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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER 0-21336
THE 3DO COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-3177293
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
600 GALVESTON DRIVE
REDWOOD CITY, CALIFORNIA 94063
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 261-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of January 31, 1998, the number of outstanding shares of the
registrants' common stock was 25,713,635.
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THE 3DO COMPANY
INDEX
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PAGE
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.......................................... 2
Consolidated Balance Sheets at December 31, 1997 and March 31, 1997........ 2
Consolidated Statements of Operations for the three and nine months ended
December 31, 1997 and 1996................................................. 3
Consolidated Statements of Cash Flows for the nine months ended December
31, 1997 and 1996.......................................................... 4
Condensed Notes to Consolidated Financial Statements....................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................. 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................... 16
Signatures................................................................. 17
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE 3DO COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
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Current assets:
Cash and cash equivalents.................................... $ 1,154 $ 14,395
Short-term investments....................................... 37,036 19,222
Accounts receivable, net..................................... 1,466 429
Prepaid and other current assets............................. 717 1,861
--------- ---------
Total current assets................................. 40,373 35,907
Property and equipment, net.................................... 3,451 6,681
Deposits and other assets...................................... 1,603 2,366
--------- ---------
Total assets......................................... $ 45,427 $ 44,954
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 214 $ 569
Accrued expenses............................................. 2,793 3,251
Deferred revenue............................................. 246 11,992
Current portion of capital lease obligations................. 416 807
Hardware incentive obligations............................... -- 2,944
Other current liabilities.................................... 1,972 2,277
--------- ---------
Total current liabilities............................ 5,641 21,840
Capital lease obligations, net of current portion.............. 46 611
Other liabilities.................................... -- 1,104
--------- ---------
Total liabilities.................................... 5,687 23,555
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares authorized; no
shares issued............................................. -- --
Common stock, $.01 par value; 50,000 shares authorized;
25,480 and 28,369 shares issued and outstanding,
respectively.............................................. 257 284
Additional paid-in capital................................... 148,811 158,489
Cumulative translation adjustment............................ (272) (164)
Accumulated deficit.......................................... (108,334) (137,210)
Treasury stock, at cost, 233 shares.......................... (722) --
--------- ---------
Total stockholders' equity........................... 39,740 21,399
--------- ---------
Total liabilities and stockholders' equity........... $ 45,427 $ 44,954
========= =========
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
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THE 3DO COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues:
Royalties and license fees.......................... $ 6,444 $17,767 $29,371 $52,766
Software publishing................................. 3,720 3,665 7,879 7,052
Developer products and other........................ -- 15 90 3,708
------- ------- ------- -------
Total revenues.............................. $10,164 $21,447 $37,340 $63,526
------- ------- ------- -------
Cost of revenues:
Royalties and pressing fees......................... -- 197 -- 407
Software publishing................................. 1,460 2,455 3,345 4,351
Developer products and other........................ -- 152 43 2,023
------- ------- ------- -------
Total cost of revenues...................... 1,460 2,804 3,388 6,781
------- ------- ------- -------
Gross profit.......................................... 8,704 18,643 33,952 56,745
------- ------- ------- -------
Operating expenses:
Research and development............................ 4,125 11,248 14,415 32,665
In-process research and development................. -- -- 7,700
Sales and marketing................................. 1,199 2,356 3,487 6,083
General and administrative.......................... 1,922 2,651 6,493 8,604
------- ------- ------- -------
Total operating expenses.................... 7,246 16,255 24,395 55,052
------- ------- ------- -------
Operating income...................................... 1,458 2,388 9,557 1,693
Gain on sale of the Systems assets.................... -- -- 18,032 --
Net interest and other income......................... 552 567 1,370 1,678
------- ------- ------- -------
Income before income and foreign withholding taxes.... 2,010 2,955 28,959 3,371
