<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 9, 1999
REGISTRATION NO. 333-_______
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
THE 3DO COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3177293
(State or other jurisdiction (I.R.S. Employer
of Identification
incorporation or organization) Number)
</TABLE>
600 GALVESTON DRIVE
REDWOOD CITY, CA 94063
(650) 261-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
JAMES A. COOK
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
600 GALVESTON DRIVE
REDWOOD CITY, CA 94063
(650) 261-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
NEIL WOLFF JOHN P. BARTHOLOMAY JEFFREY S. MARCUS
YOICHIRO TAKU 600 GALVESTON DRIVE S. DAVID GOLDENBERG
BENJAMIN CHUN REDWOOD CITY, CALIFORNIA 94063 MORRISON & FOERSTER LLP
WILSON SONSINI GOODRICH & ROSATI (650) 261-3000 1290 AVENUE OF THE AMERICAS
PROFESSIONAL CORPORATION NEW YORK, NEW YORK 10104
650 PAGE MILL ROAD (212) 468-8000
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, check the following box.
/ /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $0.01 par value............................................... $ 34,500,000.00 $ 9,591.00
</TABLE>
(1) Estimated pursuant to Rule 457.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 8, 1999
PROSPECTUS
SHARES
[3DO LOGO]
COMMON STOCK
------------------
The 3DO Company is offering shares to be sold in this offering. Of
these shares, we have reserved shares for sale to William M. Hawkins III,
our Chairman and Chief Executive Officer, who has expressed an interest in
purchasing shares in the offering. Any reserved shares not purchased by Mr.
Hawkins will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby. The last reported sale price of our
common stock on the Nasdaq National Market on June 8, 1999 was $5.00 per share.
------------------------
PRICE $ PER SHARE
------------------------
TRADING SYMBOL:
NASDAQ NATIONAL MARKET SYMBOL--THDO
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- --------------
<S> <C> <C>
Public offering price............................................. $ $
Underwriting discounts and commissions............................ $ $
Proceeds to The 3DO Company....................................... $ $
</TABLE>
The underwriters will not receive any underwriting discounts or commissions
from the sale of shares to Mr. Hawkins. We have granted to the underwriters
an option to purchase up to additional shares to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
GERARD KLAUER MATTISON & CO., INC. WEDBUSH MORGAN SECURITIES
Prospectus dated , 1999
<PAGE>
INSIDE FRONT COVER
There is a green plastic army man figure saluting on a background of a
fictitious green flag. Emblazoned across the foreground is:
"I want you to know, I'd be proud to lead you to victory."--Sarge
<PAGE>
GATEFOLD GRAPHIC
There is a central bubble on a blue background with The 3DO Company logo
inscribed and surrounded by the words: Engines, Libraries and Tools. Bubbles of
various sizes radially emanate from the central bubble. Within each bubble is a
graphic of an existing software title or a title under development with the
letters, PC, N, or P attached in a smaller bubble and keyed to the legend:
personal computer, Nintendo 64 and PlayStation Game Console. Several smaller
bubbles with the words New Brands, PlayStation, Sequels, and N64 are dispersed
across the entire graphic. The phrase, "Brand Leverage--Turning Technology Into
Fantasy Worlds" is located in the upper-right corner. The 3DO Company logo is
located in the lower-right corner.
The following titles are included in bubbles in the graphic. Family Game
Pack 2; Vegas Games 2000; BattleTanx II: Global Assault; Might and Magic VI: The
Mandate of Heaven; Heroes of Might and Magic III; Armageddon's Blade Expansion
Pack; Might and Magic VII: For Blood and Honor; Crusaders of Might and Magic;
High Heat Baseball 1999; High Heat Baseball 2000; Army Men II; Army Men III;
Army Men 3D; Army Men: Air Attack; Army Men: Sarge's Heroes.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
WHICH IS CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS MAY BE USED ONLY WHERE IT
IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS PROSPECTUS MAY ONLY
BE ACCURATE ON THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY
OF THIS PROSPECTUS OR OF ANY SALE OF COMMON STOCK.
3DO, 3DO Games Decathlon, Air Attack, Armageddon's Blade, Army Men,
BattleTanx, Blood and Honor, Celebrity Poker, Crusaders of Might and Magic, Dark
Auspices, Family Game Pack, Game Update, Gulf War: Operation Desert Hammer,
Heroes, Heroes of Might and Magic, High Heat Baseball, Killing Time, Lead and
Destroy, Meridian, Meridian 59 Liberation, Might and Magic, Might
<PAGE>
and Magic Crusade, Mind Games, Mother of All War Games, New World Computing,
Real Combat. Plastic Men., Requiem: Avenging Angel, Sarge, Sarge's Heroes, Team
.366, Toy Heroes, Toys in Space, Toy Wars, TruPitch, TruPlay, U.S. vs. Iraq,
Uprising, Vegas Games, We're Here to Play, Worlds of Might and Magic and their
respective logos are trademarks of The 3DO Company in the United States and
other countries. All other trademarks or service marks appearing in this
prospectus are trademarks or service marks of the respective companies that use
them.
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PROSPECTUS SUMMARY
BECAUSE THIS IS ONLY A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT
MAY BE IMPORTANT TO YOU. THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. IN THIS PROSPECTUS, "3DO," "WE," "US" AND "OUR"
REFER TO THE 3DO COMPANY AND ITS SUBSIDIARIES. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND
RELATED NOTES, AND ESPECIALLY THE RISKS DESCRIBED UNDER "RISK FACTORS," BEFORE
DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. UNLESS WE STATE OTHERWISE IN
THIS PROSPECTUS, ALL OF THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS DO NOT EXERCISE THEIR OVER-ALLOTMENT OPTION.
THE 3DO COMPANY
We are a leading developer and publisher of branded interactive
entertainment software. Our software products operate on several multimedia
platforms including personal computers, the Sony PlayStation and Nintendo N64
video game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color hand-held video game platform and are planning to
develop software for next-generation video game consoles. We plan to continue to
extend our popular brands across multiple categories, or "genres," and
platforms. These brands include Army Men, BattleTanx, Family Game Pack, Heroes
of Might and Magic, High Heat Baseball, and Might and Magic, many of which have
won industry awards. Our software products cover a variety of genres, including
action, strategy, adventure/role playing, sports and family entertainment. We
develop our software internally in our company-owned studios and have created an
extensive portfolio of versatile technologies that allow us to develop new
software products more quickly and cost-effectively. Our software publishing
revenues increased 409% to $48.0 million in our fiscal year ended March 31, 1999
from $9.4 million in our fiscal year ended March 31, 1998.
The NPD Group estimates that retail sales of interactive entertainment
software in the United States grew more than 25% to $4.9 billion in 1998 from
$3.9 billion in 1997. Declining prices of video game consoles and personal
computers, together with lower-cost, higher-quality graphics and audio
capabilities, have led to a growing installed base of platforms and greater
demand for video games. NPD estimates that a total of 20.9 million Sony
PlayStation and Nintendo N64 video game console systems have been sold in the
United States as of April 1999. International Data Corporation estimates that 46
million U.S. households owned a personal computer in 1998, of which over 71%
have played video games on their personal computers.
In fiscal 1999, we released 14 new products compared to three new products
in fiscal 1998. We are currently developing over 25 new products that we expect
to release in fiscal 2000. In the quarter ended March 31, 1999, our net income
was $2.6 million on revenues of $23.2 million. In March 1999, we had three
different titles in the top ten lists of games sold, one on each of the Sony
PlayStation, Nintendo N64 and personal computer platforms, according to GameWeek
and MCV magazines. We believe that growth in our software revenues and number of
new products released, as well as achieving our first profitable quarter as a
software company, demonstrate our successful transformation from a video game
hardware company to a software publishing company.
Our objective is to enhance our position as a leading developer and
publisher of branded interactive entertainment software. The key elements of our
strategy are to:
- BUILD UPON OUR RECOGNIZED PORTFOLIO OF HIGH-QUALITY BRANDS. Our product
strategy is to extend our established interactive entertainment software
brands and proprietary technologies across multiple genres and platforms
in order to better differentiate our products to consumers and retailers.
3
<PAGE>
- CONTINUE TO DEVELOP SOFTWARE PRODUCTS AND PROPRIETARY TECHNOLOGIES IN OUR
INTERNAL DEVELOPMENT STUDIOS. We develop our interactive entertainment
software and brands internally to better control product quality,
development schedules and costs.
- EXTEND OUR PROPRIETARY TECHNOLOGIES OVER MULTIPLE PRODUCTS, GENRES AND
PLATFORMS. Our internal studios will continue to create an extensive
portfolio of versatile, company-owned technologies, including interactive
software engines, development tools, various programming codes and
artwork, that we can use to develop new products more quickly and
cost-effectively.
- EXPAND OUR OPERATIONS IN EUROPE. In fiscal 2000, we plan to expand our
European operations by increasing our direct sales and marketing efforts,
as well as customizing our products for local markets.
We distribute our products through a broad variety of retail outlets,
including mass merchants, warehouse club stores, computer and software retail
chains and other specialty retailers. We have significantly increased the number
of retail outlets that sell our products to over 20,000 in fiscal 1999 from
approximately 6,000 in fiscal 1998. Our largest retail customers in fiscal 1999
were Best Buy, Wal-Mart, Electronics Boutique, Babbage's, Toys "R" Us,
Blockbuster Video, Target, Sears, Hollywood Video, KayBee Toys and Kmart. In
addition, we have recently enhanced our sophisticated Web site to enable
consumers to directly purchase products from us and to obtain game tips and chat
on-line about our products.
Our experienced management team is led by Trip Hawkins, our founder,
Chairman and Chief Executive Officer, who also founded Electronic Arts and
served as its Chairman and Chief Executive Officer.
Our executive offices are located at 600 Galveston Drive, Redwood City,
California 94063 and our telephone number is (650) 261-3000. Our Web site is
located at www.3do.com. Information contained on our Web site should not be
considered part of this prospectus.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by 3DO................. shares
Common stock to be outstanding immediately
after this offering....................... shares
Use of proceeds............................. We expect to use the net proceeds of this
offering for working capital and general
corporate purposes, including approximately
$10.0 million to develop software for
next-generation video game platforms and $5.0
million to expand our operations in Europe.
See "Use of Proceeds."
Nasdaq National Market symbol............... THDO
</TABLE>
The number of shares of our common stock outstanding immediately after this
offering is based on shares of our common stock outstanding as of March 31,
1999, excluding treasury stock and also excluding 11,421,526 shares of our
common stock subject to outstanding options and 5,546,670 shares of our common
stock available for future grants under our stock option plan. If the
underwriters exercise the over-allotment option in full, there will be
shares outstanding.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(in thousands, except per share and other data)
The following table summarizes our financial data. The data presented in
this table are derived from the "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations of Software Publishing Business" and
our consolidated financial statements and notes to those statements that are
included elsewhere in this prospectus. You should read those sections for a
further explanation of the financial data summarized here. The as adjusted
balance sheet data gives effect to this offering and the application of the
estimated net proceeds of approximately $ million.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED MARCH 31,
---------------------------------- ------------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
SOFTWARE PUBLISHING
Revenues.............................................. $ 9,540 $ 9,429 $ 48,019 $ 1,550 $ 23,191
Gross profit.......................................... 4,143 5,513 34,241 980 17,599
Operating income (loss)............................... (39,500) (22,981) (14,095) (6,707) 2,545
Income (loss) before taxes............................ (37,385) (21,107) (12,976) (6,202) 2,529
HARDWARE SYSTEMS
Revenues.............................................. $ 82,810 $ 29,461 -- -- --
Gross profit.......................................... 80,218 29,418 -- -- --
Operating income...................................... 54,731 25,831 -- -- --
Gain on sale of hardware systems assets............... -- 18,032 -- -- --
Income before taxes................................... 54,731 43,863 -- -- --
CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS
Income (loss) before taxes............................ $ 17,346 $ 22,756 $ (12,976) $ (6,202) $ 2,529
Net income (loss)..................................... 13,271 22,537 (13,167) (6,338) 2,552
Basic net income (loss) per share..................... $ 0.48 $ 0.85 $ (0.51) $ (0.25) $ 0.10
Diluted net income (loss) per share................... $ 0.46 $ 0.83 $ (0.51) $ (0.25) $ 0.09
OTHER DATA:
Products released..................................... 4 3 14 1 5
Products sold......................................... 11 7 17 7 17
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments......................................... $ 13,851
Working capital........................................................................... 15,675
Total assets.............................................................................. 40,488
Short-term debt........................................................................... 9,505
Total stockholders' equity................................................................ 20,115
</TABLE>
5
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE
ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY
KNOWN TO US OR THAT WE CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN
SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE
ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS.
OUR QUARTERLY OPERATING RESULTS FREQUENTLY VARY SIGNIFICANTLY DUE TO FACTORS
OUTSIDE OUR CONTROL.
We have experienced and expect to continue to experience wide fluctuations
in quarterly operating results as a result of a number of factors. We cannot
control many of these factors, which include the following:
- the timing and number of new title introductions;
- the mix of sales of higher and lower margin products in a quarter;
- market acceptance of our titles;
- development and promotional expenses relating to the introduction of new
titles, sequels or enhancements of existing titles;
- announcements and introductions of new hardware platforms;
- product returns;
- changes in pricing policies by us and our competitors;
- the timing of orders from major customers and distributors; and
- delays in shipment.
For these reasons, you should not rely on period-to-period comparisons of
our financial results as indications of future results. Our future operating
results could fall below the expectations of securities industry analysts or
investors. Any such shortfall could result in a significant decline in the
market price of our common stock. Fluctuations in our operating results will
likely increase the volatility of our stock price.
OUR SALES ARE SEASONAL, AND WE DEPEND ON STRONG SALES DURING THE HOLIDAY SEASON.
Sales of our titles are seasonal. Our peak shipments typically occur in the
third and fourth calendar quarters (our second and third fiscal quarters) as a
result of increased demand during the year-end holiday season. If we do not
achieve strong sales in the second half of each calendar year, our fiscal year
results would be adversely affected.
A SIGNIFICANT PORTION OF OUR REVENUES ARE DERIVED FROM A LIMITED NUMBER OF
BRANDS, SO A DECLINE IN A BRAND'S POPULARITY MAY HARM OUR RESULTS.
In fiscal 1999, three brands accounted for approximately 75% of our
revenues. Titles in the Army Men brand represented 31%, BattleTanx represented
19%, and Might and Magic represented 25% of our total revenues in fiscal 1999.
Because we depend on a limited number of brands for the
6
<PAGE>
development of sequels and line extensions, if one or more of our brands were to
lose their current popularity, our revenues and profits may be seriously harmed.
Furthermore, we cannot be certain that a sequel or line extension of a popular
brand will be as popular as prior titles in that brand.
OUR BUSINESS DEPENDS ON "HIT" PRODUCTS, SO IF WE FAIL TO ANTICIPATE CHANGING
CONSUMER PREFERENCES WE COULD SUFFER DECLINING REVENUES.
Few interactive entertainment software products have achieved sustained
market acceptance, with those "hits" accounting for a substantial portion of
revenues in the industry. Our ability to develop a hit title depends on numerous
factors beyond our control, including:
- critical reviews;
- public tastes and preferences that change rapidly and are hard to predict;
- the price and timing of new interactive entertainment titles released and
distributed by us and our competitors;
- the availability, price and appeal of other forms of entertainment; and
- rapidly changing consumer preferences and demographics.
If we fail to accurately anticipate and promptly respond to these factors,
our sales could decline. If we do not achieve adequate market acceptance of a
title, we could be forced to accept substantial product returns or grant
significant markdown allowances to maintain our relationship with retailers and
our access to distribution channels.
IF WE DO NOT CREATE TITLES FOR NEW HARDWARE PLATFORMS, OUR REVENUES WILL
DECLINE.
The interactive entertainment software market and the personal computer and
video game console industries in general have been affected by rapidly changing
technology, which leads to software and platform obsolescence. Our titles have
been developed primarily for multimedia personal computers and video game
consoles, including the Nintendo N64 and Sony PlayStation. Our software designed
for personal computers must maintain compatibility with new personal computers,
their operating software and their hardware accessories. If we are unable to
successfully adapt our software and develop new titles to function on various
hardware platforms and operating systems, our business could be seriously
harmed.
TITLES WE DEVELOP FOR NEW PLATFORMS MAY NOT BE SUCCESSFUL.
If we design new titles or develop sequels to operate on a new platform, we
will be required to make substantial development investments well in advance of
the platform introduction. If the new platform does not achieve initial or
continued market acceptance, then our titles may not sell many copies and we may
not recover our investment in product development.
IF OUR NEW PRODUCT INTRODUCTIONS ARE DELAYED, WE COULD LOSE SIGNIFICANT
POTENTIAL REVENUES.
Most of our products have a relatively short life cycle and sell for a
limited period of time after their initial release, usually less than one year.
We depend on the timely introduction of successful new products, including
enhancements of or sequels to existing products and conversions of previously
released products to additional platforms, to replace declining net revenues
from older products.
The complexity of product development, uncertainties associated with new
technologies and the porting of our products to new platforms makes it difficult
to introduce new products on a timely basis. We have experienced delays in the
introduction of some new products. We anticipate that we will experience delays
in the introduction of new products, including some products currently under
7
<PAGE>
development. We may also experience delays in receiving approval of our games
from Sony and Nintendo. Delays in the introduction of products, especially in
the third calendar quarter, could significantly harm our operating results.
IF OUR NEW PRODUCTS HAVE DEFECTS, WE COULD LOSE POTENTIAL REVENUES AND INCREASE
OUR COSTS.
Software products such as those we offer frequently contain errors or
defects. Despite extensive product testing, in the past we have released
products with software errors. This is likely to occur in the future as well. We
offer warranties on our products, and may be required to repair or replace our
defective products. Although we periodically offer software patches for our
personal computer products, such errors may result in a loss of or delay in
market acceptance and cause us to incur additional expenses and delays to fix
these errors.
OUR GROSS MARGINS CAN BE SIGNIFICANTLY AFFECTED BY THE MIX OF PRODUCTS WE SELL.
We typically earn a higher gross margin on sales of games for the personal
computer platform. Gross margins on sales of products for game console platforms
are generally lower because of:
- license fees payable to Sony and Nintendo; and
- higher manufacturing costs for game cartridges for the Nintendo N64
console platform.
Therefore, our gross margins in any period can be significantly affected by the
mix of products we sell for the personal computer, Sony PlayStation and Nintendo
N64 platforms.
IF WE DO NOT REDUCE COSTS OR PROPERLY ANTICIPATE FUTURE COSTS, OUR GROSS MARGIN
MAY DECLINE.
We anticipate that the average selling prices of our products may decrease
in the future in response to a number of factors, particularly competitive
pricing pressures and sales discounts. Therefore, to control our gross margin,
we must also seek to reduce our costs of production. The costs of developing new
interactive entertainment software have increased in recent years due to such
factors as:
- the increasing complexity and robust content of interactive entertainment
software;
- increasing sophistication of hardware technology and consumer tastes; and
- increasing costs of licenses for intellectual properties.
If our average selling prices decline, we must also increase the rate of new
product introductions and our unit sales volume to maintain or increase our
revenue. Furthermore, our budgeted research and development and sales and
marketing expenses are partially based on predictions regarding sales of our
products. To the extent that these predictions are inaccurate, our operating
results may suffer.
IF NEW PLATFORMS ARE ANNOUNCED OR INTRODUCED, SALES OF OUR EXISTING TITLES COULD
DECLINE SUDDENLY.
Historically, the anticipation or introduction of next-generation video game
platforms has resulted in decreased sales of interactive entertainment software
for existing platforms. Sega has introduced its Dreamcast system in Japan and
expects to introduce it in the United States and Europe in late 1999. We
currently do not expect to publish products for this platform. Sony has recently
announced the development of the next generation of the PlayStation. Nintendo
has stated that it is in the process of developing a new video game platform. If
sales of current models of multimedia personal computers or video game consoles
level off or decline as a result of the anticipated release of new platforms or
other technological changes, sales of our software titles developed for current
platforms can be expected to decrease. We expect that as more advanced platforms
are introduced, consumer demand for software for older platforms may decline. As
a result, our titles developed for such platforms may not generate
8
<PAGE>
sufficient sales to make such titles profitable. Obsolescence of software or
platforms could leave us with increased inventories of unsold titles and limited
amounts of new titles to sell to consumers.
OUR MARKETS ARE HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE
EFFECTIVELY.
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations which have significantly greater financial, marketing and
product development resources than us. Due to these greater resources, some of
our competitors are better able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, pay higher fees to third party software
developers and licensors of desirable properties.
Our competitors include the following:
- We compete primarily with other publishers of interactive entertainment
software for personal computer and video game consoles, including Acclaim
Entertainment Inc., Activision, Inc., Eidos plc, Electronic Arts, GT
Interactive Software Corp., Interplay Entertainment Corp., LucasArts
Entertainment Company and THQ Inc.
- Integrated video game console hardware/software companies such as Sony and
Nintendo compete directly with us in the development of software titles
for their respective platforms.
- Large diversified entertainment or software companies, such as The Walt
Disney Company or Microsoft, many of which own substantial libraries of
available content and have substantially greater financial resources than
us, may decide to compete directly with us or to enter into exclusive
relationships with our competitors.
IF WE DO NOT COMPETE SUCCESSFULLY FOR RETAIL SHELF SPACE, OUR SALES WILL
DECLINE.
Retailers of our products typically have a limited amount of shelf space and
promotional resources. Publishers of interactive entertainment software products
compete intensely for high quality retail shelf space and promotional support
from retailers. To the extent that the number of consumer software products
increases, competition for shelf space may intensify and may require us to
increase our marketing expenditures. Due to increased competition for limited
shelf space, retailers and distributors are in an increasingly better position
to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return privileges. Retailers
and distributors also consider marketing support, quality of customer service
and historical performance in selecting products to sell. Our products
constitute a relatively small percentage of any retailer's sales volume, and we
cannot be certain that retailers will continue to purchase our products or to
provide our products with adequate levels of shelf space and promotional
support.
IF MORE MASS MERCHANTS ESTABLISH EXCLUSIVE BUYING ARRANGEMENTS, OUR SALES AND
GROSS MARGIN WOULD BE ADVERSELY IMPACTED.
Mass merchants have become the most important distribution channels for
retail sales of interactive entertainment software. A number of these mass
merchants, including Wal-Mart, have entered into exclusive buying arrangements
with other software developers or distributors, which prevent us from selling
some of our products directly to that mass merchant. If the number of mass
merchants entering into exclusive buying arrangements with software distributors
were to increase, our ability to sell to those merchants would be restricted to
selling through the exclusive distributor. Because we typically earn a lower
gross margin on sales to distributors than on direct sales to retailers, this
would have the effect of lowering our gross margin.
9
<PAGE>
OUR SALES AND ACCOUNTS RECEIVABLE ARE CONCENTRATED IN A LIMITED NUMBER OF
CUSTOMERS.
Sales to our five largest customers accounted for approximately 64% of our
revenues in fiscal 1998 and 51% of our revenues in fiscal 1999. Our sales are
made primarily on a purchase order basis, without long-term agreements. The loss
of our relationships with principal customers or a decline in sales to any
principal customer could harm our business.
Our sales are typically made on credit, with terms that vary depending upon
the customer and the demand for the particular title being sold. We do not hold
any collateral to secure payment by our customers. As a result, we are subject
to credit risks, which are increased when our receivables represent sales to a
limited number of retailers or distributors or are concentrated in foreign
markets. Distributors and retailers in the computer industry have from time to
time experienced significant fluctuations in their businesses, and there have
been a number of business failures among these entities. The insolvency or
business failure of any significant distributor or retailer of our products
could result in reduced revenues and write-offs of accounts receivable. If we
are unable to collect on accounts receivable as they become due and such
accounts are not covered by insurance, it could adversely affect our business,
operating results and financial condition.
RETURNS OR EXCHANGES OF OUR TITLES MAY HARM OUR BUSINESS.
Our arrangements with retailers for published titles require us to accept
returns for unsold titles or defects, or provide adjustments for markdowns. We
establish a reserve for future returns of published titles at the time of sales,
based primarily on these return policies and historical return rates, and we
recognize revenues net of returns. Our provision for sales returns and
allowances was $6.9 million in fiscal 1999. If return rates or markdowns
significantly exceed our estimates, our business could be seriously harmed.
SONY AND NINTENDO CAN INFLUENCE THE NUMBER OF GAMES THAT WE CAN PUBLISH AND
TIMING OF OUR PRODUCT RELEASES.
We depend heavily on non-exclusive licenses with Sony and Nintendo both for
the right to publish titles for their platforms and for the manufacture of our
software designed for use on their platforms. Our licenses with Sony and
Nintendo require that we obtain their approval for title proposals as well as
completed games and all associated artwork and marketing materials. This
approval process could cause a delay in our ability to release a new title and
cause us to incur additional expenses to modify the product and obtain approval.
As a result, the number of titles we are able to publish for these platforms may
be limited.
The license with Sony terminates in September 1999 and the license with
Nintendo terminates in December 1999. We are currently negotiating with both
Sony and Nintendo to renew and expand the scope of these licenses. If any of
these licenses were terminated or not renewed on acceptable terms, we would be
unable to develop and publish software developed for these platforms and our
business would be seriously harmed.
SONY AND NINTENDO CAN INFLUENCE OUR GROSS MARGIN AND PRODUCT INTRODUCTION
SCHEDULES IN WAYS WE CANNOT CONTROL.
Each of Sony and Nintendo is the sole manufacturer of the titles we publish
under license from them. Each platform license provides that the manufacturer
may raise our costs for the titles at any time and grants the manufacturer
substantial control over whether and when we can release new titles. The
relatively long manufacturing and delivery cycle for cartridge-based titles for
the Nintendo platform (from four to six weeks) requires us to accurately
forecast retailer and consumer demand for our titles far in advance of expected
sales. Nintendo cartridges are also more expensive to manufacture
10
<PAGE>
than CD-ROMs, resulting in greater inventory risks for those titles. Each of
Sony and Nintendo also publishes software for its own platform and also
manufactures titles for all of its other licensees and may choose to give
priority to its own titles or those of other publishers if it has insufficient
manufacturing capacity or if there is increased demand.
IF OUR CONTRACT MANUFACTURERS DO NOT HAVE SUFFICIENT CAPACITY OR DELAY
DELIVERIES, OUR REVENUES WOULD BE HARMED.
Our contract manufacturers, Sony, Nintendo and JVC, may not have sufficient
production capacity to satisfy our scheduling requirements during any period of
sustained demand. If manufacturers do not supply us with finished titles on
favorable terms without delays, our operations could be materially interrupted,
and our business could be seriously harmed.
WE MAY NOT BE ABLE TO SUCCESSFULLY EXPAND OUR INTERNATIONAL OPERATIONS AND
REVENUES.
We currently have an office in the United Kingdom with limited staffing. We
intend to expand the scope of our international operations, which will require
us to enhance our management information systems and establish sales, marketing
and distribution infrastructure in markets in which we do not have significant
experience. If we are unable to expand our international operations effectively
and quickly, we may not generate additional revenues from international sales,
while our expenses may have already increased. This could have an adverse impact
on our profitability.
We are in the process of negotiating for licenses from Sony and Nintendo to
sell our products in Europe. We cannot be certain that we will be able to obtain
these licenses on acceptable terms.
