DO COMPANY
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
Subsidiary Jurisdiction of Incorporation
The 3DO Company California
Studio 3DO K.K. Japan
3DO Europe, Ltd. United Kingdom
</TABLE>
<PAGE> 1
Exhibit 23.01
THE 3DO COMPANY
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The 3DO Company:
We consent to incorporation by reference in the registration statements
(Nos. 33-71620, 33-80872, 33-84250, 33-84248, 33-96560, 33-96562,
333-20877, 333-42739 and 333-42737) on Form S-8 and the registration
statement (No. 333-11119) on Form S-3 of The 3DO Company of our report
dated May 11, 1998 relating to the consolidated balance sheets of The 3DO
Company and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended March 31,
1998, which report appears in the March 31, 1998 annual report on Form
10-K of The 3DO Company.
Mountain View, California
June 25, 1998
<PAGE> 1
Exhibit 24.01
THE 3DO COMPANY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James Alan Cook and John Adams, and each
of them acting individually, as such person's lawful attorneys-in-fact for him,
each with full power of substitution, for such person, in any and all
capacities, to sign any and all amendments to The 3DO Company's Report on Form
10-K for the fiscal year ending March 31, 1998, and to file the same, with
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------ -------------------------------------------- -----------------
<S> <C> <C>
/s/ WILLIAM M. HAWKINS, III Chairman of the Board of Directors and Chief June 25, 1998
- ----------------------------------- Executive Officer (Principal Executive
William M. Hawkins, III Officer)
/s/ JOHN ADAMS Chief Financial Officer (Principal Financial June 25, 1998
- ----------------------------------- Officer and Principal Accounting Officer)
John Adams
/s/ WILLIAM A. HALL Director June 25, 1998
- -----------------------------------
William A. Hall
/s/ HUGH C. MARTIN Director June 25, 1998
- -----------------------------------
Hugh C. Martin
/s/ H. WILLIAM JESSE, JR. Director June 25, 1998
- -----------------------------------
H. William Jesse, Jr.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 16,209
<SECURITIES> 18,375
<RECEIVABLES> 861
<ALLOWANCES> 645
<INVENTORY> 428
<CURRENT-ASSETS> 35,638
<PP&E> 11,708
<DEPRECIATION> 8,372
<TOTAL-ASSETS> 40,447
<CURRENT-LIABILITIES> 6,869
<BONDS> 0
0
0
<COMMON> 258
<OTHER-SE> (290)
<TOTAL-LIABILITY-AND-EQUITY> 40,447
<SALES> 38,890
<TOTAL-REVENUES> 38,890
<CGS> 3,959
<TOTAL-COSTS> 32,081
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 135
<INCOME-PRETAX> 22,756
<INCOME-TAX> 219
<INCOME-CONTINUING> 22,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,537
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
</TABLE>