Income and foreign withholding taxes.................. -- 70 83 4,070
------- ------- ------- -------
Net income (loss)..................................... $ 2,010 $ 2,885 $28,876 $ (699)
======= ======= ======= =======
Net income (loss) per share -- basic.................. $ 0.08 $ 0.10 $ 1.08 $ (0.03)
======= ======= ======= =======
Net income (loss) per share -- diluted................ $ 0.08 $ 0.10 $ 1.03 $ (0.03)
======= ======= ======= =======
Shares used to compute net income (loss)
per share -- basic.................................. 25,606 27,990 26,667 27,503
======= ======= ======= =======
Shares used to compute net income (loss)
per share -- diluted................................ 25,777 29,496 28,002 27,503
======= ======= ======= =======
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
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THE 3DO COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
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<CAPTION>
FOR THE NINE MONTHS
ENDED
DECEMBER 31,
---------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss)...................................................... $ 28,876 $ (699)
Adjustments to reconcile net profit (loss) to net cash used in
operating activities:
Net loss on disposition of equipment................................. 76 --
Depreciation and amortization........................................ 2,894 5,079
Deferred revenue..................................................... (11,746) (12,086)
Gain on sale of Systems assets....................................... (18,032) --
Repurchase of 3DO shares............................................. (10,965) --
In-process research and development.................................. -- 7,700
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (1,037) 176
Prepaid and other assets.......................................... 906 269
Accounts payable.................................................. (355) (831)
Accrued expenses.................................................. (458) 1,602
Hardware incentives............................................... (2,944) (1,236)
Other liabilities................................................. (1,409) (115)
-------- --------
Net cash used in operating activities.................................. (14,194) (141)
-------- --------
Cash flows from investing activities:
Proceeds from sale of Systems assets................................. 20,000 --
Proceeds from disposition of equipment............................... 74 --
Short-term investments, net.......................................... (17,898) 11,395
Capital expenditures................................................. (783) (4,551)
Purchase price guarantee payment..................................... -- (4,575)
-------- --------
Net cash provided by investing activities.............................. 1,393 2,269
-------- --------
Cash flows from financing activities:
Repurchase of 3DO shares............................................. (722) --
Proceeds from issuance of common stock, net.......................... 1,261 1,408
Payments on capital lease obligations................................ (956) (1,025)
-------- --------
Net cash provided by (used in) financing activities.................... (417) 383
-------- --------
Effect of foreign currency translation................................. (23) (11)
-------- --------
Net increase (decrease) in cash and cash equivalents................... (13,241) 2,500
Cash and cash equivalents at beginning of period....................... 14,395 9,459
-------- --------
Cash and cash equivalents at end of period............................. $ 1,154 $ 11,959
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest.......................................................... $ 23 $ 536
Income and foreign withholding taxes.............................. $ -- $ 4,070
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital lease obligations...................... $ -- $ 116
</TABLE>
See accompanying Condensed Notes to Consolidated Financial Statements.
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THE 3DO COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- GENERAL
The consolidated financial statements of The 3DO Company, a Delaware
corporation ("3DO" or the "Company"), as of December 31, 1997, and for the
quarter and nine months ended December 31, 1997 and 1996, are unaudited. In the
opinion of management, these financial statements include all adjustments
(consisting of only normal recurring items) necessary for the fair presentation
of the financial position and results of operations for the interim periods.
Certain amounts for prior periods have been reclassified to conform to the
current period presentation.
These consolidated financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 1997. The results of
operations for the quarter and nine months ended December 31, 1997 are not
necessarily indicative of the results expected for the entire year.
NOTE 2 -- REVENUE RECOGNITION
Revenue from third-party engineering and licensing agreements are
recognized using the percentage-of-completion method. Revenue from the sale of
software titles published and distributed by the Company and developer products
is recognized at the time of shipment, provided the Company has no 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
licensing agreement. Per-copy royalties on sales that exceed the guarantee are
recognized as earned. Revenue from the Company's on-line service is recognized
monthly on usage.