IF OUR INTERNATIONAL OPERATIONS EXPAND, WE WILL ENCOUNTER RISKS WHICH COULD
ADVERSELY AFFECT OUR BUSINESS.
Our products are sold in international markets both directly and through
licensees, primarily in Canada, the United Kingdom and other European countries,
and to a lesser extent in Asia and Latin America. As a result of our current
international sales and our international expansion, we will become increasingly
subject to risks inherent in foreign trade, which can have a significant impact
on our operating results. These risks include the following:
- increased costs to develop foreign language versions of our products;
- increased credit risks and collection difficulties;
- tariffs and duties;
- increased risk of piracy;
- shipping delays;
- fluctuations in foreign currency exchange rates; and
- international political, regulatory and economic developments.
IF INTERNET-BASED GAMEPLAY BECOMES POPULAR, WE WOULD NEED TO QUICKLY DEVELOP
PRODUCTS AND ESTABLISH A VIABLE INTERNET BUSINESS MODEL.
We offer a role playing fantasy game called "Meridian 59," which is a
server-based Internet game. This type of game's software resides on a remote
server, and can be played only by accessing that server via the Internet.
Meridian 59 has not achieved significant market penetration. We provide free
play time and other incentives, such as discounts and contests, to interest the
limited number of consumers currently in the Internet game market to try
Meridian 59. We have not yet established that
11
<PAGE>
any of these incentives, the availability of server-based games on the Internet
or whether the expenses we incur in offering these incentives will result in
significant growth in the use of our server-based Internet games or generate
revenues for us in the future. A number of software publishers who compete with
us have developed or are currently developing server-based Internet games for
use by consumers over the Internet. If the Internet becomes a more popular venue
for interactive software games, then we will need to both rapidly develop and
release games for the Internet, and also establish a profitable business model
for Internet-based games.
WE DEPEND ON OUR KEY PERSONNEL AND OUR ABILITY TO HIRE ADDITIONAL QUALIFIED
PERSONNEL.
Our success is largely dependent on the personal efforts of certain
personnel, especially Trip Hawkins. Our success is also dependent upon our
ability to hire and retain additional qualified operating, marketing, technical
and financial personnel. We rely heavily on our own internal development studios
to develop our products. The loss of any key developers or groups of developers
may delay the release of our products. Competition for personnel is intense,
especially in the San Francisco Bay area where we maintain our headquarters, and
we cannot be certain that we will successfully attract and retain additional
qualified personnel.
OUR INTERNAL DESIGN STUDIOS AND OUR MANUFACTURING SOURCES ARE VULNERABLE TO
DAMAGE FROM NATURAL DISASTERS.
All of our internal design studios and most of our manufacturing sources are
vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures and similar events. Our California internal design
studios are located on or near known earthquake fault zones. If a natural
disaster occurs, our ability to develop and distribute our products would be
seriously, if not completely, impaired. The insurance we maintain against fires,
floods, earthquakes and general business interruptions may not be adequate to
cover our losses in any particular case.
ILLEGAL COPYING OF OUR SOFTWARE ADVERSELY AFFECTS OUR SALES.
Although we use copy-protection devices, an unauthorized person may be able
to copy our software or otherwise obtain and use our proprietary information. If
a significant amount of illegal copying of software published or distributed by
us occurs, our product sales could be adversely impacted. Policing illegal use
of software is extremely difficult, and software piracy is expected to persist.
In addition, the laws of some foreign countries in which our software is
distributed do not protect us and our intellectual property rights to the same
extent as the laws of the U.S.
WE MAY INFRINGE ON THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS.
As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although we make reasonable efforts to ensure that our products do not violate
the intellectual property rights of others, we cannot be certain that claims of
infringement will not be made. Any such claims, with or without merit, can be
time consuming and expensive to defend. From time to time, we have received
communications from third parties asserting that features or content of certain
of our products may infringe upon their intellectual property rights. We cannot
be certain that existing or future infringement claims against us will not
result in costly litigation or require us to seek to license the intellectual
property rights of third parties, which licenses may not be available on
acceptable terms, if at all.
12
<PAGE>
WE DEPEND ON LICENSES FROM THIRD PARTIES FOR THE DEVELOPMENT OF ONE OF OUR
BRANDS.
We license various rights for use in our High Heat Baseball brand. If we
were unable to maintain or renew those licenses, we would be unable to release
additional sequels and line extensions for that brand.
RATING SYSTEMS FOR INTERACTIVE ENTERTAINMENT SOFTWARE, GOVERNMENT CENSORSHIP OR
RETAILER RESISTANCE TO VIOLENT GAMES COULD INHIBIT OUR SALES OR INCREASE OUR
COSTS.
The home video game industry requires interactive entertainment software
publishers to identify products within defined rating categories and
communicating the ratings to consumers through appropriate package labeling and
through advertising and marketing presentations consistent with each product's
rating. If we do not comply with these requirements, it could delay our product
introductions and require us to remove products from the market.
Mandatory government imposed interactive entertainment software products
rating systems eventually may be adopted in many countries, including the United
States. Due to the uncertainties inherent in the implementation of such rating
systems, confusion in the marketplace may occur and publishers may be required
to modify or remove products from the market. However, we are unable to predict
what effect, if any, such rating systems would have on our business.
Many foreign countries have laws which permit governmental entities to
censor the content of certain works, including interactive entertainment
software. As a result, we may be required to modify some of our products or
remove them from the market which could result in additional expense and loss of
revenues.
Certain retailers have in the past declined to stock some software products
because they believed that the content of the packaging artwork or the products
would be offensive to the retailer's customer base. Although such actions have
not yet affected us, we cannot be certain that our distributors or retailers
will not take such actions in the future.
THE YEAR 2000 RISK MAY ADVERSELY AFFECT US.
The inability of many existing computers to recognize and properly process
data as the Year 2000 approaches may cause many computer software applications
to fail or reach erroneous results. Any failure by us, our third-party suppliers
or customers to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain of our business operations. We have
not yet adopted a Year 2000 contingency plan.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
Disclosures of our operating results (particularly if below the estimates of
securities industry analysts), announcements of various events by us or our
competitors and the development and marketing of new titles affecting the
interactive entertainment software industry, as well as other factors, may cause
the market price of our common stock to change significantly over short periods
of time.
OUR FUTURE CAPITAL NEEDS ARE UNCERTAIN AND WE MAY NOT BE ABLE TO SATISFY THEM.
We expect the net proceeds from this offering, cash expected to be generated
from operations and available borrowings under our credit facilities should be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds,
which may not be available on acceptable terms, if at all. We may also require
additional capital to acquire or invest in complementary businesses or products
or obtain the right to use complementary technologies. If we issue additional
equity securities to raise funds, the ownership percentage of our
13
<PAGE>
existing stockholders, including the investors in this offering, would be
reduced. New investors may demand rights, preferences or privileges senior to
those of existing holders of our common stock. Debt incurred by us would be
senior to equity in the ability of debtholders to make claims on our assets. The
terms of any debt issued could impose restrictions on our operations. If we
cannot raise needed funds on acceptable terms, we may not be able to develop or
enhance our products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.
FUTURE ACQUISITIONS MAY STRAIN OUR OPERATIONS.
We have acquired various properties and businesses, and we intend to
continue to pursue opportunities by making selective acquisitions consistent
with our business strategy, although we may not make any more acquisitions. The
failure to adequately address the financial and operational risks raised by
acquisitions of technology and businesses could harm our business.
Financial risks related to acquisitions include the following:
- potentially dilutive issuances of equity securities;
- use of cash resources;
- the incurrence of additional debt and contingent liabilities;
- large write-offs; and
- amortization expenses related to goodwill and other intangible assets.
Acquisitions also involve operational risks, including:
- difficulties in assimilating the operations, products, technology,
information systems and personnel of the acquired company; diversion of
management's attention from other business concerns;
- impairment of relationships with our retailers, distributors, licensors
and suppliers;
- inability to maintain uniform standards, controls, procedures and
policies;
- entrance into markets in which we have no direct prior experience; and
- loss of key employees of the acquired company.
MANAGEMENT HAS BROAD DISCRETION AS TO USE OF PROCEEDS.
Our management can spend the proceeds from this offering in ways with which
our investors may not agree. We cannot predict that the proceeds will be used to
yield a favorable return.
WE HAVE NO INTENTION OF PAYING DIVIDENDS.
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends for the foreseeable future. In
addition, our line of credit with Coast Business Credit prohibits the payment of
dividends.
ANTI-TAKEOVER PROVISIONS MAY PREVENT AN ACQUISITION.
Provisions of our Amended and Restated Certificate of Incorporation, Bylaws
and Delaware law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders.
14
<PAGE>
OFFICERS AND DIRECTORS MAY BE ABLE TO INFLUENCE STOCKHOLDER ACTIONS.
Executive officers, directors and entities affiliated with them will, in the
aggregate, beneficially own approximately % of our outstanding common stock
following the completion of this offering. Of this amount, Trip Hawkins, our
Chairman and Chief Executive Officer, will beneficially own approximately %,
assuming that he purchases the shares reserved for him in this offering.
These stockholders acting together would be able to significantly influence all
matters that require approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. See "Principal Stockholders."
SHARES ELIGIBLE FOR FUTURE SALE MAY NEGATIVELY AFFECT OUR STOCK PRICE.
If our stockholders sell substantial amounts of common stock (including
shares issued upon the exercise of options) in the public market following this
offering, the market price of our common stock could fall. The perception that
such sales may occur could cause the market price of our common stock to fall on
or before the date those shares are first eligible for sale. Such sales also
might make it more difficult for us to sell securities in the future at a time
and price that we deem appropriate. Upon completion of this offering, we will
have outstanding approximately shares of common stock (based upon
shares outstanding as of March 31, 1999), assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options after
March 31, 1999. Of these shares, the shares sold in this offering and
approximately additional shares are freely tradable. An additional
approximately shares will be eligible for sale in the public market 180
days after the date of this prospectus upon expiration of lock-up agreements
with the underwriters.
15
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. These forward-looking statements include, but are
not limited to, statements under "Management's Discussion and Analysis of
Financial Resources and Results of Operations," "Use of Proceeds" and
"Business." This prospectus also contains forward-looking statements attributed
to certain third parties relating to their estimates regarding the growth of
certain markets. Forward-looking statements are subject to known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include, among others, those identified under
"Risk Factors" and elsewhere in this prospectus.
These forward-looking statements apply only as of the date of this
prospectus. We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties, and assumptions,
the forward-looking events discussed in this prospectus might not occur. Our
actual results could differ materially from those anticipated in these
forward-looking statements for many reasons, including the risks faced by us
described above and elsewhere in this prospectus. Such forward-looking
statements include statements as to, among others:
- the timing of the introduction of some new products;
- the expectations regarding the decrease in average selling prices;
- our ability to reduce manufacturing costs;
- our expectations that as more advanced platforms are introduced, consumer
demand for software for older platforms may decline;
- our expectations as to the change in the distribution channels for
interactive software;
- our expectations to satisfy cash requirements for at least twelve months
from a combination of the proceeds from this offering, our cash flow from
operations and our available credit facilities;
- our expectations as to our future cash requirements;
- our expectations as to our international expansion and hiring personnel
for the European expansion;
- our expectations as to the retention of future earnings;
- our expectations regarding the future development of our business;
- our expectations regarding negative cash flows;
- our expectations regarding operating expenses;
- our expectations regarding the success and cost of the Year 2000 working
group;
- our expectations regarding the development of Year 2000 contingency plans;
- our expectations regarding the effect of recent accounting pronouncements;
- our expectations regarding product releases;
- our expectations regarding the localization of our products for European
countries; and
- our expectations regarding the planned increase of sales directly to
retailers in North America.
16
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of our common stock
offered by us will be approximately $ million (approximately $ million
if the underwriters' over-allotment option is exercised in full), at an assumed
public offering price of $ per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us.
We currently expect to use the net proceeds from this offering primarily for
working capital and general corporate purposes, including approximately $10.0
million for the development of interactive entertainment software games for
next-generation video game platforms. We also expect to use approximately $5.0
million of the net proceeds to expand our operations in Europe, including hiring
sales, marketing and administrative personnel and expanding our facilities. In
addition, we may use a portion of the net proceeds for further development of
our product lines through the acquisition of complementary products,
technologies and businesses. However, we have no present agreements,
commitments, or understandings with respect to any acquisitions. Pending such
uses, we will invest the net proceeds in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. In addition, our line of credit with Coast Business Credit
prohibits the payment of dividends.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"THDO." The following table sets forth the high and low closing sales prices per
share of our common stock, as reported on the Nasdaq National Market for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1998 (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
FISCAL 1999 (ENDED MARCH 31, 1999)
First Quarter............................................................ $ 4.03 $ 2.63
Second Quarter........................................................... 3.91 2.75
Third Quarter............................................................ 4.81 2.00
Fourth Quarter........................................................... 6.50 3.69
FISCAL 2000 (ENDING MARCH 31, 2000)
First Quarter (through June 8, 1999)..................................... $ 6.97 $ 4.84
</TABLE>
On June 8, 1999, the last recorded sale price of our common stock on the
Nasdaq National Market was $5.00 per share. On March 31, 1999, there were 810
stockholders of record.
17
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999:
- our actual capitalization; and
- our as adjusted capitalization to give effect to the receipt of the
estimated net proceeds from the sale of shares of common stock
at an assumed offering price of $ per share.
You should read this information together with our consolidated financial
statements and the notes to those statements included elsewhere in this
prospectus.
The number of shares outstanding after the offering excludes:
- 11,421,526 shares issuable upon exercise of outstanding options under our
Stock Option Plans at a weighted average exercise price of $3.24 per
share;
- 1,564,662 shares available for issuance under our 1994 Employee Stock
Purchase Plan; and
- 5,546,670 shares available for issuance under our Stock Option Plans.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized; no shares issued and
outstanding.......................................................................... -- --
Common stock, $0.01 par value; 50,000,000 shares authorized; 29,760,527 shares issued
and 25,540,242 shares outstanding, actual; shares issued and shares
outstanding, as adjusted............................................................. $ 297
Additional paid-in capital............................................................... 161,975
Accumulated other comprehensive loss..................................................... (255)
Accumulated deficit...................................................................... (127,840)
Treasury stock, at cost, 4,220,285 shares................................................ (14,062)
---------- -----------
Total stockholders' equity............................................................. 20,115
---------- -----------
Total capitalization................................................................. $ 20,115
---------- -----------
---------- -----------
</TABLE>
18
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock you pay in this offering and the net tangible book value per share
of our common stock immediately after this offering. Our net tangible book value
as of March 31, 1999 was $19.1 million or approximately $0.75 per share of
common stock. Net tangible book value per share represents the amount of our
total tangible assets less total liabilities, divided by the number of shares of
common stock outstanding. After giving effect to the sale of the
shares of common stock offered by us in this offering at an assumed
public offering price of $ per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us, our net
tangible book value as of March 31, 1999 would have been $ or
approximately $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to new investors of
common stock in this offering. The following table illustrates this dilution on
a per share basis:
<TABLE>
<CAPTION>
Assumed public offering price per share...................................... $
<S> <C> <C>
Net tangible book value per share as of March 31, 1999................... $ 0.75
Increase per share attributable to new investors.........................
---------
Net tangible book value per share after the offering.........................
---------
Dilution per share to new investors.......................................... $
---------
---------
</TABLE>
The foregoing discussion and table assume no exercise of any stock options
outstanding as of March 31, 1999. As of March 31, 1999, there were options
outstanding to purchase 11,421,526 shares of common stock at a weighted average
exercise price of $3.24 per share. To the extent any of these options are
exercised, there will be further dilution to investors.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected consolidated financial data set forth below
together with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the notes
to those statements included elsewhere in this prospectus. The consolidated
statements of operations data for the years ended March 31, 1997, 1998 and 1999
and the consolidated balance sheet data at March 31, 1998 and 1999 are derived
from our consolidated financial statements, which have been audited by KPMG LLP,
independent auditors, and are included elsewhere in this prospectus. The
consolidated balance sheet data at March 31, 1997 are derived from our
consolidated financial statements that have been audited by KPMG LLP not
included herein. The consolidated statements of operations data for the three
months ended March 31, 1998 and 1999 are derived from unaudited consolidated
financial statements not included in this prospectus and include, in the opinion
of management, all adjustments consisting only of normal recurring adjustments,
that we consider necessary for the fair presentation of our financial position
and results of operations for those periods.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED MARCH 31,
------------------------------- ------------------------
1997 1998 1999 1998 1999
--------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
SOFTWARE PUBLISHING
Revenues.......................................................... $ 9,540 $ 9,429 $ 48,019 $ 1,550 $ 23,191
Cost of revenues.................................................. 5,397 3,916 13,778 570 5,592
--------- --------- --------- ----------- -----------
Gross profit...................................................... 4,143 5,513 34,241 980 17,599
Operating expenses:
Research and development........................................ 23,717 16,483 25,939 4,732 7,000
Sales and marketing............................................. 5,309 5,612 13,497 2,125 6,165
General and administrative...................................... 6,917 6,399 8,900 830 1,889
In-process research and development............................. 7,700 -- -- -- --
--------- --------- --------- ----------- -----------
Total operating expenses...................................... 43,643 28,494 48,336 7,687 15,054
--------- --------- --------- ----------- -----------
Operating income (loss)........................................... (39,500) (22,981) (14,095) (6,707) 2,545
Net interest and other income (expense)........................... 2,115 1,874 1,119 505 (16)
--------- --------- --------- ----------- -----------
Income (loss) before taxes........................................ $ (37,385) $ (21,107) $ (12,976) $ (6,202) $ 2,529
--------- --------- --------- ----------- -----------
HARDWARE SYSTEMS
Revenues:
Royalties and license fees...................................... $ 79,167 $ 29,371 $ -- $ -- $ --
Development systems and other................................... 3,643 90 -- -- --
--------- --------- --------- ----------- -----------
Total revenues................................................ 82,810 29,461 -- -- --
Cost of revenues:
Royalties and license fees...................................... 456 -- -- -- --
Development systems and other................................... 2,136 43 -- -- --
--------- --------- --------- ----------- -----------
Total cost of revenues........................................ 2,592 43 -- -- --
Gross profit...................................................... 80,218 29,418 -- -- --
--------- --------- --------- ----------- -----------
Operating expenses:
Research and development........................................ 18,360 2,664 -- -- --
Sales and marketing............................................. 2,734 -- -- -- --
General and administrative...................................... 4,393 923 -- -- --
--------- --------- --------- ----------- -----------
Total operating expenses...................................... 25,487 3,587 -- -- --
--------- ---------
Operating income.................................................. 54,731 25,831 -- -- --
Gain on sale of hardware systems assets........................... -- 18,032 -- -- --
--------- --------- --------- ----------- -----------
Income before taxes............................................... $ 54,731 $ 43,863 $ -- $ -- $ --
--------- --------- --------- ----------- -----------
CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS
Income (loss) before taxes........................................ $ 17,346 $ 22,756 $ (12,976) $ (6,202) $ 2,529
Income and foreign withholding taxes.............................. 4,075 219 191 136 (23)
--------- --------- --------- ----------- -----------
Net income (loss)................................................. $ 13,271 $ 22,537 $ (13,167) $ (6,338) $ 2,552
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Basic net income (loss) per share................................. $ 0.48 $ 0.85 $ (0.51) $ (0.25) $ 0.10
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
Diluted net income (loss) per share............................... $ 0.46 $ 0.83 $ (0.51) $ (0.25) $ 0.09
--------- --------- --------- ----------- -----------
--------- --------- --------- ----------- -----------
OTHER DATA:
Products released................................................. 4 3 14 1 5
Products sold..................................................... 11 7 17 7 17
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........................................... $ 33,617 $ 34,584 $ 13,851
Working capital............................................................................. 14,067 28,769 15,675
Total assets................................................................................ 44,954 40,447 40,488
Short-term debt............................................................................. -- -- 9,505
Total long-term liabilities................................................................. 1,715 -- --
Total stockholders' equity.................................................................. 21,399 33,578 20,115
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND
RESULTS OF OPERATIONS TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES TO THOSE STATEMENTS INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS
PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS. SEE "RISK
FACTORS."
OVERVIEW
We are a leading developer and publisher of branded interactive
entertainment software. Our software products operate on several multimedia
platforms including personal computers, the Sony PlayStation and Nintendo N64
video game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color and are planning to develop software for next-generation
video game consoles. We plan to continue to extend our popular brands across
multiple categories, or "genres," and platforms. These brands include Army Men,
BattleTanx, Family Game Pack, Heroes of Might and Magic, High Heat Baseball, and
Might and Magic, many of which have won industry awards. Our software products
cover a variety of genres, including action, strategy, adventure/role playing,
sports and family entertainment. We develop our software internally in our
company-owned studios and have created an extensive portfolio of versatile
technologies that allow us to develop new software titles more quickly and
cost-effectively.
We were incorporated in California in September 1991 and commenced
operations in October 1991. In April 1993, we reorganized as a Delaware holding
company and acquired an entity that had developed our hardware technology. We
acquired Cyclone Studios in November 1995, Archetype Interactive Corporation in
May 1996 and certain assets of New World Computing, Inc. in June 1996. We
currently have an active subsidiary in the United Kingdom, 3DO Europe, Ltd.
Software publishing revenues consist primarily of revenues from the sale of
software titles published and distributed by us and license fees for software
developed by us and manufactured, marketed and distributed by third party
licensees in Europe, Latin America, Asia and Australia. Software publishing
revenues are net of allowances for returns, price protection and discounts.
Software publishing revenues are recognized at the time of shipment, provided
that we have no related outstanding obligations. Software licensing revenues are
typically recognized when we fulfill our obligations, such as delivery of the
product master under a distribution agreement. Per-copy royalties that exceed
guaranteed minimum royalty levels are recognized as earned. We recognize revenue
from our Meridian 59 online service monthly upon customers' usage.
Cost of software publishing revenues consists primarily of direct costs
associated with software titles, including manufacturing costs and royalties
payable to platform developers such as Sony and Nintendo and, to a lesser
extent, royalties payable to third-party developers. Cost of revenues for
interactive entertainment software varies significantly by platform. Cost of
revenues for video game console titles is typically higher than cost of revenues
for personal computer titles due to relatively higher manufacturing and royalty
costs associated with these products. Cost of revenues for personal computer
titles primarily consists of the cost of the CD-ROM and packaging.
Research and development expenses consist primarily of personnel and support
costs. Internal development costs of software titles are expensed as incurred
and included in research and development expenses.
Sales and marketing expenses primarily consist of advertising and retail
marketing support, sales commissions, sales and marketing personnel costs and
other costs.
21
<PAGE>
We expect to continue to incur substantial expenditures to develop our
business in the future. We expect that our operating results will fluctuate as a
result of a wide variety of factors, including the factors described in "Risk
Factors--Our quarterly operating results frequently vary significantly."
As of March 31, 1999, we had cumulative federal net operating loss
carryforwards of $100.6 million for federal income tax purposes, which if not
offset against future taxable income, will expire in fiscal 2009 through 2019.
As of March 31, 1999, we had cumulative California net operating loss
carryforwards of $6.8 million, which if not offset against future taxable
income, will expire in fiscal 2002 through 2004.
EXIT FROM HARDWARE SYSTEMS OPERATIONS
Our initial business model was to license our technology to hardware
manufacturers and software developers to enable the establishment of a 32-bit,
CD-ROM-based, interactive video entertainment platform, the 3DO Interactive
Multiplayer system. The 3DO Multiplayer was launched in October 1993, but failed
to achieve significant market acceptance. All of our hardware licensees have
ceased manufacturing and distributing the 3DO Multiplayer and all third-party
software development for the platform has also ceased.
In December 1995, we licensed our 64-bit next-generation M2 technology to
Matsushita Electric Industrial Co., Ltd. for an upfront license fee of $100.0
million plus royalties. Revenue from this transaction was recognized using the
percentage-of-completion method. In April 1996, we agreed to modify the M2
system design in exchange for approximately $4.5 million paid in installments in
fiscal 1997 and 1998. In July 1997, we relinquished our rights to:
- develop and distribute software and peripherals compatible with hardware
products developed by Matsushita or its sublicensees that incorporate the
M2 technology;
- develop and distribute M2-compatible authoring systems; and
- receive royalties with respect to Matsushita's potential use of the M2
technology.
In exchange, Matsushita returned to us approximately 3.2 million shares of
our common stock. We recognized $11.0 million of non-cash revenues in connection
with this transaction in fiscal 1998.
In February 1996, we agreed to modify the three-dimensional graphics portion
of our M2 technology related to semiconductors and licensed it to Cirrus Logic,
Inc. We received $2.5 million that we recognized as revenue under the
percentage-of-completion method. In October 1997, in settlement of litigation,
Cirrus paid us to satisfy its past and future license fees, and advance royalty
and engineering service payment obligations. We recognized this payment as
revenue in fiscal 1998.
In June 1997, we sold or licensed most of the assets of our former hardware
systems group to Samsung Electronics Co. Ltd. for $20.0 million. We recognized a
gain of $18.0 million associated with the sale of these assets. We then focused
our operations on developing and publishing branded interactive entertainment
software.
22
<PAGE>
QUARTERLY RESULTS OF SOFTWARE PUBLISHING OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data related to our software publishing operations for each of the
eight quarters ended March 31, 1999, as well as such data expressed as a
percentage of our software publishing revenues for the quarters presented. This
unaudited quarterly information related to our software publishing operations
has been prepared on the same basis as our annual consolidated financial
statements and, in the opinion of our management, reflects all normal recurring
adjustments that we consider necessary for a fair presentation of the
information for the periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.............................. $ 2,311 $ 1,848 $ 3,720 $ 1,550 $ 9,533 $ 5,024 $10,271 $23,191
Cost of revenues...................... 1,022 864 1,460 570 2,519 2,043 3,624 5,592
-------- --------- -------- --------- -------- --------- -------- ---------
Gross profit.......................... 1,289 984 2,260 980 7,014 2,981 6,647 17,599
Operating expenses:
Research and development............ 3,838 3,788 4,125 4,732 5,523 6,051 7,365 7,000
Sales and marketing................. 1,077 1,211 1,199 2,125 1,875 2,476 2,981 6,165
General and administrative.......... 1,715 1,932 1,922 830 2,488 2,267 2,256 1,889
-------- --------- -------- --------- -------- --------- -------- ---------
Total operating expenses.......... 6,630 6,931 7,246 7,687 9,886 10,794 12,602 15,054
-------- --------- -------- --------- -------- --------- -------- ---------
Operating income (loss)............... (5,341) (5,947) (4,986) (6,707) (2,872) (7,813) (5,955) 2,545
Net interest and other income
(expense)........................... 189 628 552 505 435 377 323 (16)
-------- --------- -------- --------- -------- --------- -------- ---------
Income (loss) before taxes............ $(5,152) $(5,319) $(4,434) $(6,202) $(2,437) $(7,436) $(5,632) $ 2,529
-------- --------- -------- --------- -------- --------- -------- ---------
-------- --------- -------- --------- -------- --------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF REVENUES
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................... 44.2 46.8 39.2 36.8 26.4 40.7 35.3 24.1
--------- --------- --------- --------- --------- --------- --------- ---------
Gross profit........................ 55.8 53.2 60.8 63.2 73.6 59.3 64.7 75.9
Operating expenses:
Research and development.......... 166.1 205.0 110.9 305.3 57.9 120.4 71.7 30.2
Sales and marketing............... 46.6 65.5 32.2 137.1 19.7 49.3 29.0 26.6
General and administrative........ 74.2 104.5 51.7 53.5 26.1 45.1 22.0 8.1
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating expenses........ 286.9 375.0 194.8 495.9 103.7 214.8 122.7 64.9
--------- --------- --------- --------- --------- --------- --------- ---------
Operating income (loss)............. (231.1) (321.8) (134.0) (432.7) (30.1) (155.5) (58.0) 11.0
Net interest and other income
(expense)......................... 8.2 34.0 14.8 32.6 4.5 7.5 3.2 (0.1)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes.......... (222.9)% (287.8)% (119.2)% (400.1)% (25.6)% (148.0)% (54.8)% 10.9%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
23
<PAGE>
REVENUES. While our revenues have fluctuated from quarter to quarter,
revenues in each quarter of fiscal 1999 were substantially higher than in the
comparable quarters of fiscal 1998. During fiscal 1999 we introduced 14 new
products, including our first products for the Sony PlayStation and Nintendo N64
video game consoles. Fluctuations between quarters during both of these years
were primarily due to the number of new products released in a quarter and
seasonal consumer purchasing patterns. We expect our revenues to continue to
fluctuate on a quarterly basis in the future.