NOTE 3 -- NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed based on the weighted average
number of common shares outstanding, and common equivalent shares from stock
options, when dilutive, using the treasury stock method.
NOTE 4 -- GAIN ON SALE OF SYSTEMS GROUP
On June 23, 1997, the Company sold most of the assets of the Company's
former hardware systems group, including certain technologies and related
intellectual property rights and approximately $1.5 million in equipment, to
Samsung Electronics Company, Ltd. ("Samsung") for $20.0 million, realizing a
gain of approximately $18.0 million. As part of the sales agreement, CagEnt
Technologies, Inc. ("CagEnt"), a subsidiary of Samsung, agreed to assist the
Company, as a subcontractor, with respect to the Company's efforts to complete
the remaining deliverables under the M2 Agreement with MEI. CagEnt also acquired
from Samsung the Company's former video encoder business as part of the
Company's transaction with Samsung.
NOTE 5 -- INCENTIVE PROGRAMS
The Company provided a manufacturing incentive of $5.00, $4.00 and $3.00
for each 3DO Multiplayer system distributed in calendar years 1993, 1994 and
1995 (1994, 1995 and 1996 with respect to Japan), respectively. Amounts under
this and certain other incentive programs were accrued as the obligation arose.
In November 1997, the Company paid MEI approximately $2.9 million, which
represented the entire outstanding balance under the incentive programs.
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NOTE 6 -- INCOME TAXES
Income tax expense was $0.1 million for the nine months ended December 31,
1997. No income tax expense was incurred for the current quarter. Income tax
expense totaled $0.1 million and $4.0 million for the three and nine months
ended December 31, 1996, respectively. Income tax expense represents foreign
income and withholding taxes, and minimum state taxes.
NOTE 7 -- NEW ACCOUNTING STANDARDS
During the current period, 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The 3DO Company ("3DO" or the "Company") primarily develops, publishes and
distributes interactive entertainment software products for multiple platforms
including IBM-compatible personal computers (the "PC") and the Sony PlayStation
and Internet platforms. During fiscal year 1997, the Company also designed,
developed and licensed hardware technologies for the 64-bit consumer and PC
markets. In September 1996, the Company announced its intention to sell certain
assets relating to its hardware systems business in order to focus on publishing
interactive entertainment software.
The Company developed a next generation 64-bit technology (the "M2
Technology") and, in December 1995, the Company and Matsushita Electronic
Industrial Co., Ltd. (hereinafter "MEI" or "Matsushita") entered into a
licensing agreement pursuant to which the Company granted MEI a perpetual,
exclusive, worldwide license, with the right to grant sublicenses, with respect
to the M2 Technology, for use in both hardware and software for games and all
other applications (the "M2 Agreement"). The license was originally granted in
exchange for an upfront license payment of $100.0 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 nonexclusive
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 December 31, 1997, the Company recognized
all revenue in connection with the M2 Agreement.
On April 24, 1996, the Company agreed to make certain modifications to the
M2 system design pursuant to the terms of an addendum (the "Addendum") to the M2
Agreement with MEI. As consideration for 3DO providing certain engineering and
support services, MEI agreed to pay an additional aggregate fee of approximately
$4.5 million to be received in installments in fiscal 1997 and 1998. As of
December 31, 1997, 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
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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. 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 not
timely completed, the Company will incur substantial expenses to complete its
obligations under the M2 Agreement. This would have a material adverse impact on
the Company, including, but not limited to, diverting funds from the Company's
software publishing business.
In February 1996, the Company licensed the 3-D graphics portion of the M2
Technology to Cirrus Logic for the potential development of high-end 3-D
graphics chips for the PC market. Under the terms of the Joint Development and
License Agreement (the "Cirrus Agreement") the Company agreed to develop certain
modifications to its semiconductor technology familiarly known to the parties as
the "3DEngine." As partial consideration under such agreement, the Company
received the non-refundable 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 quarter.
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 December 31, 1997, the
Company has reacquired approximately 200,000 shares. The repurchase plan will
remain in effect until rescinded by the Board.
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
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agreements are 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 will continue to incur substantial expenditures to develop its
business throughout the remainder of fiscal 1998. The Company expects that its
operating results will fluctuate as a result of a wide variety of factors,
including the timing of software product introductions by the Company and its
competitors, the Company's expenditures on research and development, marketing
and promotional programs, and the general state of the national and global
economies. In addition, the Company's revenues will be affected by the seasonal
nature of the market for consumer electronics products and variations as a
result of the demand for a particular software title.
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are subject to the
"safe harbor" created by that section. These forward-looking statements include,
but are not limited to, statements concerning future revenues, expenses, cash
flows and capital resources; 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 created as part of its software development activities; and
the effect of competitive factors in the marketplace, including the market
acceptance of certain formats and the timing and release of competitors'
products. The Company's actual future results could differ materially from those
projected in the forward-looking statements. Some factors which could cause
future actual results to differ materially from the Company's recent results or
those projected in the forward-looking statements are described in "Factors
Affecting Future Performance," below. The Company assumes no obligation to
update any or all of the forward-looking statements or such factors.
RESULTS OF OPERATIONS
For the quarter and nine months ended December 31, 1997, the Company
generated net profits of $2.0 million and $28.9 million, respectively, compared
to a net profit of $2.9 million and a net loss of $0.7 million for the same
periods in fiscal 1997. Included in the net loss for the nine months ended
December 31, 1996 was a $7.7 million charge for in-process research and
development related to the acquisition of certain of the assets of New World
Computing, Inc. ("NWC"), and $4.0 million in withholding taxes related to the
payment of $40.0 million by Matsushita pursuant to the M2 Agreement. Net profit
for the nine months ended December 31, 1997 includes a one-time $18.0 million
gain from the sale to Samsung of certain of the assets related to the Company's
former hardware systems group.
Revenue for the three and nine months ended December 31, 1997 totaled $10.2
million and $37.3 million compared to $21.4 million and $63.5 million for the
same periods in fiscal 1997, respectively. Royalties and license fees of $6.4
million and $29.4 million were the largest components of revenue for the three
and nine months ended December 31, 1997, compared to $17.8 million and $52.8
million for the prior comparable periods, respectively. The decline was due
principally to the shift of the Company's business strategy from hardware design
and licensing to focus primarily on entertainment software publishing. As of
December 31, 1997, the Company recognized all revenue in connection with the M2
agreement with MEI and the Company's separate hardware-related agreement with
Samsung.
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Software publishing revenue for the three and nine months ended December
31, 1997 were $3.7 million and $7.9 million compared to $3.7 million and $7.1
million for the same periods in fiscal 1997, respectively. The increase was
attributable to revenue generated by the NWC division for the full nine months
of this fiscal year compared to only six months for the prior comparable period,
as the Company acquired NWC in June 1996.
Developer products and other revenue totaled $3.7 million for the nine
months ended December 31, 1996 compared to $0.1 million for the nine months
ended December 31, 1997. Revenue for the quarter ended December 31, 1996 was
nominal and no such revenue was earned for the quarter ended December 31, 1997.
Revenue for the current fiscal year periods was comprised primarily of shipments
of digital video products. Revenue for the prior comparable period was comprised
primarily of shipments of M2 development systems.
Cost of revenues for the quarter and nine months ended December 31, 1997
totaled $1.5 million and $3.4 million compared to $2.8 million and $6.8 million
for the quarter and nine months ended December 31, 1996, respectively. Software
publishing revenue includes the sale of software products and the licensing of
rights to sell such software products. Cost of publishing revenue as a
percentage of publishing revenue were 39% and 42% for the quarter and nine
months ended December 31, 1997, compared to 67% and 62% for the prior comparable
periods, respectively. The decreases were due primarily to higher average
wholesale prices charged for products shipped in the current fiscal year
compared to last year, as the Company incurred additional research and
development costs to include more complex gameplay, better graphics and sound,
and advanced technological features in the titles it published in the current
year. The decrease was also attributable to a change in revenue mix to higher
licensing revenue, which has no associated cost, from higher product revenue in
fiscal 1997. Cost of revenues consists of direct costs associated with
development systems products, software titles sold and royalties paid to
third-party software developers. Internal development costs on software title
development for the Company's published titles are recognized as incurred and
included in research and development expenses.