COST OF REVENUES. Cost of revenues as a percentage of sales has generally
declined, except in the second quarter of fiscal 1999, when it increased due to
the number of new products released for the Sony PlayStation. Cost of revenues
is typically higher for new products on this platform due to royalty and product
costs paid to Sony and Nintendo. Gross margin in the first and fourth quarters
of fiscal 1999 was higher primarily due to higher sales of titles for the
personal computer, which typically have higher gross margin.
RESEARCH AND DEVELOPMENT. In fiscal 1998, we shipped three new products,
all for the personal computer. During fiscal 1999, we shipped 14 new products
for all of the three major platforms. We have announced plans to ship as many as
25 new products in fiscal 2000. The increase in our research and development
expense in each of the four quarters in fiscal 1999 compared to the same
quarters in fiscal 1998 is primarily due to the increase in infrastructure to
support our growth in new product releases.
SALES AND MARKETING. Sales and marketing expenses have fluctuated from
quarter to quarter as new products are released. Sales and marketing expenses
were higher during each quarter of fiscal 1999 compared with the same quarters
in fiscal 1998, primarily due to increased releases of new products in fiscal
1999, and to a lesser extent, product mix because all of our products released
in fiscal 1998 were for the personal computer market, which typically require
lower advertising and marketing expenditures. In fiscal 1999, four of the 14 new
products we released were for the video game console platforms.
GENERAL AND ADMINISTRATIVE. During the first and second quarters of fiscal
1998 and 1999, we incurred seasonal expenses associated with our year-end
reporting and preparation of our annual report. These seasonal expenses resulted
in higher expenses as a percentage of revenues compared to the third and fourth
fiscal quarters.
NET INTEREST AND OTHER INCOME (EXPENSE). Software publishing has incurred
negative cash flows during each of the eight quarters ended March 31, 1999, and
we primarily have relied upon cash generated from the sale or license of
hardware systems technology to fund software publishing operations. (See notes G
and H of the notes to the consolidated financial statements.) For presentation
purposes all net interest and other income (expense) has been allocated to
software publishing. The decrease in net interest and other income (expense)
during the last three quarters in fiscal 1999 compared to the same quarters in
fiscal 1998 reflects the decrease in cash and short-term investment balances.
RESULTS OF SOFTWARE PUBLISHING OPERATIONS
The following table sets forth certain consolidated statements of operations
data related to our software publishing operations for fiscal 1997, 1998 and
1999 expressed as a percentage of revenues.
24
<PAGE>
We have not included similar information for our hardware systems operations
because we believe that such information is not helpful in understanding our
current operations.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................... 100.0% 100.0% 100.0%
Cost of revenues....................................................... 56.6 41.5 28.7
--------- --------- ---------
Gross profit........................................................... 43.4 58.5 71.3
Operating expenses:
Research and development............................................. 248.6 174.8 54.0
Sales and marketing.................................................. 55.6 59.5 28.1
General and administrative........................................... 72.5 67.9 18.5
In-process research and development.................................. 80.7 -- --
--------- --------- ---------
Total operating expenses........................................... 457.4 302.2 100.6
--------- --------- ---------
Operating loss......................................................... (414.0) (243.7) (29.3)
Net interest and other income.......................................... 22.2 19.9 2.3
--------- --------- ---------
Loss before taxes...................................................... (391.8)% (223.8)% (27.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
SOFTWARE PUBLISHING
REVENUES. Revenues increased by $38.6 million, or 409%, to $48.0 million in
fiscal 1999 from $9.4 million in fiscal 1998. This increase was due primarily to
an increase in the number of new titles released to 14 new titles in fiscal 1999
from three new titles in fiscal 1998. Revenues in fiscal 1999 consisted
primarily of sales of interactive entertainment software for the personal
computer, and to a lesser extent, the Sony PlayStation and the Nintendo N64.
Revenues in fiscal 1998 consisted primarily of sales of personal computer
software.
COST OF REVENUES. Cost of revenues increased by $9.9 million, or 252%, to
$13.8 million in fiscal 1999 from $3.9 million in fiscal 1998. This increase was
primarily due to the increased number of software titles published in fiscal
1999 compared with fiscal 1998. Gross margin increased to 71.3% in fiscal 1999
from 58.5% in fiscal 1998. This increase was due primarily to the release of
titles in fiscal 1999 which had higher per unit wholesale prices and lower
allowances for returns and price protection.
RESEARCH AND DEVELOPMENT. Research and development expenses increased by
approximately $9.5 million, or 57%, to $25.9 million in fiscal 1999 from $16.5
million in fiscal 1998. This increase was primarily due to higher on-going
development expenses as we continued to expand our product development efforts
and began to develop products for video game console systems in addition to the
personal computer. Research and development expenses as a percentage of revenues
decreased to 54.0% in fiscal 1999 from 174.8% in fiscal 1998 as revenues grew at
a faster rate than research and development expenses due in part to cost savings
from the use of our proprietary tools and technology in developing new products.
SALES AND MARKETING. Sales and marketing expenses increased $7.9 million,
or 141%, to $13.5 million in fiscal 1999 from $5.6 million in fiscal 1998. This
increase was primarily due to marketing expenses related to the release of ten
personal computer titles, three Sony PlayStation titles and one Nintendo N64
title in fiscal 1999, compared to the release of three new personal computer
titles in fiscal 1998. We also incurred substantial marketing expenses for our
television ad campaigns for BattleTanx for the N64 and Army Men 3D for the
PlayStation in fiscal 1999. Sales and marketing expenses as a percentage of
revenues decreased to 28.1% in fiscal 1999 from 59.5% in fiscal 1998 as revenues
grew at a faster rate than sales and marketing expenses due in part to sales of
new products
25
<PAGE>
in brands for which we were able to take advantage of brand name recognition
generated by our previous advertising campaigns. We anticipate that sales and
marketing expenses will increase in the future as additional software titles are
released.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by $2.5 million, or 39%, to $8.9 million in fiscal 1999, from $6.4 million in
fiscal 1998. The increase was primarily due to the increase in administrative
and overhead expenses as we continued to build the infrastructure to support the
release of new titles for the personal computer, Sony PlayStation and Nintendo
N64 platforms. We expect that general and administrative expenses will continue
to increase in the future.
NET INTEREST AND OTHER INCOME. Software publishing has incurred negative
cash flows during fiscal 1998 and 1999, and we primarily have relied upon cash
generated from the sale or license of hardware systems technology to fund
software publishing operations. (See notes G and H of the notes to the
consolidated financial statements.) For presentation purposes all net interest
and other income (expense) has been allocated to software publishing. Net
interest and other income decreased by $0.8 million to $1.1 million in fiscal
1999 from $1.9 million in fiscal 1998. The decrease in net interest and other
income is primarily due to the decrease in cash and short-term investment
balances.
HARDWARE SYSTEMS
In fiscal 1998, we licensed and sold substantially all of the assets of our
former hardware systems group.
FISCAL 1998 COMPARED TO FISCAL 1997
SOFTWARE PUBLISHING
REVENUES. Revenues were relatively consistent at $9.4 million in fiscal
1998 and $9.5 million in fiscal 1997. We released three new products in fiscal
1998 compared with four new products in fiscal 1997.
COST OF REVENUES. Cost of revenues decreased by $1.5 million, or 27%, to
$3.9 million in fiscal 1998 from $5.4 million in fiscal 1997. Gross margin
increased to 58.5% in fiscal 1998 from 43.4% in fiscal 1997. This absolute
dollar decrease and gross margin increase were primarily due to higher royalty
expense incurred in fiscal 1997 because most of the titles released in fiscal
1997 required royalty payments to third-party developers, compared to only two
of the four titles released in fiscal 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
$7.2 million, or 31%, to $16.5 million in fiscal 1998 from $23.7 million in
fiscal 1997. This decrease was primarily due to a reduction in headcount in
December 1997.
SALES AND MARKETING. Sales and marketing expenses increased by $0.3 million
or 6%, to $5.6 million in fiscal 1998 from $5.3 million in fiscal 1997. Sales
and marketing expenses remained relatively constant from fiscal 1997 to fiscal
1998 primarily due to relatively constant software publishing revenues and
number of new products released.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
by $0.5 million, or 7%, to $6.4 million in fiscal 1998 from $6.9 million in
fiscal 1997. This decrease was primarily due to a reduction in headcount in
December 1997.
IN-PROCESS RESEARCH AND DEVELOPMENT. In June 1996, we purchased certain
assets and assumed certain liabilities of New World Computing, Inc., a personal
computer platform game developer in exchange for one million shares of our
common stock and $5.0 million in cash. We accounted for the acquisition using
the purchase method of accounting. A one-time charge of $7.7 million was
recorded in the first quarter of fiscal 1997, representing the amount of the
purchase price assigned to in-process
26
<PAGE>
research and development because the acquired technology had not yet reached
technological feasibility and had no other future alternative uses. At the time
of the acquisition, a total of 12 products were in development. We estimated
that the average aggregate percentage of completion for those products was
approximately 47% at the time of the acquisition. Of the 12 products in
development, four were subsequently cancelled and four were completed and
released, but generated minimal revenues. The remaining four products were
completed and released with modest market success. However, the average
percentage of completion for those products was only approximately 33% at the
time of the acquisition. We used an income approach in valuing the acquired
in-process research and development. The income approach reflects the present
value of the operating cash flows generated by the in-process research and
development after taking into account the cost to complete the projects, the
relative risk of the projects and an appropriate discount rate to reflect the
time value of investment capital. Also included as part of the purchase price
were intangibles valued at $3.1 million, which are being amortized on a
straight-line basis over a period of approximately five years.
NET INTEREST AND OTHER INCOME. Net interest and other income decreased by
$0.2 million to $1.9 million in fiscal 1998 from $2.1 million in fiscal 1997.
This decrease in net interest and other income is primarily due to a decrease in
cash and short-term investment balances as a result of cash being used in our
operations.
HARDWARE SYSTEMS
ROYALTIES AND LICENSE FEES. Royalties and license fee revenues decreased by
$49.8 million, or 63%, to $29.4 million in fiscal 1998 from $79.2 million in
fiscal 1997. Revenues recognized in connection with the M2 agreement with
Matsushita were $23.0 million in fiscal 1998 and $73.5 million in fiscal 1997.
Royalty and license fee revenues also included $3.5 million related to our
agreement with Cirrus Logic in fiscal 1998 and $2.5 million in fiscal 1997.
DEVELOPMENT SYSTEMS AND OTHER. Development systems and other revenues
decreased by $3.6 million, or 98%, to $0.1 million in fiscal 1998 from $3.6
million in fiscal 1997. This decrease was primarily due to the sale of our
hardware systems group to Samsung in June 1997.
COST OF REVENUES. Cost of royalties and license fees revenues was $0.5
million in fiscal 1997. We did not record cost of royalties and license fees
revenues in fiscal 1998 due to the sale of our hardware systems group in fiscal
1998.
GAIN ON SALE OF HARDWARE SYSTEMS ASSETS. In fiscal 1998, we sold or
licensed most of the assets of our 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, realizing a gain of
$18.0 million.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are cash and cash equivalent balances and
short-term investment balances, which were $13.9 million at March 31, 1999 and
$34.6 million at March 31, 1998. This decrease was primarily due to net cash
used in operations of $27.1 million and capital expenditures of $2.5 million in
fiscal 1999.
In July 1997, our board of directors approved a stock repurchase plan which
authorized us to purchase up to $5.0 million of our stock on the open market or
in block trades, from time to time as management deems appropriate, if the
market price of our stock remains below certain levels. As of March 31, 1999, we
had reacquired over one million shares. The repurchase plan will remain in
effect until rescinded by our board of directors.
27
<PAGE>
In fiscal 1999, we entered into two line of credit agreements. Our agreement
with Coast Business Credit allows us to borrow up to $20.0 million or 60% of
qualified accounts receivable. Borrowings under this line of credit bear
interest at a rate of prime plus 2.0% (9.75% as of March 31, 1999). This line of
credit expires in March 2002. Our agreement with Coast Business Credit contains
financial covenants. See note P of the notes to consolidated financial
statements. As of March 31, 1999, no borrowings were outstanding under this
facility. Our agreement with Merrill Lynch & Co. allows us to borrow up to $20.0
million or 90% of the cash balance in the pledged collateral account. Borrowings
under this line of credit bear interest at a rate of the 30-day commercial paper
rate plus 2.10% (6.94% as of March 31, 1999). This line of credit expires in
November 2000. As of March 31, 1999, the outstanding loan balance was
approximately $9.5 million. On April 1, 1999, we repaid the outstanding
borrowings to Merrill Lynch and borrowed $9.5 million from Coast Business
Credit.
We expect to continue to incur negative cash flows in fiscal 2000, primarily
due to our continued investment in the internal development of entertainment
software titles that are scheduled to be released in the next fiscal year and
beyond, which include additional capital expenditures primarily for computer
equipment. In addition, we anticipate that a substantial portion of our
operating expenses in fiscal 2000 will be related to marketing and advertising,
as we continue to raise the brand awareness of our products. We anticipate that
the net proceeds of this offering, cash from operations, and available
borrowings under our credit facilities should be sufficient to fund our
activities for at least the next 12 months. We cannot be certain that additional
capital will not be required in fiscal 2000 because cash flows will be affected
by the rate at which we release products 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 of our products. The level
of financing required beyond fiscal 2000 will depend on these and other factors.
If we need to raise additional funds through public or private financing, we
cannot be certain that additional financing will be available or that, if
available, it will be available on terms acceptable to us. 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, we may be required to curtail our operations significantly or to
seek funds through arrangements with strategic partners or other parties that
may require us to relinquish material rights to certain of our products,
technologies or potential markets.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market rate risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments in our investment portfolio. We place our investments with high
quality issuers and, by policy, limit the amount of credit exposure to any one
issuer. We are averse to principal loss and ensure the safety and preservation
of our invested funds by limiting default, market and reinvestment risk. We
classify our cash equivalents and short-term investments as fixed-rate if the
rate of return on such instrments remains fixed over their term. These
fixed-rate investments include fixed-rate U.S. government securities, municipal
bonds, time deposits and certificates of deposit. We classify our cash
equivalents and short-term investments as variable-rate if the rate of return on
such investments varies based on the change in a predetermined index or set of
indices during their term. These variable-rate investments primarily include
money market accounts held at various securities brokers and banks. The table
below presents the amounts and related weighted interest rates of our investment
portfolio at March 31, 1999:
<TABLE>
<CAPTION>
AVERAGE
SHORT-TERM INVESTMENTS INTEREST RATE COST FAIR VALUE
- ------------------------------------------------------------------- --------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed-rate......................................................... 6.00% $ 11,538 $ 11,573
Variable-rate...................................................... 4.18 22 22
</TABLE>
28
<PAGE>
The aggregate fair value of the Company's investment in short-term
investments as of March 31, 1999, by contractual maturity date, consisted of the
following:
<TABLE>
<CAPTION>
AGGREGATE
FAIR
VALUE
-------------
(IN
THOUSANDS)
<S> <C>
Due in one year or less........................................................ $ 9,602
Due in one to three years...................................................... 1,993
-------------
$ 11,595
-------------
-------------
</TABLE>
YEAR 2000 COMPLIANCE
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 to properly recognize and process data related to the Year
2000. We rely on such computer systems, applications and devices in operating
and monitoring all major aspects of our business, including, but not limited to,
our financial systems (such as general ledger, billing, accounts payable and
payroll modules), customer service, internal networks and telecommunications
equipment, and end products. We also rely, directly and indirectly, on the
external systems of various independent business enterprises, such as our
customers, licensors, contract manufacturers, suppliers, creditors, and
financial organizations, and of governments, both domestically and
internationally, for the accurate exchange of data and related information.
We have formed a Year 2000 working group to organize, manage, and report on
our Year 2000 remediation efforts. The Year 2000 working group consists of
approximately 20 individuals from all levels of management and covering all
areas of our operations. We have retained an experienced Year 2000 project
manager to lead this working group.
The Year 2000 working group has identified a four-phase approach to
determining, addressing, and reporting on Year 2000 readiness. This approach is
expected to identify areas of operations that could reasonably be expected to
have adverse effects on us should they fail to adequately address their own Year
2000 issues.
Phase 1 (Inventory) involves a comprehensive inventory of systems, software,
and business relationships. We have substantially completed inventorying and
analyzing our remaining centralized computer and embedded systems to identify
any potential Year 2000 issues and will take corrective action based on the
results of analysis. We have inventoried a representative sample of our desktop
hardware and software and consider this phase essentially complete. An automated
final sweep of all desktop hardware and software is scheduled during July 1999.
This final sweep is a new portion of this Phase, added to ensure completeness.
Phase 2 (Risk Assessment) requires detailed analysis of each item or
relationship identified in Phase 1.
Phase 3 (Remediation Planning) creates project plans to correct or address
individual system, software, or business partner issues identified in the first
two phases. We are replacing or upgrading hardware and software that are known
to be Year 2000 non-compliant. Phase 4 (Remediation) implements those plans,
correcting or replacing systems, software, or business partners as required. We
have upgraded our financial and accounting systems to the most recent version.
We believe our database and financial applications are Year 2000 compliant.
These systems are used to automate order entry, accounts receivable, accounts
payable, purchasing, fixed asset and general ledger functions. We have upgraded
our electronic data interchange (EDI) systems to be Year 2000 compliant and have
participated in National Retail Federation (NRF) testing. The successful
completion of the NRF testing is reflected on the NRF Web site.
29
<PAGE>
As of March 31, 1999, our overall progress by phase was as follows:
<TABLE>
<CAPTION>
PERCENTAGE COMPLETED AS OF EXPECTED
PHASE MARCH 31, 1999 COMPLETION DATE
- ------------------------------------ ----------------------------- ---------------
<S> <C> <C> <C>
Phase 1--Inventory 98% July 1999
Phase 2--Risk Assessment 85% August 1999
Phase 3--Remediation Planning 40% August 1999
Phase 4--Remediation 15% October 1999
</TABLE>
We are surveying our critical suppliers, licensees, contract manufacturers,
distributors, and other vendors to determine if their operations and the
products and services that they provide to us are Year 2000 compliant. We intend
to mitigate our risks with respect to the failure of third parties to be Year
2000 ready, including developing contingency plans, where practical. However,
such failures remain a possibility and could harm our business. To date, we have
received responses from more than half of our critical suppliers, manufacturers,
distributors and other vendors. These responses have been analyzed as they
arrive. We are in the process of contacting significant parties who have not
responded.
In several cases, our business with our customers and suppliers is conducted
through the use of EDI systems. In each case where EDI is used, we are in the
process of conducting electronic testing with these businesses. We expect that
this electronic testing will be completed by August 1999.
Due to the nature of our products, many of them contain no date-related
processing. Therefore, many of them should not be affected by the Year 2000 date
change. However, our Year 2000 working group is in the process of developing
tests for all of our significant products to determine the effects of the Year
2000 change. We have developed tests for these products and expect to complete
testing of all of our current products by July 1999. While we expect to find few
date-related issues with our products, we have not fully identified such impact
and may or may not incur expenses related to the remediation of Year 2000
problems in our existing products.
COST
We expect to incur costs during the next three quarters related to the
planning and remediation described above. Our current estimate (including the
Year 2000 issues identified to date) is that the costs associated with the Year
2000 issue should not have a material adverse effect on our results of
operations or financial position in any quarter. However, we are not certain
that we have fully identified such impact or whether we can resolve it without
disruption of our business or incurring significant expense. We have incurred
approximately $0.4 million in expenditures to date related to the Year 2000
issue.
RISKS AND UNCERTAINTIES
If we fail to find and correct a significant Year 2000 issue, our normal
business operations could be interrupted. We currently expect to substantially
complete remediation and validation of our internal systems, as well as to
develop contingency plans for certain internal systems, by the end of the first
quarter of fiscal 2000. However, if implementation of replacement upgraded
systems or software is delayed, if significant new non-compliance issues are
identified, or if contingency plans fail, our results of operations or financial
condition could be adversely affected. Our risks include the following:
SOFTWARE DEVELOPMENT SCHEDULES. Our software development teams rely on a
variety of systems and software tools to develop products. If these systems and
tools are not functioning properly, product release schedules, which span the
Year 2000 rollover, could be adversely affected. We rely on external contractors
to develop components of some of our products. If a contractor with a
significant contribution to a project should fail to adequately address the Year
2000 issue, this could have adverse effects on the development schedule for one
or more of our products.
30
<PAGE>
FACILITIES OPERATIONS. We rely on systems and software to run our security
and telecommunications systems. Although both of these components at all of our
locations have been included in the Year 2000 plan, a failure of either of these
systems could prevent normal work at one or more of our locations.
FINANCIAL AND ACCOUNTING SOFTWARE. We have upgraded our financial and
accounting systems to the most recent available version. We believe our database
and financial applications are Year 2000 compliant. Although all of these
business applications have been (and will continue to be) thoroughly evaluated
for year 2000 compliance, a failure in one or more of these software packages
could delay our ability to process customer orders, billing, payroll, accounts
payable and financial statements. Consequently, we may not be able to file our
financial reports with the Securities and Exchange Commission on a timely basis,
which could negatively affect our stock price.
PRODUCTION AND FULFILLMENT FACILITY. We use a third party fulfillment
center to assemble and distribute our products. Even though our third party
fulfillment center is in the process of updating its computer systems to be Year
2000 compliant, we cannot be certain that its computer systems will be operating
properly. In an event that its computer systems are not functioning properly due
to Year 2000 non-compliance and the third party cannot ship products to our
customers, our financial position and earnings will be severely impacted.
CONTINGENCY PLANS
We expect to develop contingency plans for key internal systems and critical
business partners by the end of the first quarter of fiscal 2000. This
contingency planning includes identifying additional vendors who could provide
similar goods and services on short notice. We expect these plans to reduce the
risk of interruption, delay or failure of key processes required for business
operations. However, failure of such plans remains a possibility and could have
a materially adverse impact on our results of operations or financial condition.
The statements regarding year 2000 issues above and in "Risk Factors--The
Year 2000 risk may adversely affect us" are "Year 2000 readiness disclosures"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
The protection of this Act does not apply to federal securities fraud actions.
IMPACT OF EUROPEAN MONETARY CONVERSION
We are aware of the issues associated with the changes in Europe resulting
from the formation of a European economic and monetary union (EMU). One change
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the euro, as of January 1, 1999, at
which date the euro became a functional legal currency of these countries.
During the next three years, business in the EMU member states will be conducted
in both the existing national currency, such as the French franc or the Deutsche
mark, and the euro. As a result, companies operating or conducting business in
EMU member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handling these
currencies, including the euro.
We are still assessing the impact that the conversion to the euro will have
on our internal systems, the sale of our products, and the European and global
economies. To date, we have conducted limited sales activities in the European
economies. However, we are planning to significantly expand our operations in
Europe in fiscal 2000. We will take appropriate corrective actions based on the
results of such assessment. We have not yet determined the cost related to
addressing this issue.
31
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires us to recognize all derivatives as either assets or liabilities on
the balance sheet and measure them at fair value. Gains and losses resulting
from changes in fair value would be accounted for depending on the use of the
derivative and whether it is designated and qualifies for hedge accounting. SFAS
No. 133 will be adopted by us by the first quarter of fiscal 2001 and is not
expected to have a material impact on our financial statements.
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP No. 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
We do not expect the adoption of SOP No. 98-1 to have a material impact on our
results of operations or financial condition.
32
<PAGE>
BUSINESS
OVERVIEW
We are a leading developer and publisher of branded interactive
entertainment software. Our software products operate on several multimedia
platforms including personal computers, the Sony PlayStation and Nintendo N64
video game consoles, and the Internet. We are also developing software for the
Nintendo Game Boy Color hand-held game and are preparing to develop software for
next-generation video game consoles. We plan to continue to extend our popular
brands across multiple categories, or "genres," and platforms. These brands
include Army Men, BattleTanx, Family Game Pack, Heroes of Might and Magic, High
Heat Baseball, and Might and Magic, many of which have won industry awards. Our
software products cover a variety of genres, including action, strategy,
adventure/ role playing, sports and family entertainment. We develop our
software internally in our company-owned studios and have created an extensive
portfolio of versatile technologies that allow us to develop new software
products more quickly and cost-effectively.
We distribute our products through a broad variety of retail outlets,
including mass merchants, warehouse club stores, computer and software retail
chains and other specialty retailers. We have significantly increased the number
of retail outlets that sell our products to over 20,000 in fiscal 1999 from
approximately 6,000 in fiscal 1998. Our largest retail customers in fiscal 1999
were Best Buy, Wal-Mart, Electronics Boutique, Babbage's, Toys "R" Us,
Blockbuster Video, Target, Sears, Hollywood Video, KayBee Toys and Kmart. We
have recently enhanced our sophisticated Web site to enable consumers to
directly purchase products from us and to obtain game tips and chat on-line
about our products.
Our software publishing revenues increased 409% to $48.0 million in fiscal
1999 from $9.4 million in fiscal 1998. In fiscal 1999, we released 14 new
products compared to three new releases in fiscal 1998. We are currently
developing over 25 new products that we expect to release in fiscal 2000. In the
quarter ended March 31, 1999, our net income was $2.6 million on revenues of
$23.2 million. In March 1999, we had three different titles in the top ten lists
of games sold, one on each of the Sony PlayStation, Nintendo N64 and personal
computer platforms, according to GameWeek and MCV magazines. We believe that
growth in our software revenues and number of new products released, as well as
achieving our first profitable quarter as a software company, demonstrate our
successful transformation from a video game console hardware company to a
developer and publisher of branded interactive entertainment software.
Our experienced management team is led by Trip Hawkins, our founder,
Chairman and Chief Executive Officer, who also founded Electronic Arts and
served as its Chairman and Chief Executive Officer.
INDUSTRY BACKGROUND
According to the Interactive Digital Software Association, an industry trade
association, the video game and personal computer game software market was the
fastest growing entertainment industry in the United States in 1998, surpassing
books, recorded music and movie box office receipts in percentage growth. The
NPD Group estimates that retail sales of interactive entertainment software in
the United States grew more than 25% to $4.9 billion in 1998 from $3.9 billion
in 1997.
Declining prices of video game consoles and personal computers and
lower-cost, higher-quality graphics processors and improved audio capabilities
have led to a growing installed base of platforms and greater demand for video
games. NPD estimates that a total of 20.9 million Sony PlayStation and Nintendo
N64 video game console systems have been sold as of April 1999. Growth in the
installed base of personal computers is also driving demand for interactive
entertainment software. International
33
<PAGE>
Data Corporation estimates that 46 million U.S. households owned a personal
computer in 1998, of which over 71% have played video games on their personal
computers.
The Internet provides a means by which consumers may play games and obtain
information regarding interactive entertainment software titles. Individuals may
play multiplayer server-based games that reside on Web sites and servers
maintained by software companies. Additionally, players may compete against each
other over the Internet using CD-ROM-based games having multi-player
capabilities that reside on their own personal computers. The Internet also
allows consumers to participate in chat rooms to discuss features and exchange
ideas regarding the games, download video clips and demos of some games and
purchase games online.
The interactive entertainment software market has experienced fluctuations
as a result of new product platform announcements or introductions. The
anticipation of next-generation video game platforms has historically resulted
in decreased sales of interactive entertainment software titles developed to
operate on currently available platforms. We believe that software developers
have historically been reluctant to develop software for next-generation
platforms until they believe the new platforms will be commercially successful.
Once a next-generation platform has achieved market acceptance, sales of
interactive entertainment software have historically increased. Nintendo has
stated that it is in the process of developing a next-generation video game
console system. Sony recently announced the creation of the next-generation
PlayStation game console, which it expects to introduce in late 2000. Currently,
a next-generation PlayStation game console is being designed to be backwards-
compatible with existing PlayStation software, allowing consumers to play their
old PlayStation games on the new console system. Furthermore, the typical retail
prices for the current versions of Sony and Nintendo video game consoles have
declined over the past few years, most recently from $149 to $129 in May 1999.
We believe that the backwards-compatibility feature and decreasing prices of
existing consoles may mitigate decreases in sales of older software products due
to anticipation of the introduction of next-generation video game consoles.
The interactive entertainment software market can generally be divided into
several game categories or genres. The most popular genres include action,
strategy, adventure/role playing, sports and family entertainment. According to
a May 1999 Game Week magazine reader survey, consumers consider factors such as
brand history, genre, interest of story, high quality graphics, high quality
sound, reliability, pricing, hardware compatibility and ease of learning when
purchasing interactive entertainment software. A limited number of titles have
typically captured a large share of the sales in the interactive entertainment
software market. This hit-driven nature of the market has often led to higher
production budgets for titles as well are more complex development and
production processes and longer development cycles. Publishers with a history of
producing hit titles have generally enjoyed a significant marketing advantage
because of their heightened brand recognition and customer loyalty. To
capitalize on this heightened brand recognition and customer loyalty, some
publishers have introduced sequels or line extensions of their hit titles.
Sequels are typically new releases of games based upon the original game concept
that also include new characters, settings and gameplay attributes. Line
extensions are typically new releases of games based upon the same successful
brands and offering the brand in a different genre and/or on additional
platforms.
We believe that the importance of the timely release of hit titles, as well
as the increased scope, complexity and expense of the product development and
production process, have increased the need for disciplined product development
processes that limit cost and schedule overruns and reduce development time. We
believe that this need has increased the importance of leveraging the
technologies, characters and story lines of past or existing hit titles into
additional interactive entertainment software products in order to spread
development costs among multiple products.
Competition for shelf space at mass merchants and software electronic stores
has intensified because these high volume retailers often stock only a limited
number of titles that are expected to sell
34
<PAGE>
large numbers of units. We believe retailers consider the historical performance
of games and may be more willing to stock sequels to successful brands rather
than unproven titles. Retailers are also seeking to distribute their advertising
budget across a small number of titles. We believe that these trends have
increased the importance of internally creating and building upon well-known
brands by releasing sequels and line extensions.
STRATEGY
Our objective is to enhance our position as a leading developer and
publisher of branded interactive entertainment software. The key elements of our
strategy are to:
BUILD UPON OUR RECOGNIZED PORTFOLIO OF HIGH-QUALITY BRANDS
Our product strategy is to extend our established interactive entertainment
software brands across multiple genres and platforms in order to better
differentiate our products to consumers and retailers. Each of our current
brands is based on a well-defined computer game environment, or "fantasy world."
We create fantasy worlds in our products that allow users to engage in
activities that they otherwise may be unable to perform, in settings to which
they may not otherwise have access. We develop products in the most popular
genres, which include action, strategy, adventure/role playing, sports and
family entertainment. We believe that consumers who have enjoyed game playing in
a distinctive fantasy world are more likely to buy other products based on the
same or a similar fantasy world. We offer consumers of our products both sequels
and line extensions of games they already own, as well as new game experiences
in different genres within a familiar fantasy world. For example, our Army Men,
BattleTanx, Family Game Pack, Heroes of Might and Magic, High Heat Baseball and
Might and Magic brands have generated over 30 titles that have been commercially
released and over 20 additional titles that are currently in development. We
employ our branding strategy to leverage our marketing efforts so longer-lived
brands can yield results across multiple platforms and multiple years. In
addition, we intend to selectively add new brands to our portfolio. By retaining
ownership of our established brands, we may be able to enter additional consumer
markets, such as toys or television programming.
CONTINUE TO DEVELOP SOFTWARE PRODUCTS AND PROPRIETARY TECHNOLOGIES IN OUR
INTERNAL DEVELOPMENT STUDIOS
The importance of the timely release of hit titles, especially during the
year-end holiday season, has increased the need for disciplined product
development processes. We develop our interactive entertainment software
products, proprietary technologies and brands internally to better control
product quality, development schedules and costs. Our internal studio developers
are able to focus all of their efforts on creative development of our products,
and improve our ability to respond to changing consumer preferences.
Furthermore, we own all of the software technology that we develop internally.
EXTEND OUR PROPRIETARY TECHNOLOGIES OVER MULTIPLE PRODUCTS, GENRES AND
PLATFORMS
Our internal studios will continue to create an extensive portfolio of
versatile, company-owned technologies including interactive software engines,
development tools, various programming codes and artwork that we can use to
develop new products more quickly and cost-effectively. This portfolio of
technology is maintained and shared across our internal development product
teams under the direction of our Library Group. By sharing our technology across
product and teams, we are able to more efficiently and economically develop
sequels, expansion packs, line extensions and related products for existing
brands. Our strategy of leveraging and reusing our past investments in
technology also generally allows us to move new brands and titles more quickly
and less expensively from story line development to commercial release.
35
<PAGE>
EXPAND OUR OPERATIONS IN EUROPE
We believe that the interactive entertainment software market in Europe
represents a significant potential market opportunity for us. In fiscal 2000, we
plan to expand our European operations by increasing our direct sales and
marketing efforts, as well as by customizing our products for local markets. By
expanding our European operations, we expect to better control direct sales,
marketing and distribution of our products. Furthermore, by decreasing our
dependence on third-party licensees, we believe that we should be able to
improve our operating margins on products sold in Europe.
BRANDS AND PRODUCTS
In fiscal 1998, we shipped three new products for the personal computer. In
fiscal 1999, we shipped a total of 14 new products for the three major
platforms: the personal computer and the Sony PlayStation and Nintendo N64 video
game consoles. In fiscal 2000, we expect to ship a total of over 25 new products
for the personal computer, the Sony PlayStation and Nintendo N64 and the
Nintendo Game Boy Color hand-held video game platform. All of our personal
computer titles released since the beginning of fiscal 1998 feature multi-player
capabilities that allow players to compete against each other over the Internet.
We have developed the following major brands:
ARMY MEN
Army Men was first released in April 1998 for the personal computer. Army
Men is a two-dimensional tactical action game with an overhead camera angle,
featuring the familiar green and tan plastic toy soldiers that many consumers
have played with as children. Players control the main character, Sarge, a squad
leader in the green army, and his troops through more than 25 missions in a
variety of outdoor terrains to defeat the opposing tan army. Army Men 3D was
released in March 1999 for the Sony PlayStation and features three-dimensional
graphics with an over-the-shoulder camera angle and similar settings and
campaigns to Army Men. Army Men II, the sequel to Army Men, was released in
February 1999 for the personal computer and is a real-time strategy-like game.
In addition to the jungle, desert and mountain terrains featured in Army Men,
the combat in Army Men II also takes place in the home. This game is set in
everyday living areas such as the kitchen, where the green troops fend off
cockroaches and the heat from an electric range, as well as the opposing tan
troops.
We are continuing to build upon the Army Men brand and expand it into new
genres and settings. Army Men Air Attack for the Sony PlayStation game console
is a helicopter action game with an overhead three-dimensional camera angle. In
this game, Army Men troops take to the air and contend with familiar elements in
a backyard and other outdoor settings. We expect to release Army Men Air Attack
for the Sony PlayStation and personal computer in the second half of fiscal
2000. In addition, Army Men Sarge's Heroes is an over-the-shoulder
three-dimensional camera angle action game built around the main character from
the Army Men brand, Sarge. The game is expected to feature a new story line with
some of the same plastic soldier characters introduced in Army Men and is
planned for release during the second half of fiscal 2000 for the Sony
PlayStation and Nintendo N64. We intend to release Army Men III in the second
half of fiscal 2000 for the personal computer. We also intend to release a
version of Army Men in the second half of fiscal 2000 for the Nintendo Game Boy
Color.
The Army Men brand has received much acclaim after its introduction. The
April 1999 issue of Nintendo Power magazine, the official publication for the
Nintendo N64, reported that "When [Army Men Sarge's Heroes] is ready for
release, it could well be a masterpiece."
36
<PAGE>
BATTLETANX
We first released BattleTanx in December 1998 for the Nintendo N64 game
console. BattleTanx is a three-dimensional, multi-player action game for up to
four players that is set in the post-apocalyptic future. Renegade armies wage
war against each other in battle tanks. Players engage in combat action in
Chicago, Las Vegas, New York and San Francisco. BattleTanx combines battle
action with the tactical elements of "capture the flag." A sequel, BattleTanx
II: Global Assault is expected to be released in the second half of fiscal 2000
for the Nintendo N64. In BattleTanx II, players can operate more sophisticated
tanks in a variety of European cities. We also intend to release a version of
BattleTanx for multiple platforms, including the Nintendo Game Boy Color in the
second half of fiscal 2000. The December 1998 issue of Nintendo Power magazine
called BattleTanx the "one of the best multi-player games ever."
VEGAS GAMES AND FAMILY GAME PACK
Vegas Games Entertainment Pack for Windows was first introduced by New World
Computing in July 1992 for the personal computer as that company's first release
in the family entertainment genre. This game was one of New World Computing's
top selling titles in 1993 and 1994. We acquired New World Computing in 1996 and
released Vegas Games Entertainment Pack in March 1997 and Vegas Games 2000 in
September 1998, each for the PC. All three products feature a variety of casino
games and are designed to provide the casual game player with many hours of
entertainment.
Family Game Pack features 26 different games, including board (backgammon,
checkers, chess, etc.), card (bridge, gin, spades, etc.) and casino (blackjack,
craps, slots, etc.) games. Family Game Pack was released in November 1997 for
the PC and features single player action against computer opponents, as well as
multiple players on the same computer.
We plan to extend the Family Games brand by introducing Family Game Pack
2001 for multiple platforms including the personal computer in the second half
of fiscal 2000. We intend to release a version of Vegas Games 2000 for
additional platforms including the Sony PlayStation in the second half of fiscal
2000.
HIGH HEAT BASEBALL
We first released High Heat Baseball 1999 in March 1998 for the personal
computer. High Heat Baseball 1999 features high-resolution graphics, detailed
three-dimensional stadium environments, and high quality three-dimensional
player animations derived from video motion capture. We believe that High Heat
Baseball 1999 provides consumers with the most realistic control over the
pitcher and batter confrontation, fielding and base-running. We released High
Heat Baseball 2000 for the PC in March 1999 and for the Sony PlayStation in May
1999. These are the first titles in our brand to include all of the actual major
league player, team and stadium names pursuant to our licenses from Major League
Baseball and the Major League Baseball Players Association. We expect to
continue to extend the High Heat Baseball brand by releasing a sequel on
multiple platforms, including the PC, in the second half of fiscal 2000.
In April 1999, our High Heat Baseball brand was recognized as "the best
arcade PC baseball game ever" by E-Gamez.com, a gaming web site. PC Gamer
magazine reported in May 1999 that "High Heat Baseball 2000 is on track to be
not only the best baseball game of this season, but possibly of all time."
MIGHT AND MAGIC
New World Computing originally released Might and Magic in 1986 for the
personal computer. Might and Magic is a fantasy role-playing game where the
player assumes the role of multiple fantasy characters such as knights, wizards,
archers and clerics. Players participate in the ongoing story of the
37
<PAGE>
game as they rescue fair maidens and overcome dragons and giants. Our New World
Computing development team has released six sequels to the series that feature
additional story lines, kingdoms and worlds to explore. Might and Magic VII is
the latest product in the series for the personal computer and was released in
June 1999.
The cornerstone of the Might and Magic brand is the entertaining fantasy
world in which players can explore, embark on adventures and perform heroic
deeds. This is the key concept we have used to expand the brand, content and
style of play into other software genres, such as strategy, adventure and
action.
We plan to continue to extend the Might and Magic franchise to establish a
new brand on the video game console platforms by releasing an action game,
Crusaders of Might and Magic, for the Sony PlayStation and Nintendo N64.
Crusaders of Might and Magic will follow the over-the-shoulder format of some of
the best selling console titles, and will allow players to control the key
character in the Might and Magic universe, Drake. We expect to release these
products for all three platforms in the second half of fiscal 2000.
Might and Magic VI The Mandate of Heaven, released in April 1998, has
received numerous accolades from the computer gaming press. The December 1998
issue of Computer Gaming World magazine named it the number one holiday
role-playing game. In addition, the December 1998 issue of PC Gamer magazine
noted that "It's essential gaming for all fans of fantasy."
HEROES OF MIGHT AND MAGIC
Our Heroes of Might and Magic brand utilizes story lines, characters and
themes from the popular Might and Magic brand and places them in a turn-based
strategy game. Heroes of Might and Magic was released in September 1995 for the
personal computer. Heroes of Might and Magic II was released in November 1996
for the personal computer and added four new campaigns and multiple stand-alone
scenarios. We released in May 1997 an expansion pack to Heroes of Might and
Magic II that adds more gameplay, new heroes, new map locations, a new story
line and an enhanced multi-player focus with scenarios designed specifically for
team play. Heroes of Might and Magic III was released in March 1999 for the
personal computer and shares a common universe and overlapping story lines with
our Might and Magic VI and VII titles. Heroes of Might and Magic III features
new elements, graphics and story lines.
Our Heroes of Might and Magic brand has received critical acclaim from the
computer gaming industry. The October 1998 issue of PC Gamer called Heroes of
Might and Magic II "the most popular turn-based strategy game in history." In
addition, the June 1998 issue of Consumer Games Strategy Plus also rated Heroes
of Might and Magic II with "5 stars out of 5 stars."
38
<PAGE>
Our current portfolio of brands and products released or in development
includes the titles listed in the following table.
<TABLE>
<CAPTION>
ACTUAL OR
SCHEDULED
3DO RELEASE
BRAND PRODUCT PLATFORM(1) GENRE DATE(2)
<S> <C> <C> <C> <C>
ARMY MEN Army Men Game Boy Action/Strategy FY2000 2H
Army Men Air Attack PC Action FY2000 2H
Army Men Air Attack PlayStation Action FY2000 2H
Army Men III PC Action/Strategy FY2000 2H
Army Men Sarge's Heroes PlayStation Action FY2000 2H
Army Men Sarge's Heroes N64 Action FY2000 2H
Army Men 3D PlayStation Action FY1999 2H
Army Men II PC Action/Strategy FY1999 2H
Army Men PC Action/Strategy FY1999 1H
BATTLETANX BattleTanx Game Boy Action FY2000 2H
BattleTanx II: Global Assault N64 Action FY2000 2H
BattleTanx N64 Action FY1999 2H
FAMILY GAME PACK Family Game Pack 2001 PC Family Entertainment FY2000 2H
Family Game Pack 1999 PC Family Entertainment FY1999 2H
Family Card Games PC Family Entertainment FY1997 1H
GULF WAR Gulf War: Operation Desert Hammer PC Action FY2000 1H
HEROES OF MIGHT AND MAGIC Heroes of Might and Magic III PC Strategy FY2000 2H
Expansion
Heroes of Might and Magic II Gold PC Strategy FY1999 2H
Heroes of Might and Magic III PC Strategy FY1999 2H
Heroes of Might and Magic Compendium PC Strategy FY1998 2H
Heroes of Might and Magic II Expansion PC Strategy FY1998 1H
Heroes of Might and Magic II PC Strategy FY1997 2H
Heroes of Might and Magic PC Strategy FY1997 1H
HIGH HEAT BASEBALL High Heat Baseball 2001 PC Sports FY2000 2H
High Heat Baseball 2000 PlayStation Sports FY2000 1H
High Heat Baseball 2000 PC Sports FY1999 2H
High Heat Baseball 1999 PC Sports FY1998 2H
MIGHT AND MAGIC Crusaders of Might and Magic PC Action/Adventure/Role FY2000 2H
Playing
Crusaders of Might and Magic PlayStation Action/Adventure/Role FY2000 2H
Playing
Crusaders of Might and Magic N64 Action/Adventure/Role FY2000 2H
Playing
Might and Magic VIII PC Adventure/Role Playing FY2000 2H
Might and Magic VII PC Adventure/Role Playing FY2000 1H
Might and Magic VI PC Adventure/Role Playing FY1999 1H
Might and Magic Trilogy PC Adventure/Role Playing FY1997 1H
VEGAS GAMES Vegas Games 2000 PlayStation Family Entertainment FY2000 2H
Vegas Games 2000 PC Family Entertainment FY1999 2H
Vegas Games 1999 PC Family Entertainment FY1997 1H
</TABLE>
(1) "PlayStation" means the Sony PlayStation video game console, "N64" means the
Nintendo N64 video game console, and "Game Boy" means the Nintendo Game Boy
Color hand-held video game.
(2) 1H or 2H refers to first half or second half of the fiscal year indicated.
Scheduled release dates after FY2000 1H are our estimates as of the date of
this prospectus and may be delayed.
INTERACTIVE ENTERTAINMENT SOFTWARE DEVELOPMENT
With 321 studio employees as of March 31, 1999, we believe that we have one
of the largest internal development groups in the interactive entertainment
software industry. Our internal development studios are 3DO Redwood City
(Redwood City, California), 3DO Austin (Austin, Texas) and New World Computing
(Agoura Hills, California).
We believe our internal studios allow us to maintain better control over
product quality, development costs and development schedules in comparison to
companies that outsource product development to external development studios. By
developing our interactive entertainment software internally, we retain
ownership of the technology we develop and spread our investment in research and
development across brands, platforms and genres.
39
<PAGE>
Our internal studios consist of several development teams, all of which
report to our Senior Vice President of Research and Development. Each team is
dedicated to the development of a particular product for the duration of a
specific project. A team generally consists of producers, engineers, designers,
programmers and artists. As of March 31, 1999, we had 175 employees working on
design and art, 109 working on software, audio and video technology and 37
producers. We allocate personnel to brands and platforms to maintain brand
continuity and creativity in development while seeking to maximize productivity
from experts in the technology for each hardware platform. As of March 31, 1999,
264 of our 321 internal studio employees focused on our six primary brands, of
which 126 employees are allocated to games for the personal computer and
Internet platforms, 131 to the Sony platform and 36 to the Nintendo platform.
Upon completion and shipment of a new product, the team members are then
assigned to a product in development.
Interactive entertainment software game concepts are generated by employees
from our internal studios, as well as from our sales, marketing and executive
teams. Concept or theme proposals are reviewed and approved by our executive
team. We also conduct product and marketing focus groups to determine the
potential market for a new product or brand. Once a game is approved, we assign
an executive producer and a product marketing manager to oversee its development
and marketing. This team develops a design document and script for the game, as
well as a timeline. During development, our executives review each product's
development progress against predetermined milestones, as well as market
conditions and the title's potential financial performance. If market conditions
or development milestones indicate that the product will not achieve the
approved strategic or financial plan, we either take corrective actions or
terminate the product and reallocate current resources to other projects.
Products we complete are tested by our executive team and our internal testing
group prior to release for shipment to the retail channel.
Our internal studios have developed a library of over 15 proprietary
interactive entertainment software engines with over 10 additional engines in
development. Our Library Group maintains our collection of software engines and
other technology and helps to identify available tools to be shared by our
various product teams to facilitate the development of new products. While an
engine is initially developed for one product, our development staff can often
efficiently adapt an engine to new products. Our library is composed of over 90
software modules, representing collectively more than 125,000 lines of tested
software code. We also use a suite of 17 internally developed software tools to
speed product development. During fiscal 2000 we intend to develop our ability
to localize products for selected European countries using internal resources.
The development cycle of our new products is difficult to predict, but typically
ranges from 12 to 24 months for a first-generation title. Sequels or line
extensions typically can be developed more quickly and less expensively than
first-generation titles by utilizing our previously developed technology.
We have contracted with outside development firms to port several of our
current software titles to the Nintendo Game Boy Color hand-held video game
platform until we establish the internal capabilities to develop software for
this platform.
SALES, MARKETING AND DISTRIBUTION
We target the retail channel and consumers through a variety of sales,
advertising and marketing campaigns including television, print media, public
relations and Internet marketing. The selling and marketing strategies
associated with a particular product may vary depending upon the product
platform. Advertising and marketing campaigns for interactive entertainment
software for the personal computer usually require expenditures in print media
such as trade magazines, newspapers and consumer magazines. Products for the
video game console platform generally require a more significant investment in
the production of a television campaign.
In addition to our 35-person internal sales and marketing organization,
which focuses on sales to major North American retailers and distributors, we
also utilize 10 independent sales representative
40
<PAGE>
firms that specialize in the sales and marketing of products for video game
console platforms. We also have several licensees that sell our products in
various territories including Canada, Europe, Latin America, Asia, and
Australia. Our distributors purchase fully packaged products from us for resale
to retailers, while licensees receive master copies of software code and
packaging, which they can manufacture, market and sell to distributors or
retailers in exchange for royalty payments.
NORTH AMERICA. We distribute and sell our interactive entertainment
software in North America through direct relationships with major retail
customers, as well as through third party distributors. Our distributors
primarily sell products for the personal computer platform. We have recently
decreased our reliance on distributors and expect to continue to increase direct
sales to retailers, particularly for video game console products. The number of
retail outlets that sold our products increased to over 20,000 in fiscal 1999
from approximately 6,000 in fiscal 1998. Our largest retailers in fiscal 1999
were:
<TABLE>
<S> <C>
Best Buy Target
Wal-Mart Sears
Electronics
Boutique Hollywood Video
Babbage's KayBee Toys
Toys "R" Us Kmart
Blockbuster Video
</TABLE>
In fiscal 1999, sales to each of Best Buy and Navarre, a distributor,
represented more than 10% of our total software publishing revenues. Sales to
our five largest retailers and distributors accounted for approximately 54% of
our software publishing revenues in fiscal 1998 and 53% of our software
publishing revenues in fiscal 1999. Some of our major retailers also purchased
personal computer platform products from our distributors and these sales are
not reflected in the percentage of revenues figures listed above. However, we
believe that if we included sales through distributors, direct and indirect
sales to Wal-Mart would have represented more than 10% of our total revenues in
fiscal 1999.
INTERNATIONAL. We currently license the software code, user manuals and
packaging for our interactive entertainment software products for manufacture,
distribution and marketing of our products in Europe, Latin America, Asia and
Australia. By licensing the manufacturing, distribution and marketing of our
products to third parties, we have been able to maintain a worldwide presence in
the interactive entertainment software market without significant investment in
sales, marketing and manufacturing infrastructure. We plan to expand our
operations in Europe by the end of fiscal 2000 and shift more emphasis to
directly selling in Europe rather than licensing our products to third parties
for distribution. We believe we can ultimately increase our revenues and improve
our operating margins on products sold in Europe by decreasing our dependence on
third party licensees.
INTERNET. We currently maintain an extensive Web site which contains the
following major sections:
- Products. For each of our brands, the site contains a detailed
description of each product and its gameplay. Users can also download to
their computers a demo containing a few levels of each game, a video clip
showing actual gameplay, an animated description of the game and actual
screenshots from each game. Users have the ability to download artwork
including box art and character renderings and wallpaper containing
artwork from each game that the user can display on a computer desktop.
Our Web site also provides support for each product allowing users to
download updates and modifications to our software, and providing
responses to frequently asked questions and communication with our
customer service department.
- The 3DO Community. This section of the site allows customers to register
individually with their own profiles and screen names, to converse on-line
with each other about our products, and to post messages and receive mail
regarding our products.
- The 3DO Store. This section of the site allows consumers to purchase our
products online directly from us.
41
<PAGE>
MANUFACTURING
We believe that our principal strengths are designing and developing strong,
high quality interactive entertainment software brands. In order to concentrate
our efforts on brand and title development, we have established relationships
with JVC, Sony and Nintendo to outsource manufacturing and physical distribution
of our titles. We also outsource these functions to take advantage of the
manufacturing economies of scale which these major companies can offer and to
avoid the capital investment and overhead costs inherent in establishing and
maintaining internal manufacturing operations.
Sony has granted us a non-exclusive license to develop and distribute game
software on CD-ROMs for use on the Sony PlayStation console in the United States
and Canada, under which we pay Sony a per unit royalty for each unit
manufactured. Sony is the exclusive manufacturer of products licensed under this
agreement. The agreement grants us a license to use proprietary Sony software
and hardware to develop titles for the PlayStation and to use Sony trademarks to
market, distribute and sell titles for the PlayStation. We retain all right,
title, and interest in and to our software. Development of new games under this
agreement is subject to approval by Sony and testing and approval of the
completed game by Sony is required prior to market introduction. The license
expires in September 1999 and is terminable earlier by Sony for our breach,
instances related to debt and insolvency, or significant change of control of
our company. We are currently negotiating with Sony to renew our PlayStation
license and expand its geographic territory.
Nintendo has granted us a non-exclusive license to utilize proprietary
programming specifications, development tools, trademarks, and other
intellectual property rights solely in order to develop video game software and
sell such software for the BattleTanx brand for play on the Nintendo 64 system
throughout the Western Hemisphere. Development of new games for use under this
agreement is subject to approval by Nintendo and testing and approval of the
completed game by Nintendo is required prior to market introduction.
Additionally, Nintendo has exclusive responsibilities for establishing and
fulfilling all aspects of the manufacturing process. We have granted Nintendo an
exclusive right with respect to BattleTanx, which prohibits us from releasing
BattleTanx on any other platform for a one-year period commencing December 1998.
Under the agreement, after licensing a product, we buy discrete quantities of
licensed game software units from Nintendo for sale. The license expires in
December 1999 and is terminable earlier by Nintendo for breach or instances
related to our debt and insolvency. Currently, the agreement only covers the
BattleTanx brand, but we are negotiating with Nintendo to expand the license to
other brands and extend the license term.