Research and development expenses, including in-process research and
development, decreased to $4.1 million and $14.4 million for the three and nine
months ended December 31, 1997 from $11.2 million and $40.4 million for the
three and nine months ended December 31, 1996, respectively. The decrease was
primarily due to reduced research and development spending in the Company's
former hardware systems division as the majority of the M2 development project
approached completion and as the Company transferred certain assets and
personnel relating to its former hardware systems group to Samsung.
Additionally, a onetime $7.7 million expense for in-process research and
development related to the Company's acquisition of certain assets of NWC was
incurred in June 1996. The decrease was partially offset by higher on-going
development expenses associated with Cyclone Studios, Archetype Interactive and
New World Computing, which were acquired by the Company in November 1995, May
1996 and June 1996, respectively.
Sales and marketing expenses for the three and nine months ended December
31, 1997 were $1.2 million and $3.5 million compared to $2.4 million and $6.1
million for the same periods in fiscal 1997. The decrease of 49% and 43% for the
three and nine months periods was attributable to fewer new title releases and
lower sales and marketing personnel in the current fiscal year compared to
fiscal 1997, as the Company streamlines its operations and focuses on the
development of titles featuring more complex gameplay, better graphics and
sound, and advanced technological features. Sales and marketing expenses
incurred during this fiscal year principally consisted of expenses related to
software for the PC platform. Moreover, the Company has substantially reduced
the operating expenses associated with its international operations by
transitioning the functions previously handled by its former office in the
United Kingdom to its headquarters in the U.S. Sales and marketing expenses
during the nine months ended December 31, 1996 primarily consisted of expenses
related to the 32-bit 3DO Interactive Multiplayer systems, digital video
products and software products for the PC platform titles.
General and administrative expenses decreased from $2.7 million and $8.6
million for the quarter and nine months ended December 31, 1996 to $1.9 million
and $6.5 million for the same periods in the current fiscal year. The decrease
was attributable to reduced overhead expenses as the Company transitioned from a
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hardware systems licensing company to an entertainment software publishing
company, offset by the amortization of goodwill associated with the acquisition
of certain assets of NWC.
Net interest and other income increased from $0.6 million and $1.7 million
for the three and nine months ended December 31, 1996 to $0.6 and $19.4 million
for the current comparable periods. The increase was due primarily to the $18.0
million gain on the sale of certain assets of the Company's former hardware
systems division to Samsung.
Income and foreign withholding taxes were $0.1 million and $4.1 million for
the three and nine months ended December 31, 1996 compared to $0.1 million for
the nine months ended December 31, 1997, respectively. No income and foreign
withholding taxes were incurred for the current quarter. The decrease was
attributable to the fact that foreign withholding taxes calculated at a rate of
10% were incurred in the prior year on a $40.0 million payment received from MEI
in June 1996 in connection with the M2 Agreement.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash and cash
equivalent balances and short-term investment balances, which totaled
approximately $38.2 million at December 31, 1997. At March 31, 1997, cash and
short-term investments totaled $33.6 million. This increase was primarily due to
the net proceeds of $20.0 million received from Samsung in connection with the
sale of certain assets of the Company's former hardware systems business.