JVC manufactures our personal computer CD-ROMs. We have granted JVC a
non-exclusive license to replicate compact discs of our executable game software
code and assemble and package materials to create a finished product. Prices for
replication are pursuant to prices submitted by written quotation or contract
and are subject to change annually by JVC based on changes in material and labor
costs and market conditions. Additionally JVC provides warehousing services and
takes orders from us for finished products and packages and prepares them for
shipping. At no time does JVC acquire any ownership rights to items we supply to
it. The contract may be terminated by either party with 60 days' prior written
notice.
Before we start shipping a product, we provide our manufacturers with a
title's software code and related artwork, user instructions, warranty
information, brochures and packaging designs. JVC, Nintendo and Sony manufacture
based on purchase orders we submit in the ordinary course of business. JVC and
Sony generally ship our titles within two weeks after receiving our order.
Nintendo generally ships titles within four to six weeks after receiving our
order primarily due to the additional time required to manufacture game
cartridges overseas. Although we depend on a limited number of manufacturers, we
have not experienced any material difficulties or delays in the manufacture of
our
42
<PAGE>
titles, nor have we experienced any material delays due to title defects or due
to the unavailability of components or raw materials. Our software titles carry
a 90-day limited warranty.
COMPETITION
The interactive entertainment software industry is intensely competitive and
is characterized by the frequent introduction of new hardware systems and
software products. Our competitors vary in size from small companies to very
large corporations with significantly greater financial, marketing and product
development resources than us. Due to these greater resources, some of our
competitors are better able to undertake more extensive marketing campaigns,
adopt more aggressive pricing policies, and pay higher fees to licensors of
desirable properties and to third party software developers. We believe that the
principal competitive factors in the interactive entertainment software industry
include brand name recognition, entertainment value of specific titles, product
features, quality, ease of use, price and product support.
We compete primarily with other publishers of interactive entertainment
software for personal computers and video game consoles. Significant competitors
include Acclaim Entertainment, Activision, Eidos, Electronic Arts, GT
Interactive Software, Interplay, LucasArts and THQ. In addition, integrated
video game console hardware/software companies such as Sony and Nintendo compete
directly by developing their own software titles for their respective platforms.
Large diversified entertainment or software companies, such as The Walt Disney
Company or Microsoft, many of which own substantial libraries of available
content and have substantially greater financial resources than us, may decide
to compete directly with us or to enter into exclusive relationships with our
competitors.
Retailers of our products typically have a limited amount of shelf space and
promotional resources, and there is intense competition among consumer software
publishers, and in particular interactive entertainment software publishers, for
high quality retail shelf space and promotional support from retailers. To the
extent that the number of consumer software products and computer platforms
increases, competition for shelf space may intensify and may require us to
increase our marketing expenditures. Due to increased competition for limited
shelf space, retailers and distributors are in an increasingly better position
to negotiate favorable terms of sale, including price discounts, price
protection, marketing and display fees and product return privileges and other
concessions. Retailers and distributors also consider, as important competitive
factors, marketing support, quality of customer service and historical
performance. Our products constitute a relatively small percentage of any
retailer's sales volume.
INTELLECTUAL PROPERTY
We hold copyrights on our products, product literature and advertising and
other materials, and hold trademark rights in our name, our logo, and some of
our product names and publishing labels. We have licensed certain products to
third parties for manufacture and distribution in particular geographic markets
outside North America, and receive royalties on such licenses. We currently
outsource product development for the Nintendo Game Boy Color hand-held video
game platform to third party developers. We contractually retain all
intellectual property rights related to such projects.
We regard our software as proprietary and rely primarily on a combination of
copyright, trademark and trade secret laws, employee and third party
nondisclosure agreements and other methods to protect our proprietary rights. We
own or license various copyrights and trademarks. While we provide "shrinkwrap"
license agreements or limitations on use with our software, the enforceability
of such agreements or limitations is uncertain. While we copy-protect our
products, we are aware that unauthorized copying occurs within the computer
software industry, and if a significantly greater amount of unauthorized copying
of our interactive entertainment software products were to occur, our operating
results could be materially adversely affected.
43
<PAGE>
We rely on existing copyright laws to prevent unauthorized distribution of
our software. Existing copyright laws afford only limited protection. Policing
unauthorized use of our products is difficult, and software piracy can be
expected to be a persistent problem, especially in certain international
markets. Further, the laws of certain countries in which our products are or may
be distributed either do not protect our products and intellectual property
rights to the same extent as the laws of the U.S. or are weakly enforced. Legal
protection of our rights may be ineffective in such countries, and if we seek to
leverage our software products using emerging technologies, such as the Internet
and on-line services, it may become more difficult to protect our intellectual
property rights, and to avoid infringing the intellectual property rights of
others. In addition, the intellectual property laws are less clear with respect
to such emerging technologies. We cannot be certain that existing intellectual
property laws will provide adequate protection for our products in connection
with such emerging technologies.
As the number of interactive entertainment software products in the industry
increases and the features and content of these products further overlap,
software developers may increasingly become subject to infringement claims.
Although we believe that we make reasonable efforts to ensure that our products
do not violate the intellectual property rights of others, we cannot be certain
that claims of infringement will not be made. Any such claims, with or without
merit, can be time consuming and expensive to defend. From time to time, we have
received communication from third parties asserting that features or content of
certain of our products may infringe upon the intellectual property rights of
such parties. We cannot be certain that existing or future infringement claims
against us will not result in costly litigation or require us to seek to license
the intellectual property rights of third parties, which licenses may not be
available on acceptable terms, if at all.
We license certain copyrights and trademarks for use in our High Heat
Baseball brand and pay applicable royalties. If we were unable to maintain or
renew those licenses for use in High Heat Baseball, we would be unable to
release additional sequels and line extensions for that brand and our business
may be seriously harmed.
GOVERNMENT REGULATION
The home video game industry requires interactive entertainment software
publishers to provide consumers with information about graphic violence and
sexually explicit material contained in their interactive entertainment software
products. This system requires publishers to identify particular products within
defined rating categories and communicate such ratings to consumers through
appropriate package labeling and through advertising and marketing presentations
consistent with each product's rating.
Mandatory government-imposed interactive entertainment software products
rating systems eventually may be adopted in many countries, including the United
States. Due to the uncertainties inherent in the implementation of rating
systems, confusion in the marketplace may occur, and publishers may be required
to modify or remove products from the market. However, we are unable to predict
what effect, if any, such rating systems would have on our business.
Many foreign countries have laws which permit governmental entities to
censor the content of certain works, including interactive entertainment
software. As a result, we may be required to modify our products to comply with
these requirements, or withdraw them from the market which could result in
additional expense and loss of revenues.
Certain retailers have in the past declined to stock some software products
because they believed that the content of the packaging artwork or the products
would be offensive to their customer base. Although such actions have not yet
affected us, we cannot be certain that our distributors or retailers will not
take such actions in the future.
44
<PAGE>
EMPLOYEES
As of March 31, 1999, we employed 353 full-time employees and 46 independent
contractors. These persons provided services in the following areas: 321 in
product development, 26 in sales and marketing, and 52 in finance,
administration, distribution and legal services.
FACILITIES
As of March 31, 1999, we leased 50,488 square feet in Redwood City,
California, 12,500 square feet in San Mateo, California, 7,900 square feet in
Austin, Texas, and 14,300 square feet in Agoura Hills, California, for an
aggregate monthly rent expense of approximately $177,000. These facilities house
our administrative, research, development and sales operations. The lease for
the Redwood City facility expires in July 2001. The lease for approximately
7,800 square feet of the San Mateo facility expired and we subleased the
remaining space in May 1999. The lease for the Austin facility expires in
September 2000, and the lease for the Agoura Hills facility expires in January
2001. We believe that these facilities are adequate for our current needs.
LEGAL PROCEEDINGS
We are engaged in certain legal actions arising in the ordinary course of
business. We believe that we have adequate legal defenses and that the ultimate
outcome of these actions will not have a material effect on our financial
position or results of operations, although we cannot be certain as to the
outcome of such litigation.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information for our executive
officers and directors as of March 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- ---------------------------------------------------------------
<S> <C> <C>
Trip Hawkins............................... 45 Chairman of the Board and Chief Executive Officer
James A. Cook.............................. 50 Executive Vice President, General Counsel and Secretary
Stephen E. Fowler.......................... 40 Senior Vice President, Sales and Operations
Richard J. Hicks, III...................... 38 Senior Vice President, Product Development
John W. Adams.............................. 37 Chief Financial Officer
Robert Gayman.............................. 38 Vice President, Sales
Jeffrey A. Cleary.......................... 41 Vice President, Marketing
Dominic Wheatley........................... 39 Chairman of 3DO Europe
William A. Hall............................ 67 Director
H. William Jesse, Jr....................... 47 Director
Hugh C. Martin............................. 45 Director
</TABLE>
TRIP HAWKINS, the founder of 3DO, has been Chairman of the Board and Chief
Executive Officer of 3DO since September 1991. He also served as President 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 Computer, Inc.
JAMES A. COOK became Executive Vice President, General Counsel and Secretary
of 3DO 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. 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.
STEPHEN E. FOWLER was appointed as 3DO's Senior Vice President, Sales and
Operations in April 1998. Previously, he served as Senior Vice President,
Operations from May 1997; Vice President, Operations from October 1995; Vice
President, Developer and 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 (now called
Centura Software Corporation), a software tools company. From April 1984 to
August 1990, he served in various senior management positions including
Director, Worldwide Services at Application Development Systems.
RICHARD J. HICKS, III joined 3DO as Vice President, Product Development in
October 1997 and was promoted to Senior Vice President, Product Development in
November 1998. He was co-founder of New Wave Entertainment, Inc., an interactive
entertainment software company, and served as its Vice President, Software
Development from July 1995 to August 1997. He was Vice President, Software of
ShaBLAMM Computer, Inc., a computer hardware company, from February 1994 to July
1995. From May 1988 to January 1994, he held several software development
positions at Electronic Arts.
JOHN W. ADAMS became 3DO's Chief Financial Officer in March 1998. He served
as Vice President, Planning and Analysis and Director of Operations at
International Thomson Publishing, from April 1996 to March 1998. Mr. Adams
served as Senior Manager, Financial Planning from February 1993 to April 1996 at
The Walt Disney Company and was a Manager, Business Planning at The Gap
46
<PAGE>
Incorporated from March 1992 to February 1993. Mr. Adams has also held various
planning positions at the Pepsi-Cola Company from February 1986 to March 1992.
ROBERT GAYMAN joined 3DO as Vice President, Sales in March 1999. From
October 1996 to March 1999, he was Western Regional Sales Manager for Sony
Computer Entertainment America, and from January 1993 to October 1996, he was
National Sales Manager for Sun Gro Consumer Products. He has also held sales
positions at Mediagenic, Spalding Sports Worldwide, and RJR Nabisco Brands.
JEFFREY A. CLEARY joined 3DO as Vice President, Marketing in May 1999. From
June 1998 to May 1999, he was the Vice President, Marketing and Sales at
Stagecast Software. From August 1993 to September 1995, he was Director,
Marketing and Product Development for the Boys Toys division at Galoob Toys and
from September 1995 to June 1998, he was Vice President, Marketing and Product
Development for Boys Toys at Galoob Toys. From June 1987 to August 1993, he held
several marketing positions at RJRNabisco/Del Monte. He has also worked in
advertising and retail sales.
DOMINIC WHEATLEY became Chairman of 3DO Europe in May 1999. From 1996 to
1998, he was semi-retired and pursued various entrepreneurial activities. He
founded Domark Software in 1984 and served as its Chief Executive Officer
through a series of several acquisitions whereby Domark became Eidos plc in
1996. Mr. Wheatley also serves as a non-executive director of Statpro, a
financial software company.
WILLIAM A. HALL has been a director since June 1997. He founded Sight &
Sound Distributing Company, in December 1984 and has been its President and
Chief Executive Officer since that time. Since 1988 he has also been owner of
W.A.A. 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., a management consultant company, since June 1994.
Mr. Hall is also a director of Chromium Graphics, Inc.; Credentials (TRW
Credit); Northword Press; and Lincolnshire Management, Inc. Mr. Hall is a member
of the Audit Committee and Compensation Committee.
H. WILLIAM JESSE, JR. has been a director since September 1997. He joined
cybermeals, Inc. (now called Food.com), an Internet company, 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., a consulting company, 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 Recovery, and Online Partners,
Inc. Mr. Jesse is a member of the Audit Committee.
HUGH C. MARTIN has been a director since April 1996. Since January 1998, he
has been Chief Executive Officer of Optical Networks, Incorporated, a
telecommunications network equipment company. Until his resignation from 3DO in
June 1997, he served as our President 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 is a member of the
Compensation Committee.
Our Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws provide that the Board is divided into three classes, with each
class serving staggered three-year terms. Mr. Hall will stand for re-election at
the 1999 annual meeting of stockholders. Mr. Jesse will stand for re-election at
the 2000 annual meeting of stockholders. Mr. Hawkins and Mr. Martin will stand
for re-election at the 2001 annual meeting of stockholders. Each officer serves
at the discretion of the Board of Directors.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us for the beneficial
ownership of our common stock as of March 31, 1999, and as adjusted to reflect
the sale of common stock in this offering by:
- each stockholder known by us to own beneficially more than 5% of our
common stock;
- each director;
- each of our chief executive officer and four other most highly compensated
executive officers; and
- all directors and executive officers as a group.
As of March 31, 1999 there were 25,540,242 shares of common stock
outstanding. This number does not include shares of treasury stock. Except as
otherwise indicated, we believe that the beneficial owners of the common stock
listed below, on the information furnished by such owners, have sole voting
power and investment power over those shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING (1)
------------------------ -----------------------
NUMBER PERCENT NUMBER PERCENT
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Trip Hawkins (2)........................................... 6,239,736 23.4%
J&W Seligman & Co., Incorporated
100 Park Avenue
New York, New York 10017................................. 3,232,200 12.7 3,232,200
William A. Hall (3)........................................ 45,383 * 45,383
H. William Jesse, Jr. (4).................................. 38,333 * 38,333
Hugh C. Martin (5)......................................... 36,667 * 36,667
James A. Cook (6).......................................... 461,085 1.8 461,085
Stephen E. Fowler (7)...................................... 159,116 * 159,116
Richard J. Hicks, III (8).................................. 62,133 * 62,133
John W. Adams (9).......................................... 35,818 * 35,818
All executive officers and directors as a group
(11 persons) (10)........................................ 7,140,230 26.0%
</TABLE>
- ------------------------
* Less than 1% of the outstanding shares of common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within 60 days
after March 31, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any
other person. Unless otherwise indicated in the table above, the address of
each of the individuals listed in the table is 600 Galveston Drive, Redwood
City, California 94063.
(2) Includes 1,102,833 shares subject to an option exercisable within 60 days
of March 31, 1999. We have reserved shares for sale to Mr.
Hawkins, who has expressed an interest in purchasing shares in the
offering. See "Underwriting."
(3) Includes 38,333 shares subject to an option exercisable within 60 days of
March 31, 1999.
48
<PAGE>
(4) Includes 33,333 shares subject to an option exercisable within 60 days of
March 31, 1999.
(5) Includes 36,667 shares subject to an option exercisable within 60 days of
March 31, 1999.
(6) Includes 451,167 shares subject to an option exercisable within 60 days of
March 31, 1999.
(7) Includes 155,665 shares subject to an option exercisable within 60 days of
March 31, 1999.
(8) Includes 57,333 shares subject to an option exercisable within 60 days of
March 31, 1999.
(9) Includes 35,000 shares subject to an option exercisable within 60 days of
March 31, 1999.
(10) Includes shares held beneficially by executive officers and directors as
shown in the foregoing table and 1,962,326 shares subject to options
exercisable within 60 days of March 31, 1999.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 50,000,000 shares of common stock, $0.01 par
value, and 5,000,000 shares of undesignated preferred stock, $0.01 par value.
The following description of our capital stock does not purport to be complete
and is subject to and qualified in its entirety by our Certificate of
Incorporation and Bylaws.
COMMON STOCK
As of March 31, 1999, there were 25,540,242 shares of common stock
outstanding which were held of record by approximately 810 stockholders. This
number does not include shares of treasury stock.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of 3DO, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of preferred stock. However, the
effects might include, among other things, restricting dividends on the common
stock, diluting the voting power of the common stock, impairing the liquidation
rights of the common stock and delaying or preventing a change in control of us
without further action by the stockholders. No shares of preferred stock are
outstanding, and we have no present plans to issue any shares of preferred
stock.
50
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Gerard Klauer Mattison & Co., Inc. and Wedbush Morgan Securities Inc. are
acting as representatives, have severally, but not jointly, agreed to purchase
from us the following respective number of shares of common stock:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Gerard Klauer Mattison & Co., Inc..........................................
Wedbush Morgan Securities Inc..............................................
-----------------
Total....................................................................
-----------------
-----------------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to some conditions precedent, and that the underwriters will be
obligated to purchase all of the shares of common stock offered in this
prospectus (other than those shares covered by the over-allotment option
described below) if any are taken. The underwriting agreement provides that in
the event of a default by an underwriter, in some circumstances the purchase
commitments of non-defaulting underwriters may be increased.
The underwriters propose to offer the shares of common stock to the public
initially at the public offering price set forth on the cover page of this
prospectus and to some dealers at a price that represents a concession not in
excess of $ per share. After the initial offering of the shares of common
stock, the offering price and concession and discount to dealers may be changed
by the representatives of the underwriters.
We have granted to the underwriters an option exercisable by the
representatives of the underwriters, expiring at the close of business on the
30th day after the date of this prospectus, to purchase up to
additional shares of common stock at the offering price, less
underwriting discounts and commissions, all as set forth on the cover page of
this prospectus. This option may be exercised only to cover over-allotments in
the sale of the shares of common stock. To the extent that the option is
exercised, each underwriter will become obligated, subject to some conditions,
to purchase a number of additional shares of the common stock proportionate to
each underwriter's initial amount reflected in the foregoing table.
The following table summarizes the compensation to be paid to the
underwriters by us.
<TABLE>
<CAPTION>
WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT
-------------- --------------
<S> <C> <C>
Underwriting discounts and commissions paid by us.............
</TABLE>
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $700,000.
We and our directors, executive officers, and certain of our employees have
agreed that they will not offer, sell, contract to sell, announce their
intention to sell, pledge or otherwise dispose of, directly or indirectly, any
shares of common stock or securities convertible into or exchangeable or
exercisable for any shares of common stock, without the prior written consent of
Gerard Klauer Mattison & Co., Inc. for a period of 180 days after the date of
this prospectus.
51
<PAGE>
The representatives of the underwriters on behalf of the underwriters may
engage in over-allotment, stabilizing transactions, syndicate covering
transactions, penalty bids and "passive" market making in accordance with
Regulation M under the Securities Exchange Act of 1934. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the shares of common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the representatives of the
underwriters to reclaim a selling concession from a syndicate member when the
shares of common stock originally sold by these syndicate members are purchased
in a syndicate covering transaction to cover syndicate short positions. In
"passive" market making, market makers in the securities offered hereby who are
underwriters or prospective underwriters may, subject to some limitations, make
bids for or purchases of such securities until the time, if any, at which a
stabilizing bid is made. These stabilizing transactions, syndicate covering
transactions, penalty bids, and other permissible purchases of shares of common
stock by or on behalf of the underwriters may cause the price of the common
stock to be higher than it would otherwise be in the absence of these
transactions. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.
We have agreed to indemnify the underwriters against some liabilities,
including civil liabilities under the Securities Act.
We have reserved shares for sale to William M. Hawkins III, our
Chairman and Chief Executive Officer, who has expressed an interest in
purchasing shares in this offering. Any reserved shares not purchased by Mr.
Hawkins will be offered by the underwriters to the general public on the same
basis as the other shares offered hereby. The underwriters will not receive any
underwriting discounts or commissions from the sale of shares to Mr. Hawkins.
52
<PAGE>
LEGAL MATTERS
The validity of the common stock in this offering will be passed upon for us
by James A. Cook, general counsel. Certain other legal matters will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the underwriters
by Morrison & Foerster LLP, New York, New York.
EXPERTS
The consolidated balance sheets as of March 31, 1998 and 1999, and the
consolidated statements of operations, stockholders' equity and cash flows for
the years ended March 31, 1997, 1998 and 1999 have been included in this
registration statement in reliance upon the report of KPMG LLP, independent
auditors, given and upon the authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-3 under
the Securities Act with respect to the shares of common stock offered in this
prospectus. This prospectus does not contain all the information set forth in
the registration statement and the exhibits and schedules thereto. For further
information about us and our common stock, we refer you to the registration
statement and to the exhibits filed with it. Statements in this prospectus as to
the contents of any contract or other document referred to are not necessarily
complete. We refer you to those copies of contracts or other documents that have
been filed as exhibits to the registration statement, and statements relating to
such documents are qualified in all respects by such reference. Anyone may
inspect a copy of the registration statement without charge at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain copies of all or any portion of the registration statement by writing to
the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C.
20549, and paying prescribed fees. You may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In
addition, the Commission maintains a Web site at www.sec.gov that contains
reports, proxy and information statements and other information regarding
companies such as ours that file electronically with the Commission.
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, and therefore we file reports, proxy statements and
other information with the Commission. You can inspect and copy the reports,
proxy statements and other information that we file at the public reference
facilities maintained by the Commission at the Public Reference Room, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices
located at 7 World Trade Center, Suite 1300, New York, New York 10048 and 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. You can also obtain
copies of such material from the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also
makes electronic filings publicly available on its Web site within 24 hours of
acceptance. Our common stock is quoted on the Nasdaq National Market under the
trading symbol "THDO." Reports, proxy and information statements and other
information about us may be inspected at the National Association of Securities
Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
INFORMATION INCORPORATED BY REFERENCE
The following documents, which we have filed with the Commission, are
incorporated by reference into this prospectus: (1) our annual report on Form
10-K for the fiscal year ended March 31, 1998; (2) our quarterly reports on Form
10-Q for the quarters ended December 31, 1998, September 30, 1998 and June 30,
1998; and (3) our proxy statement filed August 6, 1998 relating to the 1998
Annual Meeting of Stockholders held on September 16, 1998.
53
<PAGE>
All documents that we file with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus and
before the termination of the offering of the common stock offered in this
prospectus shall be deemed incorporated by reference into this prospectus and to
be a part of this prospectus from the respective dates of filing such documents.
We will provide without charge to each person to whom a copy of this
prospectus is delivered, upon such person's written or oral request, a copy of
any or all of the information incorporated by reference in this prospectus
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this prospectus
incorporates). Requests should be directed to The 3DO Company, 600 Galveston
Drive, Redwood City, California 94063, Attention: Investor Relations, telephone
number (650) 261-3000.
Any statement contained in a document incorporated or deemed to be
incorporated by reference in this prospectus shall be deemed modified,
superseded or replaced for purposes of this prospectus to the extent that a
statement contained in this prospectus or in any subsequently filed document
that also is or is deemed to be incorporated by reference in this prospectus
modifies, supersedes or replaces such statement. Any statement so modified,
superseded or replaced shall not be deemed, except as so modified, superseded or
replaced, to constitute a part of this prospectus.
54
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report......................................................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999............................ F-3
Consolidated Statements of Operations for each of the years in the three year period
ended March 31, 1999............................................................... F-4
Consolidated Statements of Stockholders' Equity for each of the years in the three
year period ended March 31, 1999................................................... F-5
Consolidated Statements of Cash Flows for each of the years in the three year period
ended March 31, 1999............................................................... F-6
Notes to Consolidated Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
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 1999, 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, 1999. 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 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
May 4, 1999
F-2
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 16,209 $ 2,256
Short-term investments................................................................ 18,375 11,595
Accounts receivable, net.............................................................. 216 20,777
Prepaid and other current assets...................................................... 838 1,420
----------- -----------
Total current assets................................................................ 35,638 36,048
Property and equipment, net............................................................. 3,336 3,320
Deposits and other assets............................................................... 1,473 1,120
----------- -----------
Total assets........................................................................ $ 40,447 $ 40,488
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 495 $ 1,859
Accrued expenses...................................................................... 2,468 6,526
Deferred revenue...................................................................... 352 485
Short-term debt....................................................................... -- 9,505
Other current liabilities............................................................. 3,554 1,998
----------- -----------
Total current liabilities........................................................... 6,869 20,373
----------- -----------
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; 29,018 and 29,760 shares
issued; 25,570 and 25,540 shares outstanding, respectively.......................... 290 297
Additional paid-in capital............................................................ 159,938 161,975
Accumulated other comprehensive loss.................................................. (290) (255)
Accumulated deficit................................................................... (114,673) (127,840)
Treasury stock, at cost, 3,448 and 4,220 shares, respectively......................... (11,687) (14,062)
----------- -----------
Total stockholders' equity.......................................................... 33,578 20,115
----------- -----------
Total liabilities and stockholders' equity.......................................... $ 40,447 $ 40,488
----------- -----------
----------- -----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
SOFTWARE PUBLISHING
Revenues...................................................................... $ 9,540 $ 9,429 $ 48,019
Cost of revenues.............................................................. 5,397 3,916 13,778
---------- ---------- ----------
Gross profit.................................................................. 4,143 5,513 34,241
---------- ---------- ----------
Operating expenses:
Research and development.................................................... 23,717 16,483 25,939
Sales and marketing......................................................... 5,309 5,612 13,497
General and administrative.................................................. 6,917 6,399 8,900
In-process research and development......................................... 7,700 -- --
---------- ---------- ----------
Total operating expenses.................................................. 43,643 28,494 48,336
---------- ---------- ----------
Operating loss................................................................ (39,500) (22,981) (14,095)
Net interest and other income................................................. 2,115 1,874 1,119
---------- ---------- ----------
Loss before taxes............................................................. $ (37,385) $ (21,107) $ (12,976)
---------- ---------- ----------
HARDWARE SYSTEMS
Revenues:
Royalties and license fees.................................................. $ 79,167 $ 29,371 $ --
Development systems and other............................................... 3,643 90 --
---------- ---------- ----------
Total revenues............................................................ 82,810 29,461 --
---------- ---------- ----------
Cost of revenues:
Royalties and license fees.................................................. 456 -- --
Development systems and other............................................... 2,136 43 --
---------- ---------- ----------
Total of cost of revenues................................................. 2,592 43 --
---------- ---------- ----------
Gross profit.................................................................. 80,218 29,418 --
---------- ---------- ----------
Operating expenses:
Research and development.................................................... 18,360 2,664 --
Sales and marketing......................................................... 2,734 -- --
General and administrative.................................................. 4,393 923 --
---------- ---------- ----------
Total operating expenses.................................................. 25,487 3,587 --
---------- ---------- ----------
Operating income.............................................................. 54,731 25,831 --
Gain on sale of hardware systems assets....................................... -- 18,032 --
---------- ---------- ----------
Income before taxes........................................................... $ 54,731 $ 43,863 $ --
---------- ---------- ----------
CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE SYSTEMS
Income (loss) before taxes.................................................... $ 17,346 $ 22,756 $ (12,976)
Income and foreign withholding taxes.......................................... 4,075 219 191
---------- ---------- ----------
Net income (loss)............................................................. $ 13,271 $ 22,537 $ (13,167)
---------- ---------- ----------
---------- ---------- ----------
Basic net income (loss) per share............................................. $ 0.48 $ 0.85 $ (0.51)
---------- ---------- ----------
---------- ---------- ----------
Diluted net income (loss) per share........................................... $ 0.46 $ 0.83 $ (0.51)
---------- ---------- ----------
---------- ---------- ----------
Shares used to compute basic net income (loss) per share...................... 27,662 26,387 25,602
---------- ---------- ----------
---------- ---------- ----------
Shares used to compute diluted net income (loss) per share.................... 28,935 27,114 25,602
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED MARCH 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED OTHER
---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL INCOME DEFICIT
--------- ----------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Balances as of March 31, 1996...................... 26,003 $ 260 $ 150,541 $ (189) $ (150,481)
Comprehensive Income:
Net income....................................... 13,271
Other comprehensive income (loss)
Unrealized gain from investments............... -- -- -- 36 --
Foreign currency translation................... -- -- -- (11) --
Comprehensive income.............................