The Company will incur negative cash flow for the remainder of fiscal year
1998 from the continued investment in the internal development of entertainment
software titles scheduled to be released in the fourth quarter of fiscal year
1998 and beyond. The Company anticipates that its existing cash resources,
future lease and working capital financing, and other sources of funds should be
sufficient to fund the Company's activities through the end of fiscal year 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
releases its products, the market acceptance of such products, and the levels of
advertising and promotions required to promote market acceptance of the
Company's products. The level of financing required beyond fiscal year 1999 will
depend on these and other factors. If the Company needs to raise additional
funds through public or private financings, no assurance can be given that
additional financing will be available or that, if available, it will be
available on terms acceptable to the Company or its stockholders. Additional
financings may result in substantial and immediate dilution to existing
stockholders. If adequate funds are not available to satisfy either short or
long term capital requirements, the Company may be required to curtail its
operations significantly or to seek funds through arrangements with strategic
partners or others that may require the Company to relinquish material rights to
certain of its technologies, products and/or potential markets.
FACTORS AFFECTING FUTURE PERFORMANCE
Hardware Systems Group Sale
On June 23, 1997, the Company sold certain assets of its former hardware
systems group to Samsung pursuant to an Asset Purchase Agreement (the "Samsung
Agreement"). As part of the Samsung Agreement, CagEnt, a subsidiary of Samsung,
agreed to assist the Company, as a subcontractor, in its efforts to complete the
remaining deliverables associated with the M2 Agreement. No agreement with MEI,
including, without limitation, any addendum to the M2 Agreement, relieves the
Company of its obligation to complete the deliverables called for in the M2
Agreement. There can be no assurance that the Company, with or without CagEnt's
subcontracted assistance, will successfully complete the deliverable items
required pursuant to the M2 Agreement, as amended. In the event that CagEnt's
subcontracted engineering services are unsatisfactory or are not timely
completed, the Company will incur substantial expenses to complete its
obligations under the M2 Agreement. This would have a material adverse impact on
the Company, including, but not limited to, diverting funds from the Company's
software publishing business.
10
<PAGE> 12
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 currently possessed by
the Company. In addition, there can be no assurance that the platforms for which
the Company develops products will achieve market acceptance and, as a result,
there can be no assurance that the Company's development efforts with respect to
such new platforms will lead to marketable products or products that generate
sufficient revenues to offset research and development costs incurred in
connection with the creation of such products. There can be no assurance that
the Company will be successful in developing and marketing products for new
platforms. Failure to develop products for new platforms that achieve
significant market acceptance would have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore, the
Company does not have a license to develop products for certain of the most
popular platforms, including the proprietary platforms of Sega and Nintendo.
Finally, the Company's products must maintain compatibility with certain
hardware and software accessories. Any changes in any of such third-party
product designs that result in incompatibility of the Company's products could
result in significant product returns and obsolescence.
Dependence on PC Market
The Company's future success is in part dependent on the PC market, which
is extremely dynamic and has historically been characterized by wide
fluctuations in product supply and demand. From time to time, the PC industry
has also experienced significant downturns, often in connection with, or in
anticipation of, declines in general economic conditions. Furthermore, rapid
technological 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 Sony Playstation Market
The market for software products for the Sony PlayStation is currently
experiencing rapid growth. The Company's future success is partly dependent on
its ability to successfully take advantage of this market and on the continued
growth of the Sony PlayStation market. There can be no assurance that the
Company will be able to develop products for the Sony PlayStation in a timely
manner to take advantage of this growing market, that the Company's Sony
PlayStation software products will achieve market acceptance, or that the Sony
PlayStation market will continue to grow. In the event that the Company fails to
develop products while the Sony PlayStation market is expanding or fails to
deliver products that are commercially successful, or if the Sony PlayStation
market does not continue to grow, the Company's operating results would be
adversely affected.
11
<PAGE> 13
Dependence on the Internet Market
The Company's future success is in part dependent upon continued growth in
the use of the Internet. Rapid growth in the use of and interest in the Internet
is a recent phenomenon. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure or timely development of performance
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by any such growth. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity, or due to increased government regulations. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in slower response times and adversely affect usage of
entertainment software developed for the Internet. If the use of the Internet
does not grow, or if the Internet infrastructure does not effectively support
the growth that may occur, the Company's business, results of operations and
financial conditions would be materially adversely affected.