Issuance of common stock for acquisition........... 1,610 16 5,664 -- --
Sale of common stock through employee stock plans
and other plans.................................. 709 7 1,844 -- --
Common stock issued under stock incentive
program.......................................... 47 1 440 -- --
--------- ----- ----------- ----- ------------
Balances as of March 31, 1997...................... 28,369 $ 284 $ 158,489 $ (164) $ (137,210)
Comprehensive Income:
Net income....................................... -- -- -- 22,537
Other comprehensive loss
Unrealized loss from investments............... -- -- -- (112) --
Foreign currency translation................... -- -- -- (14) --
Comprehensive income.............................
Sale of common stock through employee stock plans
and other plans.................................. 649 6 1,449 -- --
Repurchase of common stock......................... -- -- --
--------- ----- ----------- ----- ------------
Balances as of March 31, 1998...................... 29,018 $ 290 $ 159,938 $ (290) $ (114,673)
Comprehensive Income:
Net loss......................................... -- -- -- -- (13,167)
Other comprehensive income
Unrealized gain from investments............... -- -- -- 35 --
Comprehensive loss.................................
Sale of common stock through employee stock plans
and other plans.................................. 742 7 2,037 -- --
Repurchase of common stock......................... -- --
--------- ----- ----------- ----- ------------
Balances as of March 31, 1999...................... 29,760 $ 297 $ 161,975 $ (255) $ (127,840)
--------- ----- ----------- ----- ------------
--------- ----- ----------- ----- ------------
<CAPTION>
TREASURY
STOCK, AT STOCKHOLDERS' COMPREHENSIVE
COST EQUITY INCOME (LOSS)
----------- ------------- ---------------
<S> <C> <C> <C>
Balances as of March 31, 1996...................... -- $ 131
Comprehensive Income:
Net income....................................... 13,271 $ 13,271
Other comprehensive income (loss)
Unrealized gain from investments............... -- 36 36
Foreign currency translation................... -- (11) (11)
---------------
Comprehensive income............................. $ 13,296
---------------
---------------
Issuance of common stock for acquisition........... -- 5,680
Sale of common stock through employee stock plans
and other plans.................................. -- 1,851
Common stock issued under stock incentive
program.......................................... -- 441
----------- -------------
Balances as of March 31, 1997...................... -- $ 21,399
Comprehensive Income:
Net income....................................... -- 22,537 $ 22,537
Other comprehensive loss
Unrealized loss from investments............... -- (112) (112)
Foreign currency translation................... -- (14) (14)
---------------
Comprehensive income............................. $ 22,411
---------------
---------------
Sale of common stock through employee stock plans
and other plans.................................. -- 1,455
Repurchase of common stock......................... $ (11,687) $ (11,687)
----------- -------------
Balances as of March 31, 1998...................... $ (11,687) $ 33,578
Comprehensive Income:
Net loss......................................... -- (13,167) $ (13,167)
Other comprehensive income
Unrealized gain from investments............... -- 35 35
---------------
Comprehensive loss................................. $ (13,132)
---------------
---------------
Sale of common stock through employee stock plans
and other plans.................................. -- 2,044
Repurchase of common stock......................... (2,375) (2,375)
----------- -------------
Balances as of March 31, 1999...................... $ (14,062) $ 20,115
----------- -------------
----------- -------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................................... $ 13,271 $ 22,537 $ (13,167)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization........................................... 7,446 3,744 2,973
Deferred revenue........................................................ (35,870) (11,640) 133
Gain on sale of hardware systems assets................................. -- (18,032) --
Revenue recognized in exchange for common stock......................... -- (10,965) --
In-process research and development..................................... 7,700 -- --
Changes in operating assets and liabilities:
Accounts receivable, net.............................................. 2,571 213 (20,561)
Prepaid and other assets.............................................. 733 803 (678)
Accounts payable...................................................... (2,249) (74) 1,364
Accrued expenses...................................................... (1,540) (783) 4,058
Hardware incentives................................................... (1,236) (2,944) --
Other liabilities..................................................... 1,095 (162) (1,255)
---------- ---------- ----------
Net cash used in operating activities......................................... (8,079) (17,303) (27,133)
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sale of hardware systems assets............................... -- 20,000 --
Sale of short-term investments, net......................................... 21,500 735 6,814
Capital expenditures........................................................ (4,304) (1,254) (2,507)
Acquisition of businesses................................................... (4,575) -- --
---------- ---------- ----------
Net cash provided by investing activities..................................... 12,621 19,481 4,307
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from short-term debt............................................... -- -- 9,505
Repurchase of common stock.................................................. -- (722) (2,375)
Proceeds from issuance of common stock, net................................. 1,851 1,455 2,044
Payments on capital lease obligations....................................... (1,446) (1,083) (301)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... 405 (350) 8,873
---------- ---------- ----------
Effect of foreign currency translation........................................ (11) (14) --
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 4,936 1,814 (13,953)
Cash and cash equivalents at beginning of year................................ 9,459 14,395 16,209
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 14,395 $ 16,209 $ 2,256
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year
Interest.................................................................. $ 628 $ 135 $ 20
Income and foreign withholding taxes...................................... $ 4,075 -- --
Noncash investing and financing transactions:
Assets acquired under capital lease obligations........................... $ 152 -- --
Common stock issued in connection with business acquisitions.............. $ 5,680 -- --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1998 AND 1999
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 (Company), 3DO Europe, Ltd.
and Studio 3DO K.K. The 3DO Company develops and publishes branded interactive
entertainment software for multiple platforms.
BASIS OF PRESENTATION
The software publishing statements of operations were primarily derived from
the sales of interactive entertainment software and software publishing related
expenses. The hardware systems statements of operations were primarily derived
from revenue recognized under the M2 Agreement with Matsushita and expenses
associated with the hardware operations. Software publishing has incurred
negative cash flows for all periods presented and the Company primarily has
relied upon cash generated from the sale or license of hardware systems
technology to fund software publishing operations (see notes G and H.) For
presentation purposes all net interest and other income has been allocated to
software publishing.
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 and equity
securities as "available-for-sale." Such investments are recorded at fair value,
with unrealized gains and losses recorded as accumulated other comprehensive
income (loss) in stockholders' equity, until realized. 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.
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.
F-7
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets including goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets including goodwill
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
including goodwill 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
The Company uses the intrinsic value-based method of accounting for all of
its employee stock-based compensation plans.
REVENUE RECOGNITION
Revenue from the sale of software titles published and distributed by the
Company is recognized at the time of shipment. Subject to certain limitations,
the Company permits its customers to exchange 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 recognized upon persuasive evidence of an
arrangement, 3DO's fulfillment of its obligations (e.g., delivery of the product
golden master) under any such licensing agreement, and determination that
collection of a fixed or determinable license fee is considered probable.
Per-copy royalties on sales that exceed the minimum guarantee are recognized as
earned. Revenue from the Company's on-line service is recognized monthly based
on usage.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-2 SOFTWARE REVENUE RECOGNITION, which
supersedes SOP 91-1. SOP 97-2 is effective for the Company 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 adopted SOP 97-2 in the
current fiscal year. However, the effect of adopting SOP 97-2 did not have a
material impact on the Company's consolidated results of operations or financial
position.
In February 1998, the Accounting Standards Executive Committee (AcSEC) of
the AICPA issued SOP 98-4, DEFERRAL OF THE EFFECTIVE DATE OF SOP 97-2. The SOP
defers the effective date for applying the provisions regarding vendor-specific
objective evidence (VSOE) of fair value until fiscal year beginning after
December 15, 1998.
In December 1998, AcSEC issued SOP 98-9 SOFTWARE REVENUE RECOGNITION, WITH
RESPECT TO CERTAIN ARRANGEMENTS, which requires recognition of revenue using the
"residual method" in a multiple element arrangement when fair value does not
exist for one or more of the delivered elements in the
F-8
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
arrangement. Under the "residual method", the total fair value of the
undelivered elements is deferred and subsequently recognized in accordance with
SOP 97-2. SOP 98-9 is effective for the Company for transactions entered into
after March 31, 1999. The effect of adopting SOP-98-9 is not expected to have a
material impact on the Company.
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. Amortization of goodwill is computed on a straight-line basis over
the estimated useful life of approximately five years.
ADVERTISING EXPENSES
Advertising costs are expensed as incurred. Cooperative advertising with
distributors and retailers is expensed when spending is committed. For fiscal
1997, 1998, and 1999, advertising expenses totaled approximately $3,682,000,
$3,511,000, and $10,330,000, respectively.
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 recorded as accumulated other comprehensive income
(loss) in 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
Basic earnings per share is computed using the weighted average number of
shares of common stock outstanding. Diluted earnings per share is computed using
the weighted average number of shares of common stock outstanding and, when
dilutive, common equivalent shares from options to purchase common stock using
the treasury stock method.
F-9
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
A. SUMMARY OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the periods presented:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31,
--------------------------------
1997 1998 1999
--------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)........................................... $ 13,271 $ 22,537 $ (13,167)
Shares used to compute basic net income (loss) per
share--weighted-average number of common shares
outstanding............................................... 27,662 26,387 25,602
Effect of common equivalent shares--stock options
outstanding using the treasury stock method............... 1,273 727 --
--------- --------- ----------
Shares used to compute diluted net income (loss) per
share..................................................... 28,935 27,114 25,602
--------- --------- ----------
--------- --------- ----------
Basic net income (loss) per share........................... $ 0.48 $ 0.85 $ (0.51)
--------- --------- ----------
--------- --------- ----------
Diluted net income (loss) per share......................... $ 0.46 $ 0.83 $ (0.51)
--------- --------- ----------
--------- --------- ----------
</TABLE>
Options to purchase 109,406, 932,823 and 11,421,526 shares of common stock
were excluded from the Company's dilutive net income (loss) per share
calculations in fiscal 1997, 1998 and 1999, respectively because their effect
was anti-dilutive. These anti-dilutive shares had weighted average exercise
prices of $11.49, $4.13 and $3.24 in fiscal 1997, 1998 and 1999, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133 ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
and requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure them at fair value. Gains and
losses resulting from changes in fair value would be accounted for depending on
the use of the derivative and whether it is designated and qualifies for hedge
accounting. SFAS No. 133 will be adopted by the Company in the first quarter of
fiscal 2002 and is not expected to have a material impact on its financial
statements.
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1 ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED
FOR INTERNAL USE. SOP No. 98-1 requires that certain costs related to the
development or purchase of internal-use software be capitalized and amortized
over the estimated useful life of the software. SOP No. 98-1 is effective for
financial statements issued for fiscal years beginning after December 15, 1998.
The Company does not expect the adoption of SOP No. 98-1 to have a material
impact on its results of operations or financial condition.
F-10
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
B. AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities classified as current assets as of March 31,
1998 and 1999 included the following:
<TABLE>
<CAPTION>
AGGREGATE FAIR VALUE
MARCH 31,
----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Short-term investments:
U. S. Treasury and other government agency obligations.............. $ 11,553 $ 11,595
Commercial debt securities.......................................... 6,822 --
---------- ----------
Total short-term investments 18,375 11,595
Cash equivalents:
Money market funds.................................................. 15,128 --
---------- ----------
Total available-for-sale securities................................... $ 33,503 $ 11,595
---------- ----------
---------- ----------
</TABLE>
The aggregate fair value of the Company's investment in available-for-sale
securities as of March 31, 1999, by contractual maturity, consisted of the
following:
<TABLE>
<CAPTION>
AGGREGATE
FAIR VALUE
-------------
(IN
THOUSANDS)
<S> <C>
Due in one year or less........................................................ $ 9,602
Due in one to three years...................................................... 1,993
-------------
$ 11,595
-------------
-------------
</TABLE>
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 fiscal 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year.................................. $ 2,329 $ 3,108 $ 1,888
Additions..................................................... 4,873 2,113 6,931
Deductions.................................................... (4,094) (3,333) (4,802)
--------- --------- ---------
Balance at end of year........................................ $ 3,108 $ 1,888 $ 4,017
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-11
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
D. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 1998 and 1999, consisted of:
<TABLE>
<CAPTION>
MARCH 31,
---------------------
1998 1999
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Computer and manufacturing equipment................................... $ 6,578 $ 8,691
Furniture, fixtures and leasehold improvements......................... 2,567 2,644
Computer software...................................................... 2,563 2,880
--------- ----------
Property and equipment, at cost........................................ 11,708 14,215
Less accumulated depreciation and amortization......................... (8,372) (10,895)
--------- ----------
Property and equipment, net............................................ $ 3,336 $ 3,320
--------- ----------
--------- ----------
</TABLE>
As of March 31, 1998 and 1999, property and equipment includes approximately
$1.6 and $0.2 million of assets acquired under capital lease obligations,
respectively. Accumulated amortization related to these lease assets was
approximately $1.5 million and $0.1 million as of March 31, 1998 and 1999,
respectively.
E. ACCRUED EXPENSES
Accrued expenses as of March 31, 1998 and 1999, consisted of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation....................................................... $ 614 $ 2,112
Accrued market development fund............................................ 294 1,146
Accrued royalties.......................................................... 643 214
Other...................................................................... 917 3,054
--------- ---------
Total...................................................................... $ 2,468 $ 6,526
--------- ---------
--------- ---------
</TABLE>
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 20% 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 1997, 1998 and 1999, 204,254, 127,596 and 358,297
shares, respectively, were issued by the Company to employees at a price ranging
from $3.98 to $6.80, $2.18 to $2.98 and $2.18 to $2.40 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 $2.93, $1.44 and $1.71 at March
31, 1997, 1998 and 1999, respectively. As of March 31, 1997, 1998 and 1999, the
Company had 550,555,
F-12
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
F. STOCK PLANS (CONTINUED)
422,959 and 1,564,662 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 (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, 1997, 1998 and 1999, 13,211,136, 18,229,625 and 20,783,869
shares, respectively, of common stock have been authorized for issuance under
the Plan.
DIRECTOR OPTION PLAN
The Company's 1995 Director Option Plan (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, 1997, 1998 and 1999, 300,000, 700,000 and 700,000 shares,
respectively, of common stock have been authorized for issuance under the
Director Plan.
F-13
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
F. STOCK PLANS (CONTINUED)
Transactions for all of the Company's option plans for fiscal 1997, 1998 and
1999, 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, 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
Authorized...................................... 2,547,489 -- --
Granted......................................... (4,926,250) 4,926,250 3.49
Terminated...................................... 1,595,558 (1,595,558) 3.17
Exercised....................................... -- (384,236) 3.16
------------- -------------
Outstanding as of March 31, 1999................ 5,546,670 11,421,526 $ 3.24
------------- -------------
------------- -------------
</TABLE>
The weighted-average fair values of options granted during 1997, 1998 and
1999 with exercise prices equal to market value were $2.41, $1.07 and $2.13,
respectively.
As of March 31, 1997, 1998 and 1999, 1,618,167, 1,564,301 and 2,998,633
options, respectively, were exercisable under the Plan. The weighted-average
exercise price for the shares exercisable at March 31, 1997, 1998 and 1999 were
$4.84, $3.12, and $3.10, respectively. Fiscal 1997 and 1998 shares granted and
shares terminated as shown in the table above included options which were
repriced.
F-14
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
F. STOCK PLANS (CONTINUED)
The following table summarizes information about fixed stock options
outstanding at March 31, 1999:
<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................ 39,312 3.36 $ 0.18 39,312 $ 0.18
$2.00 to $2.97................ 1,743,626 8.69 $ 2.25 388,459 $ 2.16
$3.03 to $3.94................ 9,208,888 8.76 $ 3.38 2,552,882 $ 3.27
$4.44 to $5.50................ 427,550 9.94 $ 4.49 16,839 $ 5.46
$8.13......................... 2,150 7.36 $ 8.13 1,141 $ 8.13
------------ -----------
$0.05 to $8.13................ 11,421,526 8.77 $ 3.24 2,998,633 $ 3.10
------------ -----------
------------ -----------
</TABLE>
In April 1996, October 1996 and April 1997, the Board of Directors approved
the repricing of options granted at prices in excess of $8.25, $5.50 and $3.25
per share, respectively, for all employees, including executive officers.
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 fiscal 1997, 1998 and 1999 would
have been as indicated below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Net income (loss) as reported............................... $ 13,271 $ 22,537 $ (13,167)
Pro forma................................................... $ 7,230 $ 16,483 $ (20,130)
Net income (loss) per basic share as reported............... $ 0.48 $ 0.85 $ (0.51)
Pro forma................................................... $ 0.26 $ 0.62 $ (0.79)
Net income (loss) per diluted share as reported............. $ 0.46 $ 0.83 $ (0.51)
Pro forma................................................... $ 0.25 $ 0.61 $ (0.79)
</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 1996 through 1999. The fair
value of employee stock options and employee stock purchase plan rights are
F-15
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
F. STOCK PLANS (CONTINUED)
estimated on the date of grant using the Black Scholes option-pricing model with
the following weighted-average assumptions for fiscal 1997, 1998 and 1999:
<TABLE>
<CAPTION>
OPTION PLAN ESPP
------------------------------------- -------------------------------------
1997 1998 1999 1997 1998 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Weighted-average risk free
rate.............................. 6.01% 6.31% 5.51% 6.04% 5.63% 5.82%
Expected life of options/rights (in 2 years with 6 month
years)............................ 3.5 3.5 3.5 increments
Expected stock price volatility..... 68% 78% 84% 68% 78% 84%
Dividend yield...................... -- -- -- -- -- --
Forfeiture rate..................... 60% 60% 20% 60% 60% 20%
</TABLE>
G. MATSUSHITA ELECTRIC INDUSTRIAL CO., LTD. AGREEMENTS
On December 7, 1995, the Company and Matsushita Electronic Industrial Co.,
Ltd. (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 (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. All revenue related to the M2 Agreement has been
recognized as of the end of fiscal year 1998 under the percentage-of-completion
method of accounting.
On April 24, 1996, the Company agreed to make certain modifications to the
M2 system design pursuant to the terms of an addendum (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. On July 23,
1997, the Company and MEI signed a second addendum (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.
F-16
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
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.
I. CIRRUS LOGIC, INC.
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 (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 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 Cirrus
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. The
Company recognized the payment as revenue in fiscal 1998.
J. NET INTEREST AND OTHER INCOME
Net interest and other income for the fiscal 1997, 1998 and 1999, consisted
of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income.................................................. $ 2,720 $ 2,108 $ 1,134
Interest expense................................................. (628) (135) (20)
Other income (expense), net...................................... 23 (99) 5
--------- --------- ---------
$ 2,115 $ 1,874 $ 1,119
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-17
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
K. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 75 $ 120 $ --
State and local.................................................. 1 1 1
Foreign.......................................................... 3,999 98 190
--------- --------- ---------
Total current...................................................... 4,075 219 191
--------- --------- ---------
Total deferred..................................................... -- -- --
--------- --------- ---------
--------- --------- ---------
Total income taxes................................................. $ 4,075 $ 219 $ 191
--------- --------- ---------
--------- --------- ---------
</TABLE>
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 fiscal 1997, 1998 and 1999 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal tax rate............................................ 34.0% 34.0% 34.0%
Valuation allowance................................................... (33.6) (36.1) (35.8)
Foreign tax withholding and other..................................... 23.1 3.1 0.3
--------- --------- ---------
23.5% 1.0% (1.5)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of deferred tax assets as of March 31, 1998 and 1999, are presented as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1998 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax asset:
Depreciation and amortization....................................... $ 2,479 $ 3,251
Deferred revenue.................................................... 151 208
Deferred research and development costs............................. 7,819 7,861
Net operating loss carryforwards.................................... 30,554 34,813
Tax credit carryforwards............................................ 22,257 24,807
Other............................................................... (2,260) (2,009)
---------- ----------
Total gross deferred tax assets....................................... 61,000 68,931
Less valuation allowance.............................................. (61,000) (68,931)
---------- ----------
Net deferred tax assets............................................... $ -- $ --
---------- ----------
---------- ----------
</TABLE>
F-18
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
K. INCOME TAXES (CONTINUED)
The valuation allowance increased $7.9 million in fiscal 1999. Approximately
$0.5 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, 1999, the Company had cumulative federal net operating loss
carryforwards of approximately $100.6 million for federal income tax purposes,
which if not offset against future taxable income, will expire in fiscal 2009
through 2019. As of March 31, 1999, the Company has cumulative California net
operating loss carryforwards of approximately $6.8 million, which if not offset
against future taxable income, will expire in the fiscal 2002 through 2004.
As of March 31, 1999, the Company had unused research and development tax
credits of approximately $6.8 million and $5.3 million available to reduce
future federal and California income taxes, respectively. The federal research
and development tax credit expires in various years through 2019. The California
research and development tax credit can be carried forward indefinitely. The
Company also had foreign tax credits of approximately $11.5 million available to
reduce future federal income taxes, expiring through fiscal 2004. There are also
minimum tax credits of approximately $0.5 million available to reduce future
federal income taxes, which will carry forward indefinitely.
L. 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, 1997, 1998, and 1999,
were $2.0 million, $1.2 million and $1.5 million, respectively.
Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
MARCH 31,
- ------------------------------------------------------------------------------- OPERATING
LEASES
-------------
(IN
THOUSANDS)
<S> <C>
2000........................................................................... $ 2,930
2001........................................................................... 2,943
2002........................................................................... 1,787
2003........................................................................... 842
2004........................................................................... 652
------
Total minimum lease payments................................................... $ 9,154
------
------
</TABLE>
M. 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.
F-19
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
M. CONCENTRATION OF CREDIT RISK (CONTINUED)
Credit risk in receivables is limited to distributors, retailers, software
developers, software licensees and affiliated labels. The Company performs
ongoing credit evaluations of its customers' financial condition and requires
prepayments when deemed necessary.
N. 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 (Purchase Price Guarantee); in fiscal year
1997, 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 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 of the acquisition, a total of 12 products were in
development. The Company estimated that the average aggregate percentage of
completion for those products was approximately 47%. Of the 12 products in
development, four were subsequently cancelled and four were completed and
released, but generated minimal revenues. The remaining four products were
completed and released with modest market success. However, the average
percentage of completion for those products was only approximately 33% at the
time of acquisition. The Company used an income approach in valuing the acquired
in-process research and development. The income approach reflects the present
value of the operating cash flows generated by the in-process research and
development after taking into account the cost to complete the projects, the
relative risk of the projects and an appropriate discount rate to reflect the
time value of investment capital.
At the time, the entire purchase was booked at the guaranteed purchase
price. As a result, the payment of approximately $5.0 million has no impact on
the Company's income statement for fiscal 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
1999, intangible assets, net of amortization, were $1.5 million and $1.0
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 fiscal 1997, with pro forma adjustments as if the acquisition had
been consummated as of the beginning of the periods presented.
F-20
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
N. ACQUISITIONS (CONTINUED)
Pro forma financial information:
<TABLE>
<CAPTION>
FOR YEAR ENDED
MARCH 31, 1997
--------------
<S> <C>
Revenues...................................................................... $ 93,191
Net income (loss)............................................................. $ 11,678
Net income (loss) per basic share............................................. $ 0.42
Net income (loss) per diluted share........................................... $ 0.40
</TABLE>
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.
O. GEOGRAPHIC, SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION
The Company adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information, during fiscal 1999. SFAS No.
131 establishes standards for the reporting by public business enterprises of
information about operating segments, products and services, geographic areas,
and major customers. The method for determining what information to report is
based on the way that management organizes the operating segments within the
Company for making operational decisions and assessments of financial
performance. The Company's chief operating decision maker is considered to be
the Company's Chief Executive Officer (CEO). The CEO reviews financial
information presented on a consolidated basis accompanied by disaggregated
information about revenues by products for purposes of making operating
decisions and assessing financial performance. Therefore, the Company operates
in a single operating segment: interactive entertainment software products.
The disaggregated financial information on a product basis reviewed by the
CEO is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Software publishing revenues:
PC......................................................... $ 9,540 $ 8,346 $ 26,799
Console.................................................... -- -- 20,029
Other...................................................... -- 1,083 1,191
--------- --------- ---------
Total software publishing revenues........................... 9,540 9,429 48,019
Royalty and other revenues................................... 82,810 29,461 --
--------- --------- ---------
Total revenues............................................... $ 92,350 $ 38,890 $ 48,019
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1997, 1998 AND 1999
O. GEOGRAPHIC, SEGMENT AND SIGNIFICANT CUSTOMER INFORMATION (CONTINUED)
In fiscal 1999, the Company's two top customers each accounted for
approximately 13% of the Company's total revenues. All revenues in fiscal 1999
were derived from the Company's software publishing operations. In fiscal 1997
and 1998, one customer from the Company's former hardware systems business
accounted for 85% and 67% of the Company's total revenue, respectively.
The Company's software publishing export sales are principally in Europe and
Asia/Pacific. In each of fiscal 1997, 1998 and 1999, less than 10% of the
Company's total net revenues were derived from international software publishing
sales. The Company had software publishing export sales, primarily to Japan and
the United Kingdom, of approximately $0.6 million, $2.1 million, and $4.2
million for the fiscal 1997, 1998, and 1999, respectively. In fiscal 1997 and
1998, the Company's export sales to Japan from its hardware systems operations
were derived primarily from the M2 agreement with MEI. The Company's assets are
primarily located in its corporate office in the United States.
P. LINES OF CREDIT
In fiscal 1999, the Company entered into two revolving credit agreements
with Coast Business Credit and Merrill Lynch & Co.
The Merrill Lynch credit facility allows the Company to borrow up to $20.0
million or 90% of the cash balances in the pledged collateral bank account at
Merrill Lynch. The amount outstanding under this credit facility bears a
variable per annum rate of interest equal to the sum of the 30-day commercial
paper rate plus 2.10% (6.94% as of March 31, 1999). Interest expense is due
monthly and the loan balance is due at the expiration date of the credit
agreement. This credit agreement will expire on November 30, 2000. As of March
31, 1999, the Company's outstanding loan balance was approximately $9.5 million.
The Coast Business Credit revolving credit agreement permits the Company to
obtain a loan amount of up to $20.0 million, or 60% of qualified accounts
receivables, bearing an interest rate equal to Prime Rate plus 2.0% per annum
(9.75% as of March 31, 1999) and will expire on March 31, 2002. Interest expense
is due monthly and the loan balance is due at the expiration date of the credit
agreement. This agreement contains certain financial covenants, including the
requirement that the Company:
- must achieve 80% of the projected quarterly tangible net worth upon
projections acceptable to Coast;
- must maintain $2,000,000 on deposit at all times in restricted accounts
which shall be assigned to and accessible only to Coast; and
- must not pay dividends.