Interactive Multiple Player Games on the Internet
The availability of multiple player games on the Internet is a 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.
12
<PAGE> 14
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 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., 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.
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
13
<PAGE> 15
periods. The Company establishes reserves for returns and price protection based
on estimated future returns of products, taking into account promotional
activities, the timing of new product introductions, distributor and retailer
inventories of the Company's products and other factors. There can be no
assurance that actual returns or price protection requirements will not exceed
the Company's reserves.
Dependence on Distributors
The distribution channels through which consumer software products are sold
have been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers, and the emergence of new
retailers such as general mass merchandisers. The bankruptcy or other business
difficulties of a distributor or retailer could render the Company's accounts
receivable from such entity uncollectible, which could have an adverse effect on
the operating results and financial condition of the Company. In addition, an
increasing number of companies are competing for access to these channels.
Distributors and retailers often carry numerous products that compete with those
of the Company. Retailers of the Company's products typically have a limited
amount of shelf space and promotional resources for which there is intense
competition. There can be no assurance that distributors and retailers will
purchase the Company's products or provide the Company's products with prominent
display or even with adequate levels of shelf space.
Dependence on Key Personnel
The Company's future success depends in large part on the continued service
of its key technical, marketing, sales and management personnel. Given the
Company's early stage of development, the Company is dependent on its ability to
recruit, retain and motivate high-quality personnel, especially highly-skilled
engineers, programmers and artists involved in the ongoing development required
to define future interactive technologies, refine existing interactive
technologies, introduce enhancements for future applications, and develop novel
software titles. The Company is particularly dependent on the skills and
contributions of several key individuals, any one of whom may voluntarily
terminate employment with the Company at any time and whose departure would have
a material adverse effect on the Company's business. The Company is particularly
dependent upon its Chief Executive Officer, Trip Hawkins. The Company does not
have "key person" life insurance policies on any of its employees. The
interactive multimedia industry is characterized by a high level of employee
mobility and aggressive recruiting of skilled personnel. The Company competes
with computer hardware, software and entertainment companies for the recruitment
of skilled personnel. There can be no assurance that the Company's current
employees will continue to work for the Company or that the Company will be able
to obtain the services of additional personnel necessary for the Company's
growth.
Proprietary Rights and Licenses
The Company's success will depend in part on its ability to obtain and
enforce intellectual property protection for its 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
14
<PAGE> 16
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 name and logo for use in connection with
authorized products. The Company has experienced difficulty in registering some
of its marks in various jurisdictions, including Japan. There can be no
assurance that the Company will obtain sufficient trademark protection for these
marks, that these marks will not be duplicated without authorization, or that
the Company will have adequate remedies for trademark infringement in any
country.
From time to time, the Company receives communications from third parties
asserting that features or content of certain of the Company's or its licensees'
products infringe upon intellectual property rights held by such third parties.
As the number of patents and products in the Company's industry increases and as
the functionality of such products further overlaps, the Company believes that
products incorporating its technology may increasingly become the subject of
infringement claims. The Company could incur substantial costs in defending
itself or its licensees in litigation brought by others, or in prosecuting
infringement claims against third parties. The Company could also incur
substantial costs in interference proceedings before the U.S. Patent Office in
connection with one or more of the Company's or a third party's patents or
patent applications. Those proceedings could result in an adverse decision as to
the priority of the Company's inventions. A third party claiming infringement
may be able to obtain an injunction or other equitable relief, which could
effectively block the ability of the Company or its licensees to import into
various jurisdictions, including the United States, or to distribute and sell
products within particular jurisdictions. Such a result would materially and
adversely affect the Company. Such a third party could also assert claims for
substantial damages against the Company, its licensees or distributors of such
products, which could inhibit the manufacture or sale of licensed products. In
the event of a claim of infringement, the Company or its licensees may be
required to obtain one or more licenses from third parties. There can be no
assurance that the Company or its licensees will be able to obtain from third
parties any required license 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.