As of March 31, 1999, no borrowings were outstanding under this facility.
However, on April 1, 1999, the Company repaid the outstanding borrowings to
Merrill Lynch and borrowed $9.5 million from Coast Business Credit.
F-22
<PAGE>
There is a light background with The 3DO Company logo. The front graphics
are an assortment of quotes and awards based on our titles. The text on the page
consists of:
ARMY MEN
ARMY MEN 3D
"These guys really know how to make fun games"--PSExtreme (5/99 issue)
ARMY MEN-AIR ATTACK
"What's so damn fun about the Army Men series is the reminiscence
factor"--Imagine Games Network (4/30/99)
ARMY MEN SARGE'S HEROES
"...It could well be a masterpiece"--Nintendo Power (4/99)
"Some very impressive gameplay mechanics and a superb multiplayer
mode"--Imagine Games Network (3/29/99)
ARMY MEN I
"Toy war is a hell of a lot of fun"--The Washington Post (5/22/99)
ARMY MEN II
"...I found it hard to tear myself away"--PC Accelerator May 1999
BATTLETANX
- "5 stars"--CNET Gamecenter (2/5/99)
- "Battletanx blows up the N64 with great gameplay and ferocious multiplay
action"--GamePro (February 1999)
- "One of the best multiplayer games of all time."--Nintendo Power (December
1998)
HIGH HEAT BASEBALL
- "Editor's Choice"--Computer Gaming World (7/99 issue)
- "This game says hello like the business end of a Louisville
slugger"--Computer Gaming World (7/99 issue)
- "High Heat Baseball 2000 is on track to be not only the best baseball game
of this season, but possibly of all time"--PC Gamer (5/99 issue)
- "3DO has already locked up the MVP award, and everyone else can pretty
much go home and work on next year"--Operation Sports (4/26/99)
- "High Heat 2000 (HH2K) is quite possibly the best baseball game of the
year, if not of all time!"-- Operation Sports (4/26/99)
MIGHT AND MAGIC
MIGHT AND MAGIC VI THE MANDATE OF HEAVEN
- Computer Gaming World Editor's Choice (8/98 issue)
- #1 Holiday Role-Playing Pick, Computer Gaming World (12/98 issue)
- PC Gamer Editor's Choice (8/98 issue)
- "Once you start playing, you won't be able to stop"--PC Gamer (8/98 issue)
HEROES OF MIGHT AND MAGIC II
- "The most popular turn-based strategy game in history"--PC Gamer (10/98
issue)
- Computer Gaming World Hall of Fame (7/99)
HEROES OF MIGHT AND MAGIC III
- "5 stars"--CNET Gamecenter (3/11/99)
- "A"--Gameweek (3/17/99 issue)
- "5 stars"--Computer Games Strategy Plus (6/98 issue)
- Computer Games Strategy Plus Stamp of Approval (6/98 issue)
- Computer Gaming World Editor's Choice (6/98 issue)
- Honored in "The Family PC Top 100"--Family PC (June/July '99)
- Family PC tested (June/July '99)
- Rated 92.--Family PC (June/July '99)
- "One of the most brilliant strategy game designs ever conceived"--GameSpot
(3/99)
VEGAS GAMES 2000
- "Put a bet on this one to win the jackpot."--hotgames.com
<PAGE>
----------------------
TABLE OF CONTENTS
----------------------
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.......................... 3
Risk Factors................................ 6
Forward-Looking Statements.................. 16
Use Of Proceeds............................. 17
Dividend Policy............................. 17
Price Range Of Common Stock................. 17
Capitalization.............................. 18
Dilution.................................... 19
Selected Consolidated Financial Data........ 20
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations................................ 21
Business.................................... 33
Management.................................. 46
Principal Stockholders...................... 48
Description Of Capital Stock................ 50
Underwriting................................ 51
Legal Matters............................... 53
Experts..................................... 53
Additional Information...................... 53
Information Incorporated By Reference....... 53
Index To Consolidated Financial
Statements................................ F-1
</TABLE>
SHARES
[3DO LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
GERARD KLAUER MATTISON & CO., INC.
WEDBUSH MORGAN SECURITIES
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, NASD filing fee and Nasdaq National Market fee.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee.............................................................. $ 9,591
NASD filing fee................................................................... 3,950
Nasdaq National Market fee........................................................ 17,500
Printing and engraving costs...................................................... 175,000
Legal fees and expenses........................................................... 200,000
Accounting fees and expenses...................................................... 200,000
Blue sky fees and expenses........................................................ 5,000
Transfer agent and registrar fees................................................. 5,000
Miscellaneous expenses............................................................ 83,959
----------
Total........................................................................... $ 700,000
----------
----------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933. The Registrant's Restated
Certificate of Incorporation and Amended and Restated Bylaws provide for
indemnification of its directors, officers, employees and other agents to the
maximum extent permitted by the Delaware General Corporation Law. In addition,
the Registrant has entered into Indemnification Agreements with its executive
officers and directors. The Registrant has also purchased and maintains
insurance for its officers, directors, employees and agents against liabilities
which an officer, a director, an employee or an agent may incur in his capacity
as such.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of James A. Cook, General Counsel*
23.1 Consent of Independent Auditors
23.2 Consent of James A. Cook, Executive Vice President, General Counsel and Secretary (see exhibit 5.1)*
23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
24.1 Power of Attorney (see page II-3)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
II-1
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Redwood City, California, on the 9th day of June, 1999.
<TABLE>
<S> <C> <C>
THE 3DO COMPANY
By: /s/ WILLIAM M. HAWKINS III
-----------------------------------------
William M. Hawkins III
CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John W. Adams and James A. Cook, and each of
them, his attorneys-in-fact, each with the power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to sign any registration statement for the same offering covered by this
Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents or any of them, or his or
their substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
Chief Executive Officer
/s/ WILLIAM M. HAWKINS III and
- ------------------------------ Chairman of the Board June 9, 1999
William M. Hawkins III (Principal Executive
Officer)
/s/ JOHN W. ADAMS Chief Financial Officer
- ------------------------------ (Principal Financial June 9, 1999
John W. Adams Officer)
- ------------------------------ Director June 9, 1999
William A. Hall
/s/ H. WILLIAM JESSE, JR.
- ------------------------------ Director June 9, 1999
H. William Jesse, Jr.
/s/ HUGH C. MARTIN
- ------------------------------ Director June 9, 1999
Hugh C. Martin
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ----------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement
5.1 Opinion of James A. Cook, General Counsel*
23.1 Consent of Independent Auditors
23.2 Consent of James A. Cook, Executive Vice President, General Counsel and Secretary (see exhibit
5.1)*
23.3 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
24.1 Power of Attorney (see page II-5)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
<PAGE>
EXHIBIT 1.1
[________________] Shares
THE 3DO COMPANY
Common Stock
UNDERWRITING AGREEMENT
[________, 1999]
GERARD KLAUER MATTISON & CO., INC.
WEDBUSH MORGAN SECURITIES INC.
As Representatives of the
several Underwriters
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Ladies and Gentlemen:
The 3DO Company, a Delaware corporation (the "Company"), proposes to
issue and sell [____________] shares (the "Firm Shares") of the Company's Common
Stock, $0.01 par value (the "Common Stock"), to you and to the other
underwriters named in Schedule I (collectively, the "Underwriters"), for whom
you are acting as Representatives (the "Representatives"). The Company has also
agreed to grant to you and the other Underwriters an option (the "Option") to
purchase up to an additional [__________] [15% of total Firm Shares] shares of
Common Stock (the "Option Shares") on the terms and for the purposes set forth
in Section 1(b). The Firm Shares and the Option Shares are referred to
collectively herein as the "Shares".
The public offering price per share at which the Shares are initially
offered and the purchase price per share for the Shares to be paid by the
several Underwriters shall be agreed upon by the Company and the
Representatives, acting on behalf of the several Underwriters, and such
agreement shall be set forth in a separate written instrument substantially in
the form of EXHIBIT A hereto (the "Price Determination Agreement"). The Price
Determination Agreement may take the form of an exchange of any standard form of
written telecommunication among the Company and the Representatives and shall
specify such applicable information as is indicated in EXHIBIT A hereto. The
offering of the Shares shall be governed by this Agreement, as supplemented by
the Price Determination Agreement. From and after the date of the execution and
delivery of the Price Determination Agreement, this Agreement shall be deemed to
incorporate, and, unless the context otherwise indicates, all references
contained herein to "this Agreement" and to the phrase "herein" shall be deemed
to include, the Price Determination Agreement.
The Company confirms as follows its agreements with the Representatives
and the several other Underwriters:
1
<PAGE>
1. AGREEMENT TO SELL AND PURCHASE.
(a) On the basis of the respective representations,
warranties and agreements of the Company herein contained and subject to all the
terms and conditions of this Agreement: (i) the Company agrees to issue and sell
to the several Underwriters the Firm Shares; and (ii) each of the Underwriters,
severally and not jointly, agrees to purchase from the Company at the purchase
price per share for the Firm Shares to be agreed upon by the Company and the
Representatives, in accordance with Section 1(c) hereof and set forth in the
Price Determination Agreement, the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I, plus such additional number of Firm
Shares which such Underwriter may become obligated to purchase pursuant to
Section 8 hereof. If the Company elects to rely on Rule 430A (as hereinafter
defined), Schedule I may be attached to the Price Determination Agreement.
(b) Subject to all the terms and conditions of this
Agreement, the Company grants the Option to the several Underwriters to
purchase, severally and not jointly, up to [___________] Option Shares from the
Company at the same price per share as the Underwriters shall pay for the Firm
Shares. The Option may be exercised only to cover over-allotments in the sale of
the Firm Shares by the Underwriters and may be exercised in whole or in part at
any time (but not more than once) on or before the [45th] day after the date of
this Agreement (or, if the Company has elected to rely on Rule 430A, on or
before the [45th] day after the date of the Price Determination Agreement), upon
written or telegraphic notice (the "Option Shares Notice") by the
Representatives to the Company no later than 12:00 noon, New York City time, at
least two and no more than five business days before the date specified for
closing in the Option Shares Notice (the "Option Closing Date") setting forth
the aggregate number of Option Shares to be purchased and the time and date for
such purchase. On the Option Closing Date, the Company shall issue and sell to
the Underwriters the number of Option Shares set forth in the Option Shares
Notice, and each Underwriter shall purchase such percentage of the Option Shares
as is equal to the percentage of Firm Shares that such Underwriter is
purchasing, as adjusted by the Representatives in such manner as they deem
advisable to avoid fractional shares.
(c) The public offering price per share at which the Shares
are initially offered and the purchase price per share for the Firm Shares to be
paid by the several Underwriters shall be agreed upon and set forth in the Price
Determination Agreement. In the event such prices have not been agreed upon and
the Price Determination Agreement has not been executed by the close of business
on the fourteenth business day following the date on which the Registration
Statement (as hereinafter defined) becomes effective, this Agreement shall
terminate forthwith, without liability of any party to any other party.
2. DELIVERY AND PAYMENT. Delivery of the Firm Shares shall be made
to the Representatives for the accounts of the Underwriters against payment of
the purchase price therefor by wire transfer of immediately available funds to
the order of the Company at the offices of Morrison & Foerster LLP, counsel to
the Underwriters, located at [1290 Avenue of the Americas, 40th Floor, New York,
New York 10104]. Such payments shall be made at 10:00 a.m., New York City time,
on [_______________, 1999], or at such time on such other date, not later than
ten business days after such date, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "Closing Date").
2
<PAGE>
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) shall take
place at the offices specified above for the closing, at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two full business days prior to the
Closing Date or the Option Closing Date, as the case may be, by written notice
to the Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and the Option Shares by the Company to
the respective Underwriters shall be borne by the Company. The Company shall pay
and hold each Underwriter and any subsequent holder of the Firm Shares and the
Option Shares harmless from, any and all liabilities with respect to or
resulting from any failure or delay in paying Federal and state stamp and other
transfer taxes, if any, which may be payable or determined to be payable in
connection with the original issuance or sale to such Underwriter of the Firm
Shares and the Option Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and covenants with, each Underwriter that:
(a) The company meets the requirements for use of Form S-3
and a registration statement (Registration No. 333-[_________]) on Form S-3
relating to the Shares, including a preliminary prospectus and such amendments
to such registration statement as may have been required to the date of this
Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a preliminary
prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to the Representatives. The term
"Registration Statement" means the registration statement as amended at the time
it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A or Rule 434 of the Rules and Regulations. If the Company files a
registration statement to register a portion of the Shares and relies on Rule
462(b) of the Rules and Regulations for such registration statement to become
effective upon filing with the Commission (the "Rule 462 Registration
Statement"), then any reference to the "Registration Statement" shall be deemed
to include the Rule 462 Registration Statement, as amended from time to time.
The term "Prospectus" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement at
the Effective Date. Any reference herein to the Registration Statement, any
preliminary prospectus or the
3
<PAGE>
Prospectus shall be deemed to refer to and include the documents incorporated by
reference therein pursuant to Item 12 of Form S-3 which were filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), on or before
the Effective Date or the date of such preliminary prospectus or the Prospectus,
as the case may be. Any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to refer to and include the filing
of any document under the Exchange Act after the Effective Date, or the date of
any preliminary prospectus or the Prospectus, as the case may be, and deemed to
be incorporated therein by reference.
(b) On the Effective Date, the date the Prospectus is first
filed with the Commission pursuant to Rule 424(b) (if required), at all times
subsequent to and including the Closing Date and, if later, the Option Closing
Date and when any post-effective amendment to the Registration Statement becomes
effective or any amendment or supplement to the Prospectus is filed with the
Commission, the Registration Statement and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included or
incorporated by reference in the Prospectus, did or will comply in all material
respects with all applicable provisions of the Act, the Rules and Regulations,
the Exchange Act and the rules and regulations thereunder (the "Exchange Act
Rules and Regulations") and will contain all statements required to be stated
therein in accordance with the Act, the Rules and Regulations, the Exchange Act
and the Exchange Act Rules and Regulations. On the Effective Date and when any
post-effective amendment to the Registration Statement becomes effective, no
part of the Registration Statement or any such amendment did or will contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading. At the Effective Date, the date the Prospectus or any amendment or
supplement to the Prospectus is filed with the Commission and at the Closing
Date and, if later, the Option Closing Date, the Prospectus did not or will not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The foregoing representations and
warranties in this Section 3(b) do not apply to any statements or omissions made
in reliance on and in conformity with information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the Registration Statement or Prospectus or any amendment or
supplement thereto. For all purposes of this Agreement, the amounts of the
selling concession and reallowance set forth in the Prospectus under
"Underwriting" constitute the only information relating to any Underwriter
furnished in writing to the Company by or on behalf of the Representatives
specifically for inclusion in the preliminary prospectus, the Registration
Statement or the Prospectus. The Company has not distributed any offering
material in connection with the offering or sale of the Shares other than the
Registration Statement, the preliminary prospectus, the Prospectus or any other
materials, if any, permitted by the Act.
(c) The documents which are incorporated by reference in the
preliminary prospectus and the Prospectus or from which information is so
incorporated by reference, when they become effective or were filed with the
Commission, as the case may be, complied in all material respects with the
requirements of the Act or the Exchange Act, as applicable, the Exchange Act
Rules and Regulations and the Rules and Regulations; and any documents so filed
4
<PAGE>
and incorporated by reference subsequent to the Effective Date shall, when they
are filed with the Commission, conform in all material respects with the
requirements of the Act or the Exchange Act, as applicable, the Exchange Act
Rules and Regulations and the Rules and Regulations.
(d) The only subsidiaries (as defined in the Rules and
Regulations) of the Company are the subsidiaries listed on Exhibit 21 to the
Registration Statement (the "Subsidiaries"). The Company and each of its
Subsidiaries is, and at the Closing Date will be, a corporation duly organized,
validly existing and in good standing (if such status is recognized by
governmental authorities) under the laws of its jurisdiction of incorporation.
Each of the Company and its Subsidiaries is not now, and at the Closing Date
will not be, in violation of any provision of its certificate of incorporation
or by-laws. The Company and each of its Subsidiaries has, and at the Closing
Date will have, full power and authority to conduct all the activities conducted
by it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. The
Company and each of its Subsidiaries is, and at the Closing Date will be, duly
licensed or qualified to do business in and in good standing as a foreign
corporation in all jurisdictions in which the nature of the activities conducted
by it or the character of the assets owned or leased by it makes such licensing
or qualification necessary, except where the failure to be so qualified would
not have a material adverse effect, singly or in the aggregate, on the business,
properties, prospects, condition (financial or otherwise) or results of
operations of the Company and its Subsidiaries taken as a whole (a "Material
Adverse Effect"). All of the issued and outstanding shares of capital stock of
the Subsidiaries have been duly authorized and validly issued, and are fully
paid and non-assessable and, except as disclosed in the Prospectus, are owned by
the Company free and clear of all liens, encumbrances and claims. Except for the
stock of the Subsidiaries and as disclosed in the Registration Statement, the
Company does not own, and at the Closing Date will not own, directly or
indirectly, any shares of stock or any other equity or long-term debt securities
of any corporation or have any equity interest in any firm, partnership, joint
venture, association or other entity. Complete and correct copies of the
certificate of incorporation and of the by-laws of the Company and each of its
Subsidiaries and all amendments thereto have been delivered to the
Representatives, and no changes therein will be made subsequent to the date
hereof and prior to the Closing Date or, if later, the Option Closing Date.
(e) The outstanding shares of Common Stock have been and the
Shares to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive, first refusal, or similar right. The description of the
Common Stock in the Registration Statement and the Prospectus under the caption
"Description of Capital Stock" is now, and at the Closing Date will be, complete
and accurate in all respects. Except as set forth in the Prospectus, the Company
does not have outstanding, and at the Closing Date will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, any shares of Common Stock, any shares of capital stock of any
Subsidiary or any such warrants, convertible securities or obligations.
(f) The financial statements and schedules included or
incorporated by reference in the Registration Statement or the Prospectus
present fairly in all material respects the consolidated financial condition of
the Company and its Subsidiaries as of the respective
5
<PAGE>
dates thereof and the consolidated results of operations and cash flows of the
Company and its Subsidiaries for the respective periods covered thereby, all in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the entire period involved, except as otherwise disclosed in
the Prospectus. No other financial statements or schedules of the Company are
required by the Act, the Rules and Regulations, the Exchange Act or the Exchange
Act Rules and Regulations to be included or incorporated by reference in the
Registration Statement or the Prospectus. KPMG LLP (the "Accountants") who have
reported on such financial statements and schedules, are independent accountants
with respect to the Company as required by the Act and the Rules and
Regulations. The statements included in the Registration Statement with respect
to the Accountants pursuant to Rule 509 of Regulation S-K of the Rules and
Regulations are true and correct in all material respects.
(g) The Company maintains a system of internal accounting
control sufficient to provide reasonable assurance that: (i) transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
material change in the capitalization of the Company (except for the issuance of
Common Stock upon the exercise of stock options granted under the Company's
stock option or other employee benefit plans), (ii) there has not been and will
not have been any material adverse change in the business, properties,
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole (a "Material Adverse Change"),
(iii) neither the Company nor any of its Subsidiaries has incurred, nor will it
incur any material liabilities or obligations, direct or contingent, nor has it
entered into, nor will it enter into any material transactions other than
pursuant to this Agreement and the transactions referred to herein, and (iv) the
Company has not and will not have paid or declared any dividends or other
distributions of any kind on any class of its capital stock.
(i) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act of
1940, as amended.
(j) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending against or
affecting the Company or any of its Subsidiaries or any of their respective
officers or directors in their capacity as such, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding could reasonably be expected to have a Material Adverse Effect and,
to the knowledge of the Company, no such proceedings are threatened. Neither the
Company nor any of its Subsidiaries has received any notice of proceedings
relating to the revocation or modification of any
6
<PAGE>
authorization, approval, order, license, certificate, franchise or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a Material Adverse Effect. There are no pending
investigations known to the Company involving the Company or any of its
Subsidiaries by any governmental agency having jurisdiction over the Company or
its Subsidiaries or their respective businesses or operations.
(k) Except as would not have a Material Adverse Effect, each
of the Company and its Subsidiaries has, and at the Closing Date will have, (i)
all governmental licenses, permits, consents, orders, approvals and other
authorizations necessary to carry on its business as contemplated in the
Prospectus, (ii) complied in all respects with all laws, regulations and orders
applicable to it or its business and (iii) performed all obligations required to
be performed by it, and is not, and at the Closing Date will not be, in default
under any indenture, mortgage, deed of trust, voting trust agreement, loan
agreement, bond, debenture, note agreement, lease, license agreement, contract
or other agreement or instrument (collectively, a "Contract or Other Agreement")
to which it is a party or by which its property is bound or affected. To the
knowledge of the Company and each of its Subsidiaries, no other party under any
Contract or Other Agreement to which it is a party is in default in any respect
thereunder or has given written or oral notice to the Company, its Subsidiaries
or any of their respective officers or directors of such other party's intention
to terminate, cancel or refuse to renew any Contract or Other Agreement.
(l) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is required
in connection with the authorization, issuance, transfer, sale or delivery of
the Shares by the Company, in connection with the execution, delivery and
performance of this Agreement by the Company or in connection with the taking by
the Company of any action contemplated hereby or thereby, except as have been
obtained under the Act or the Rules and Regulations and such as may be required
under state securities or Blue Sky laws or the by-laws and rules of the National
Association of Securities Dealers, Inc. (the "NASD") or regulations of any
jurisdiction in the United States in connection with the purchase and
distribution by the Underwriters of the Shares to be sold by the Company.
(m) The Company has and will have full corporate power and
authority to enter into this Agreement. This Agreement has been duly authorized,
executed and delivered by the Company and (assuming the due authorization,
execution and delivery by the Representatives) constitutes a valid and binding
agreement of the Company and is enforceable against the Company in accordance
with the terms hereof. The performance of this Agreement and the consummation of
the transactions contemplated hereby, and the application of the net proceeds
from the offering and sale of the Shares to be sold by the Company in the manner
set forth in the Prospectus under "Use of Proceeds" will not result in the
creation or imposition of any lien, charge or encumbrance upon any of the assets
of the Company or any of its Subsidiaries pursuant to the terms or provisions
of, or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any other party a right to terminate any of
its obligations under, or result in the acceleration of any obligation under,
(x) the certificate of incorporation or by-laws of the Company or any of its
Subsidiaries, or (y) any Contract or other Agreement to which the Company or any
of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries or any of its properties is bound or affected, and will not violate
or
7
<PAGE>
conflict with any judgment, ruling, decree, order, statute, rule or regulation
of any court or other governmental agency or body applicable to the business or
properties of the Company or any of its Subsidiaries, except where such breach,
violation or default would not have a Material Adverse Effect.
(n) Each of the Company and its Subsidiaries has good and
marketable title to all properties and assets described in the Prospectus to be
owned by each such entity, respectively, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the Prospectus or
are not material to the business of the Company or its Subsidiaries. Each of the
Company and its Subsidiaries has valid, subsisting and enforceable leases or
licenses, as the case may be, for the properties (whether tangible or
intangible) described in the Prospectus to be leased or licensed by it, with
such exceptions as are not material and do not materially interfere with the use
made and proposed to be made of such properties by the Company and such
Subsidiaries.
(o) There is no document or Contract or Other Agreement of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement which is
not described or filed as required. All such Contracts or Other Agreements to
which the Company or any Subsidiary is a party have been duly authorized,
executed and delivered by the Company or such Subsidiary and (assuming the due
authorization, execution and delivery thereof by the other parties to such
Contracts and Other Agreements) constitute valid and binding agreements of the
Company or such Subsidiary and are enforceable against the Company or such
Subsidiary in accordance with the terms thereof.
(p) No statement, representation, warranty or covenant made
by the Company in this Agreement or made in any certificate or document required
by this Agreement to be delivered to the Representatives was or will be, when
made, inaccurate, untrue or incorrect.
(q) Neither the Company nor, to the knowledge of the Company,
any of its directors, officers or controlling persons has taken, directly or
indirectly, any action intended to cause or result in, or which might reasonably
be expected to cause or result in, or which has constituted, stabilization or
manipulation, under the Act or otherwise, of the price of any security of the
Company to facilitate the sale or resale of the Shares.
(r) No holder of securities of the Company has rights to
register any securities of the Company because of the filing of the Registration
Statement, except for rights that have been duly waived by such holder.
(s) The Shares are duly authorized for listing on the Nasdaq
National Market, subject only to notice of issuance of the Shares.
(t) Neither the Company nor any of its Subsidiaries is
involved in any material labor dispute, nor, to the knowledge of the Company, is
any such dispute threatened.
(u) The Company and its Subsidiaries own, or are licensed or
otherwise have the full right to use, all material trademarks and trade names
which are used in or necessary for the conduct of their respective businesses as
described in the Prospectus. Except as otherwise
8
<PAGE>
disclosed in the Prospectus, neither the Company nor any of its Subsidiaries has
received any notice of any claims asserted by any person with respect to the use
of any such trademarks or trade names, or challenging or questioning the
validity or effectiveness of any such trademark or trade name. The use, in
connection with the business and operations of the Company and its Subsidiaries
of such trademarks and trade names does not, to the Company's knowledge,
infringe on the rights of any person.
(v) Neither the Company, its Subsidiaries nor, to the best of
the Company's knowledge, any of their respective officers, directors, partners,
employees, agents or affiliates or any other person acting on behalf of the
Company or any of its Subsidiaries has made or agreed to make any payment of
funds or other items of value, or received or retained any funds or other items
of value, in violation of any law or regulation or of a character required to be
disclosed in the Prospectus.
4. AGREEMENTS OF THE COMPANY. The Company with the several
Underwriters as follows:
(a) The Company shall not, either prior to the Effective Date
or thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company shall use its best efforts to cause the
Registration Statement to become effective, and shall notify the Representatives
promptly (1) when the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, (2) of any request by the
Commission for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (3) of the commencement by the
Commission or by any state securities commission or other securities regulator
of any proceedings for the suspension of the qualification of any of the Shares
for offering or sale in any jurisdiction or of the initiation, or the
threatening, of any proceeding for that purpose, including, without limitation,
the issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement or the initiation of any proceedings for that purpose
or the threat thereof, (4) of the happening of any event during the period
mentioned in the second sentence of Section 4(e) hereof that in the judgment of
the Company makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or that requires the making of any changes in
the Registration Statement or the Prospectus in order to make the statements
therein, in light of the circumstances in which they are made, not misleading
and (5) of receipt by the Company or any attorney or other representative of the
Company of any other communication from the Commission or other securities
regulator relating to the Company, the Registration Statement, any preliminary
prospectus or the Prospectus. If at any time the Commission shall issue any
order suspending the effectiveness of the Registration Statement, if so
requested by the Representatives, the Company shall make every reasonable effort
to obtain the withdrawal of such order at the earliest possible moment. The
Company shall use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and to notify the
Representatives promptly of all such filings.
9
<PAGE>
(c) The Company shall furnish to counsel for the
Underwriters, without charge, one manually signed copy of the Registration
Statement and of any post-effective amendment thereto, including financial
statements and schedules, and all exhibits thereto (including any documents
filed under the Exchange Act and deemed to be incorporated by reference into the
Prospectus) and shall furnish to the Representatives, without charge, for
transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules but without exhibits.
(d) The Company shall comply with all the provisions of any
undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time,
the Company shall deliver to each of the Underwriters, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection therewith.
If during such period of time any event shall occur which in the judgment of the
Company or counsel to the Underwriters is necessary to be set forth in the
Prospectus in order to make any statement therein, in the light of the
circumstances under which it was made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company shall, as
promptly as practicable, prepare and duly file with the Commission an
appropriate supplement or amendment thereto, and shall deliver to each of the
Underwriters, without charge, such number of copies thereof as the
Representatives may reasonably request. The Company shall not file with the
Commission any document under the Exchange Act before the termination of the
offering of the Shares by the Underwriters if such document would be deemed to
be incorporated by reference into the Prospectus, unless such document has been
reviewed and approved by the Representatives after reasonable notice thereof.
(f) Prior to any public offering of the Shares by the
Underwriters, the Company shall cooperate with the Representatives and counsel
to the Underwriters in connection with the registration or qualification of the
Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may request, including, without limitation,
the provinces and territories of Canada and other jurisdictions outside of the
United States; provided, however, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the
Effective Date, the Company shall furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish to
the Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
10
<PAGE>
(h) The Company shall make generally available to holders of
its securities as soon as reasonably practicable but in no event later than the
last day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be audited
but shall be in reasonable detail) for a period of 12 months commencing after
the Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) Whether or not any of the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, the Company
shall pay, or reimburse if paid by the Representatives, all costs and expenses
incident to the performance of the obligations of the Company under this
Agreement, including but not limited to costs and expenses of or relating to (1)
the preparation, printing and filing of the Registration Statement and exhibits
to it, each preliminary prospectus, the Prospectus and any amendment or
supplement to the Registration Statement or the Prospectus, (2) the preparation
and delivery of certificates representing the Shares, (3) the printing of this
Agreement, the Agreement Among Underwriters, any Dealer Agreements, any
Underwriters' Questionnaire and the Agreement and Power of Attorney, (4)
furnishing (including costs of shipping, mailing and overnight courier) such
copies of the Registration Statement, the Prospectus and any preliminary
prospectus (including any documents incorporated by reference therein), and all
amendments and supplements thereto, as may be requested for use in connection
with the offering and sale of the Shares by the Underwriters or by dealers to
whom Shares may be sold, (5) the listing of the Shares on the Nasdaq National
Market, (6) any filings required to be made by the Underwriters with the NASD,
and the fees, disbursements and other charges of counsel for the Underwriters in
connection therewith, (7) the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of such jurisdictions
designated pursuant to Section 4(f) hereof, including the fees, disbursements
and other charges of counsel to the Underwriters in connection therewith, and
the preparation and printing of preliminary, supplemental and final Blue Sky
memoranda, (8) counsel to the Company, (9) the transfer agent for the Shares,
(10) the Accountants, (11) the marketing of the offering by the Company,
including, without limitation, all costs and expenses of aircraft rentals,
commercial airline tickets, hotels, meals and other travel expenses of officers,
employees, agents and other representatives of the Company (but not officers,
employees, agents or other representatives of the Underwriters) and (12) all
fees, costs and expenses for consultants used by the Company in connection with
the offering.
(j) If this Agreement shall be terminated by the Company
pursuant to any of the provisions hereof (other than pursuant to Section 8) or
if for any reason the Company shall be unable to perform its obligations
hereunder, the Company shall reimburse the several Underwriters for all
out-of-pocket expenses (including the fees, disbursements and other charges of
counsel to the Underwriters) reasonably incurred by them in connection herewith.
(k) The Company shall not at any time, directly or
indirectly, take any action intended to cause or result in, or which might
reasonably be expected to cause or result in, or which will constitute,
stabilization or manipulation, under the Act or otherwise, of the price of the
shares of Common Stock to facilitate the sale or resale of any of the Shares.
11
<PAGE>
(l) The Company shall apply the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds."
(m) The Company shall not, and the Company shall cause each
of its executive officers and directors to enter into agreements with the
Representatives, in form and substance acceptable to the Representatives, to the
effect that they shall not, for a period of 180 days after the date of the
Prospectus, without the prior written consent of Gerard Klauer Mattison & Co.,
Inc. ("GKM"), offer to sell, sell, contract to sell, grant any option to sell
(other than pursuant to the Company's employee benefit plans described in the
Prospectus), or otherwise dispose of, or require the Company to file with the
Commission a registration statement under the Act (other than on Form S-8) to
register, any shares of Common Stock or securities convertible into or
exchangeable for Common Stock or warrants or other rights to acquire shares of
Common Stock of which such person is now, or may in the future become, the
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act),
other than as bona fide gifts to persons who agree in writing with GKM to be
bound by the provisions of this Section 4(m).
5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. In addition
to the execution and delivery of the Price Determination Agreement, the
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 6:00 p.m., New
York City time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by the Representatives and all filings required
by Rule 424 of the Rules and Regulations and Rule 430A shall have been made.
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, which, in the Representatives' reasonable
judgment, makes it impracticable or inadvisable to market the Shares or to
enforce the contracts for the sale of the Shares, (iii) any request for
additional information on the part of the staff of the Commission or any such
authorities shall have been complied with to the satisfaction of the staff of
the Commission or such authorities and (iv) after the date hereof, no amendment
or supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives did not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and the Option Closing
Date and signed by the Chief Executive Officer or the Chairman of the Board of
Directors of the Company and the Chief Financial Officer of the Company (who
may, as to proceedings threatened, rely upon the best of their information and
belief), to the effect of clauses (i), (ii) and (iii).
(c) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there shall not have
been a Material Adverse
12
<PAGE>
Change or development involving a prospective Material Adverse Change, whether
or not arising from transactions in the ordinary course of business, in each
case other than as set forth in the Registration Statement and the Prospectus,
(ii) neither the Company nor any of its Subsidiaries shall have sustained any
material loss or interference with its business or properties from fire,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or any court or legislative or other governmental action,
order or decree, which is not set forth in the Registration Statement and the
Prospectus, if in the judgment of the Representatives any such development makes
it impracticable or inadvisable to consummate the sale and delivery of the
Shares by the Underwriters at the public offering price, (iii) there shall have
been no transactions, not in the ordinary course of business, entered into by
the Company or any of its Subsidiaries, except as set forth in the Registration
Statement and the Prospectus, and no liabilities or obligations incurred by the
Company or any of its Subsidiaries, in each case from the latest date as of
which the financial condition of the Company and its Subsidiaries is set forth
in the Registration Statement and the Prospectus, which would have a Material
Adverse Effect, (iv) neither the Company nor any of its Subsidiaries has issued
any securities (other than the Shares) or declared or paid any dividend or made
any distribution in respect of its capital stock of any class, debt (long-term
or short-term) or, except in the ordinary course of business, liabilities or
obligations of the Company or any of its Subsidiaries (contingent or otherwise),
except as set forth in the Registration Statement and Prospectus, and (v) no
material amount of the assets of the Company or any of its Subsidiaries shall
have been pledged, mortgaged or otherwise encumbered, except as set forth in the
Registration Statement and Prospectus.
(d) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would have a Material Adverse Effect.
(e) Each of the representations and warranties of the Company
herein shall be true and correct in all material respects at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, as if made
at the Closing Date and, with respect to the Option Shares, at the Option
Closing Date, and all covenants and agreements contained herein to be performed
by the Company and all conditions contained herein to be fulfilled or complied
with by the Company at or prior to the Closing Date and, with respect to the
Option Shares, at or prior to the Option Closing Date, shall have been duly
performed, fulfilled or complied with.
(f) The Representatives shall have received opinions, each
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, satisfactory in form and substance to counsel for the
Underwriters, from Wilson, Sonsini, Goodrich & Rosati, counsel to the Company,
and from James A. Cook, General Counsel of the Company.
(g) The Representatives shall have received an opinion, dated
the Closing Date and the Option Closing Date, from Morrison & Foerster LLP,
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives.
13
<PAGE>
(h) On the date of the Prospectus, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery,
addressed to the Representatives and in form and substance satisfactory to the
Representatives, confirming that they are independent accountants with respect
to the Company as required by the Act and the Rules and Regulations and with
respect to the financial and other statistical and numerical information
contained in the Registration Statement or incorporated by reference therein. At
the Closing Date and, as to the Option Shares, the Option Closing Date, the
Accountants shall have furnished to the Representatives a letter, dated the date
of its delivery, which shall confirm, on the basis of a review in accordance
with the procedures set forth in the letter from the Accountants, that nothing
has come to their attention during the period from the date of the letter
referred to in the prior sentence to a date (specified in the letter) not more
than five days prior to the Closing Date and the Option Closing Date which would
require any change in their letter dated the date of the Prospectus, if it were
required to be dated and delivered at the Closing Date and the Option Closing
Date.
(i) At the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed by the Chief Executive
Officer and the Chief Financial Officer of the Company, in form and substance
satisfactory to the Representatives, to the effect that:
1. Each signer of such certificate has carefully examined
the Registration Statement and the Prospectus (including any documents
filed under the Exchange Act and deemed to be incorporated by reference
into the Prospectus), and (A) as of the date of such certificate, such
documents are true and correct in all material respects and do not omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading and (B) since the Effective
Date, no event has occurred as a result of which it is necessary to
amend or supplement the Prospectus in order to make the statements
therein not untrue or misleading in any material respect and there has
been no document required to be filed under the Exchange Act or the
Exchange Act Rules and Regulations, which upon such filing would be
deemed to be incorporated by reference into the Prospectus, that has not
been so filed on a timely basis;
2. Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects; and
3. Each of the covenants required herein to be performed by
the Company on or prior to the date of such certificate has been duly,
timely and fully performed and each condition herein required to be
complied with by the Company on or prior to the delivery of such
certificate has been duly, timely and fully complied with.
(j) On or prior to the Closing Date, the Representatives
shall have received the executed agreements referred to in Section 4(m).
14
<PAGE>
(k) The Shares shall be qualified for sale in such states as
the Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
(l) The Common Stock shall continue to be traded on the
Nasdaq National Market and the Shares shall have been duly authorized for
listing thereon, subject only to the issuance of the Shares.
(m) The Company shall have furnished to the Representatives
such certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the transactions and matters
contemplated hereby.
6. INDEMNIFICATION.
(a) The Company shall indemnify and hold harmless each (i)
Underwriter and (ii) the directors, officers, employees, counsel and agents of
each Underwriter and each person, if any, who controls each Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act (any of
the persons referred to in clause (i) or (ii) may hereinafter be referred to as
an Indemnified Person or collectively as Indemnified Persons) from and against
any and all losses, claims, liabilities, expenses and damages (including any and
all investigative, legal and other expenses reasonably incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding
between any of the Indemnified Persons and any indemnifying parties or between
any indemnified party and any third party, or otherwise, or any claim asserted),
to which they, or any of them, may become subject under the Act, the Exchange
Act or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based on any untrue statement or alleged untrue statement of
a material fact contained in (i) any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus or in any documents filed under the Exchange Act and
deemed to be incorporated by reference into the Prospectus, (ii) any
application, other document or written communication, executed by the Company or
based upon written information supplied by the Company, filed in any
jurisdiction in order to qualify the Shares under the securities laws of such
jurisdiction, or (iii) any document, executed by the Company or based on written
information supplied by the Company, filed with any securities exchange, or the
omission or alleged omission to state in such documents enumerated in the
immediately preceding clauses (i)-(iii) of a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they were made; PROVIDED, HOWEVER, that: (x) the
Company shall not be liable to the extent that such loss, claim, liability,
expense or damage arises from the sale of the Shares in the public offering to
any person by an Underwriter and is based on an untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives on behalf of any Underwriter expressly for inclusion in the
Registration Statement, any preliminary prospectus or the Prospectus; and (y)
the Company shall not be liable to any Underwriter (or any director, officer,
employee, counsel or agent or any person who controls such Underwriter within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act) with
respect to any loss, claim, liability, expense or damage arising out of or based
on any untrue statement or alleged untrue statement of a material fact or any
omission
15
<PAGE>
or alleged omission to state a material fact in any preliminary prospectus
which is corrected in the Prospectus, if the person asserting any such loss,
claim, liability, expense or damage purchased Shares from such Underwriter
but was not sent or given a copy of the Prospectus at or prior to the written
confirmation of the sale of such Shares to such person. If multiple claims
are brought against any Indemnified Person in an arbitration proceeding, and
indemnification is permitted under applicable law and is provided for under
this Agreement with respect to at least one such claim, the Company agrees
that any arbitration award shall be conclusively deemed to be based on claims
as to which indemnification is permitted and provided for, except to the
extent the arbitration award expressly states that the award, or any portion
thereof, is based solely on a claim as to which indemnification is not
available. This indemnity agreement will be in addition to any liability that
the Company might otherwise have.
(b) Each Underwriter shall indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each director of the
Company and each officer of the Company who signs the Registration Statement to
the same extent as the foregoing indemnity from the Company to each Underwriter,
but only insofar as losses, claims, liabilities, expenses or damages arise out
of or are based on any untrue statement or omission or alleged untrue statement
or omission made in reliance on and in conformity with information relating to
any Underwriter furnished in writing to the Company by the Representatives on
behalf of such Underwriter expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus. This indemnity will be in addition to
any liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be
indemnified under this Section 6 shall, promptly after receipt of notice of
commencement of any action against such party in respect of which a claim is to
be made against an indemnifying party or parties under this Section 6, notify
each such indemnifying party of the commencement of such action, enclosing a
copy of all papers served, but the omission so to notify such indemnifying party
shall not relieve it from any liability that it may have to any indemnified
party under the foregoing provisions of this Section 6 unless, and only to the
extent that, such omission results in the forfeiture of substantive rights or
defenses by the indemnifying party. If any such action is brought against any
indemnified party and it notifies the indemnifying party of its commencement,
the indemnifying party will be entitled at its own expense (except as provided
below) to participate in and, to the extent that it elects by delivering written
notice to the indemnified party promptly after receiving notice of the
commencement of the action from the indemnified party, jointly with any other
indemnifying party similarly notified, to assume the defense of the action, with
counsel reasonably satisfactory to the indemnified party, and after notice from
the indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified party
in connection with the defense. The indemnified party will have the right to
employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(1) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (2) the indemnified party has reasonably
concluded (based on written advice of counsel) that there may be legal defenses
available to it or other indemnified parties that are different from or in
addition to those available to the indemnifying party, (3) a conflict or
16
<PAGE>
potential conflict exists (based on written advice of counsel to the indemnified
party) between the indemnified party and the indemnifying party (in which case
the indemnifying party shall not have the right to direct the defense of such
action on behalf of the indemnified party) or (4) the indemnifying party has not
in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees, disbursements and other charges of
counsel shall be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in connection with
any proceeding or related proceedings, be liable for the reasonable fees,
disbursements and other charges of more than one firm (in addition to local
counsel) for all such indemnified party or parties. All such fees, disbursements
and other charges shall be reimbursed by the indemnifying party promptly as they
are incurred. An indemnifying party shall not be liable for any settlement of
any action or claim effected without its written consent (which consent will not
be unreasonably withheld or delayed). No indemnifying party shall, without the
prior written consent of each indemnified party that is or could reasonably be
expected to become a party thereto, settle or compromise or consent to the entry
of any judgment in any pending or threatened claim, action or proceeding
relating to the matters contemplated by this Section 6, unless such settlement,
compromise or consent includes an unconditional release of each such indemnified
party from all liability arising or that may arise out of such claim, action or
proceeding.
(d) In order to provide for just and equitable contribution
in circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Underwriters, the
Company and the Underwriters shall contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who also may be liable for contribution) to which the Company
and any one or more of the Underwriters may be subject in such proportion as
shall be appropriate to reflect the relative benefits received by the Company
and the Underwriters, respectively. The relative benefits received by the
Company and the Underwriters, respectively, shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. If, but only if, the allocation provided by
the foregoing sentence is not permitted by applicable law, the allocation of
contribution shall be made in such proportion as is appropriate to reflect not
only the relative benefits referred to in the foregoing sentence but also the
relative fault of the Company and the Underwriters, respectively, with respect
to the statements or omissions which resulted in such loss, claim, liability,
expense or damage or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Representatives on
behalf of the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that it
17
<PAGE>
would not be just and equitable if contributions pursuant to this Section 6(d)
were to be determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take into account the equitable considerations referred to
herein. The amount paid or payable by an indemnified party as a result of the
loss, claim, liability, expense or damage, or action in respect thereof,
referred to above in this Section 6(d) shall be deemed to include, for purpose
of this Section 6(d), any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 6(d), no Underwriter
shall be required to contribute any amount in excess of the underwriting
discounts and commissions received by it, and no person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute as
provided in this Section 6(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 6(d), any
person who controls a party to this Agreement within the meaning of the Act will
have the same rights to contribution as that party, and each officer of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action against such party in respect of which a claim for contribution
may be made under this Section 6(d), will notify any such party or parties from
whom contribution may be sought, but the omission so to notify will not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have under this Section 6(d). No party will be liable
for contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in
this Section 6 and the representations and warranties of the Company contained
in this Agreement shall remain operative and in full force and effect regardless
of (i) any investigation made by or on behalf of the Underwriters, (ii)
acceptance of any of the Shares and payment therefor or (iii) any termination of
this Agreement.
7. TERMINATION. The obligations of the several Underwriters under
this Agreement may be terminated at any time prior to the Closing Date (or, with
respect to the Option Shares, on or prior to the Option Closing Date), by notice
to the Company from the Representatives, without liability on the part of any
Underwriter to the Company if, prior to delivery and payment for the Shares (or
the Option Shares, as the case may be), in the sole judgment of the
Representatives, (i) trading in any of the equity securities of the Company
shall have been suspended by the Commission, by Nasdaq or by an exchange that
lists the Shares, (ii) trading in securities generally on the New York Stock
Exchange shall have been suspended or limited or minimum or maximum prices shall
have been generally established on such exchange, or additional material
governmental restrictions, not in force on the date of this Agreement, shall
have been imposed upon trading in securities generally by such exchange or by
order of the Commission or any court or other governmental authority, (iii) a
general banking moratorium shall have been declared by either Federal or New
York State authorities, (iv) any material adverse change in the financial or
securities markets in the United States or in political, financial or economic
conditions in the United States or any outbreak or material escalation of
hostilities or declaration by the United
18
<PAGE>
States of a national emergency or war or other calamity or crisis shall have
occurred, the effect of any of which is such as to make it impracticable or
inadvisable to market the Shares or the Option Shares on the terms and in the
manner contemplated by the Prospectus, (v) if the Company or any of its
Subsidiaries shall have sustained a loss material or substantial to the Company
or any of its Subsidiaries by reason of flood, fire, accident, hurricane,
earthquake, theft, sabotage or other calamity or malicious act which, whether or
not such loss shall have been insured, will make it inadvisable to proceed with
the offering and sale of the Shares or the Option Shares, or (vi) if there shall
have been a material adverse change in the condition (financial or otherwise),
earnings, business, prospects, shareholders' equity, operations, properties,
business or results of operations of the Company or the Company and its
Subsidiaries taken as a whole, as would make it inadvisable to proceed with the
offering and sale of the Shares or the Option Shares.
8. SUBSTITUTION OF UNDERWRITERS. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it or
they have agreed to purchase hereunder, and the aggregate number of Firm Shares
which such defaulting Underwriter or Underwriters agreed but failed or refused
to purchase is not more than one-tenth of the aggregate number of Firm Shares to
be purchased on such date, the other Underwriters shall be obligated, severally,
to purchase the Firm Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase, in the proportions which the number of
Firm Shares which they have respectively agreed to purchase pursuant to Section
1 bears to the aggregate number of Firm Shares which all such non-defaulting
Underwriters have so agreed to purchase, or in such other proportions as the
Representatives may specify; provided that in no event shall the maximum number
of Firm Shares which any Underwriter has become obligated to purchase pursuant
to Section 1 be increased pursuant to this Section 8 by more than one-ninth of
the number of Firm Shares agreed to be purchased by such Underwriter without the
prior written consent of such Underwriter. If any Underwriter or Underwriters
shall fail or refuse to purchase any Firm Shares and the aggregate number of
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase exceeds one-tenth of the aggregate number of the Firm
Shares to be purchased on such date, and arrangements satisfactory to the
Company and the Representatives for the purchase of such Firm Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or the Company for the
purchase or sale of any Shares under this Agreement. In any such case, either
the Representatives or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and in the Prospectus or in any
other documents or arrangements may be effected. Any action taken pursuant to
this Section 8 shall not relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
9. MISCELLANEOUS.
(a) Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (a) if to the Company, at its principal office, 600 Galveston
Drive, Redwood City, California 94063, attention: William M. Hawkins III, or (b)
if to the Underwriters, to GKM at the offices of GKM, 529 Fifth Avenue,
19
<PAGE>
New York, New York 10017, Attention: Dominic A. Petito; or in any case to such
other address as the party to be notified may have requested in writing. Any
such notice shall be effective only upon receipt. Any notice under Section 7 or
8 may be made by telex or telephone, but if so made shall be subsequently
confirmed in writing.
(b) This Agreement has been and is made solely for the
benefit of the several Underwriters and the Company and of the controlling
persons, directors and officers referred to in Section 6, and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" as used
in this Agreement shall not include a purchaser, as such purchaser, of Shares
from any of the several Underwriters.
(c) All representations, warranties and agreements of the
Company contained herein or in certificates or other instruments delivered
pursuant hereto, shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter or any of their
controlling persons and shall survive delivery of and payment for the Shares
hereunder.
(d) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE
AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. Each party hereto hereby
irrevocably submits for purposes of any action arising from this Agreement
brought by any other party hereto to the jurisdiction of the courts of New York
State located in the Borough of Manhattan and the U.S. District Court for the
Southern District of New York. This Agreement may be signed in two or more
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
(e) In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
(f) The Company and the Underwriters each hereby irrevocably
waive any right they may have to a trial by jury in respect of any claim based
upon or arising out of this Agreement or the transactions contemplated hereby.
(g) This Agreement embodies the entire agreement and
understanding between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. This Agreement may not be
amended or otherwise modified or any provision hereof waived except by an
instrument in writing signed by GKM and the Company.
20
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among the
Company and the several Underwriters.
Very truly yours,
THE 3DO COMPANY
By:
----------------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
Confirmed as of the date first
above mentioned:
GERARD KLAUER MATTISON & CO., INC.
WEDBUSH MORGAN SECURITIES
Acting on their own behalf and as the
Representatives of the other several Underwriters
named in Schedule I hereof
By: GERARD KLAUER MATTISON & CO., INC.
By:
------------------------------------------
Name: Dominic Petito
Title: Senior Managing Director
WEDBUSH MORGAN SECURITIES INC.
By:
-------------------------------------
Name:
------------------------------
Title:
-----------------------------
21
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Name of Shares to be
Underwriter Purchased
- ---------------- ---------------------
<S> <C>
Gerard Klauer Mattison & Co., Inc. ..................
Wedbush Morgan Securities Inc. ......................
---------
Total [ ]
---------
---------
</TABLE>
22
<PAGE>
EXHIBIT A
THE 3DO COMPANY
- --------------------------------------------------------------------------------
PRICE DETERMINATION AGREEMENT
[___________, 1999]
GERARD KLAUER MATTISON & CO., INC.
WEDBUSH MORGAN SECURITIES INC.
As Representatives of the
several Underwriters
c/o Gerard Klauer Mattison & Co., Inc.
529 Fifth Avenue
New York, New York 10017
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated
[________________, 1999] (the "Underwriting Agreement"), among The 3DO Company,
a Delaware corporation (the "Company") and the several Underwriters named in
Schedule I thereto or hereto (the "Underwriters"), for whom you are acting as
Representatives (the "Representatives"). The Underwriting Agreement provides,
subject to the terms and conditions set forth therein, for the purchase by the
Underwriters from the Company an aggregate of [______________] shares (the "Firm
Shares") of the Company's common stock, par value $.01 per share (the "Common
Stock"). This Agreement is the Price Determination Agreement referred to in the
Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the undersigned
agree with the Representatives as follows:
1. The public offering price per share at which the Firm Shares shall
initially be offered shall be $_______.
2. The purchase price per share for the Firm Shares to be paid to the
Company by the several Underwriters shall be $_______, representing an amount
equal to the public offering price set forth above, less $______ per share
representing the underwriting discounts and commissions.
The Company represents and warrants to each of the Underwriters that
the representations and warranties of the Company set forth in Section 3 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule I
is a completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE
PERFORMED ENTIRELY
23
<PAGE>
WITHIN SUCH STATE. Each party hereto hereby irrevocably submits for purposes of
any action arising from this Agreement brought by any other party hereto to the
jurisdiction of the courts of New York State located in the Borough of Manhattan
and the U.S. District Court for the Southern District of New York.
If the foregoing is in accordance with your understanding of the
agreement among the Company and the Underwriters, please sign and return to the
Company a counterpart hereof, whereupon this instrument along with all
counterparts and together with the Underwriting Agreement shall be a binding
agreement among the Company and the Underwriters in accordance with its terms
and the terms of the Underwriting Agreement.
Very truly yours,
THE 3DO COMPANY
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
Confirmed as of the date first
above mentioned:
GERARD KLAUER MATTISON & CO., INC.
WEDBUSH MORGAN SECURITIES
Acting on their own behalf and as the
Representatives of the other several Underwriters
named in Schedule I hereof
By: GERARD KLAUER MATTISON & CO., INC.
By:
----------------------------------------------
Name: Dominic Petito
Title: Senior Managing Director
WEDBUSH MORGAN SECURITIES INC.
By:
-------------------------------------
Name:
--------------------------------
Title:
-------------------------------
24
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Name of Underwriter to Be Purchased
- ---------------------- --------------------------
<S> <C>
Gerard Klauer Mattison & Co., Inc.................
Wedbush Morgan Securities Inc.....................
---------
Total [ ]
---------
---------
</TABLE>
25
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The 3DO Company
We consent to the use of our report included herein, and to the references
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
/s/ KPMG LLP
Mountain View, California
June 8, 1999
<PAGE>
EXHIBIT 23.3
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
WWW.WSGR.COM
June 9, 1999
The 3DO Company
600 Galveston Drive
Redwood City, CA 94063
RE: REGISTRATION STATEMENT ON FORM S-3
Ladies and Gentlemen:
We consent to the use of our name wherever appearing in the Registration
Statement on Form S-3 for The 3DO Company filed with the Securities and Exchange
Commission on June 9, 1999.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ WILSON SONSINI GOODRICH & ROSATI
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999, CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE TWELVE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,256
<SECURITIES> 11,595
<RECEIVABLES> 24,794
<ALLOWANCES> 4,017
<INVENTORY> 874
<CURRENT-ASSETS> 36,048
<PP&E> 14,215
<DEPRECIATION> 10,895
<TOTAL-ASSETS> 40,488
<CURRENT-LIABILITIES> 20,373
<BONDS> 0
0
0
<COMMON> 255
<OTHER-SE> (257)
<TOTAL-LIABILITY-AND-EQUITY> 40,488
<SALES> 48,019
<TOTAL-REVENUES> 48,019
<CGS> 13,778
<TOTAL-COSTS> 48,336
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (12,976)
<INCOME-TAX> 191
<INCOME-CONTINUING> (13,167)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,167)
<EPS-BASIC> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