15
<PAGE> 17
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
affect 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 sure that it 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 3, 1996, Cirrus Logic, Inc. ("Cirrus") filed a complaint in the
Superior Court of the State of California for the Southern Division of the
County of Alameda to rescind a Joint Development and License Agreement (the
"Cirrus Agreement") entered into between Cirrus and the Company on February 29,
1996, on the grounds of frustration of purpose, mistake, failure of
consideration, concealment, and non-disclosure; and to obtain repayment of $2.5
million in nonrefundable payments made to the Company. The Company responded to
Cirrus' complaint and filed a cross-complaint regarding Cirrus' breach of the
Agreement and seeking to enforce its right under the Cirrus Agreement, including
procurement of the payment by Cirrus of $4.5 million in nonrefundable license
fees, prepaid royalties, and termination fees; and to recover damages, collect
interest, and obtain attorney's fees and costs.
On October 15, 1997, 3DO and Cirrus agreed to resolve and settle the
parties' respective claims with respect to the above-referenced litigation,
including, inter alia, the dismissal with prejudice of the subject litigation,
the general release of both parties from any and all claims relating to the
Joint Development and License Agreement, and the payment by Cirrus to 3DO of a
mutually acceptable sum in satisfaction of the license fees, advance royalties,
and payments for engineering services due to 3DO in connection with the Cirrus
Agreement. 3DO and Cirrus executed a written Settlement Agreement, effective
such matters on October 15, 1997, regarding such matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------------------------------------------------------------------
<C> <S>
11.01 Computation of Net Income (Loss) Per Share
27.01 Financial Data Schedule
</TABLE>
(b) No Reports on Form 8-K were filed during the quarter ended December
31, 1997.
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 6, 1998 THE 3DO COMPANY
/s/ TERRENCE SCHMID
--------------------------------------
Terrence Schmid
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
(Duly authorized officer)
17
<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
11.01 Computation of Net Income (Loss) Per Share
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.01
THE 3DO COMPANY
COMPUTATION OF NET INCOME (LOSS) PER SHARE (1)
<TABLE>
<CAPTION>
FOR THREE MONTHS FOR NINE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
--------------------- -------------------
1997 1996 1997 1996
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net income (loss)............................... $ 2,010 $ 2,885 $28,876 $ (699)
------- ------- ------- -------
Weighted average number of common shares
outstanding................................... 25,606 27,990 26,667 27,503
Common equivalent shares from options to
purchase common stock......................... 171 1,506 1,335 --
------- ------- ------- -------
Common and common equivalents shares............ 25,777 29,496 28,002 27,503
------- ------- ------- -------
Net income (loss) per common and common
equivalents share............................. $ 0.08 $ 0.10 $ 1.08 $ (0.03)
------- ------- ------- -------
</TABLE>
- ---------------
(1) This schedule should be read with Note 3 -- Net Income (Loss) Per Share in
the Condensed Notes to Consolidated Financial Statements.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,154
<SECURITIES> 37,036
<RECEIVABLES> 4,148
<ALLOWANCES> 2,682
<INVENTORY> 113
<CURRENT-ASSETS> 40,373
<PP&E> 11,279
<DEPRECIATION> 7,828
<TOTAL-ASSETS> 45,427
<CURRENT-LIABILITIES> 5,641
<BONDS> 0
0
0
<COMMON> 257
<OTHER-SE> (272)
<TOTAL-LIABILITY-AND-EQUITY> 45,427
<SALES> 37,340
<TOTAL-REVENUES> 37,340
<CGS> 3,388
<TOTAL-COSTS> 24,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23
<INCOME-PRETAX> 28,959
<INCOME-TAX> 83
<INCOME-CONTINUING> 28,876
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,876
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.03
</TABLE>
