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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
March 31, 1999 0-21336
THE 3DO COMPANY
(Exact name of Registrant as specified in its charter)
Delaware 94-3177293
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
600 Galveston Drive, Redwood City,
California 94063 (Address of principal
executive offices and zip code)
(650) 261-3000
(Registrant's telephone number, including area code)
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Securities registered pursuant to 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 Par Value
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
As of May 31, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $90,706,272 (based upon the closing
sales price of such stock as reported by the Nasdaq National Market on such
date). Shares of Common Stock held by each officer, director, and holder of
5% or more of the outstanding Common Stock on that date have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of May 31, 1999, the number of outstanding shares of the Registrants'
Common Stock was 25,684,787.
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PART 1
ITEM 1. 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.
We filed a registration statement on Form S-3 with the Securities and
Exchange Commission on June 9, 1999 in connection with a proposed public
offering of up to $34.5 million of our Common Stock.
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 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.
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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 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.
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.
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
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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 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:
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Best Buy Target
Wal-Mart Sears
Electronics Boutique Hollywood Video
Babbage's KayBee Toys
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Toys "R" Us Kmart
Blockbuster Video
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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 64%
of our software publishing revenues in fiscal 1998 and 51% 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.
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
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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 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
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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.
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.
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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.
RISK FACTORS
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.
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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 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 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.
9
<PAGE>
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 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
10
<PAGE>
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.
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.
11
<PAGE>
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
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:
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<PAGE>
- 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 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.
13
<PAGE>
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.
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 the offering of up to an aggregate of $34.5
million of our Common Stock, 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 existing
14
<PAGE>
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.
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.
ITEM 2. 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
15
<PAGE>
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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended March 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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>
CLOSING SALES PRICES
----------------------------------
HIGH LOW
---------------- ---------------
<S> <C> <C>
Fiscal Year Ended March 31, 1998:
First Quarter $ 5.19 $ 2.75
Second Quarter 4.50 3.25
Third Quarter 3.75 2.00
Fourth Quarter 3.59 2.00
Fiscal Year 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
</TABLE>
As of May 31, 1999, there were approximately 784 holders of record of
25,684,787 shares of outstanding common stock.
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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- --------------- ------------- -------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
SOFTWARE PUBLISHING
Revenues....................................... $3,287 $7,330 $9,540 $9,429 $48,019
Cost of revenues............................... $1,526 $3,989 5,397 3,916 13,778
-------------- --------------- ------------- -------------- ---------------
Gross profit................................... $1,761 $3,341 4,143 5,513 34,241
Operating expenses:
Research and development.................... 6,433 13,002 23,717 16,483 25,939
Sales and marketing......................... 1,527 2,015 5,309 5,612 13,497
General and administrative.................. 1,471 3,034 6,917 6,399 8,900
In-process research and development......... -- -- 7,700 -- --
-------------- --------------- ------------- -------------- ---------------
Total operating expenses................. 9,431 18,051 43,643 28,494 48,336
Operating income (loss)........................ (7,670) (14,710) (39,500) (22,981) (14,095)
Net interest and other income (expense)(1)..... 437 684 2,115 1,874 1,119
-------------- --------------- ------------- -------------- ---------------
Income (loss) before taxes..................... $(7,233) $(14,026) $(37,385) $(21,107) $(12,976)
-------------- --------------- ------------- -------------- ---------------
HARDWARE SYSTEMS
Revenues:
Royalties and license fees.................. $18,593 $24,074 $79,167 $29,371 --
Development systems and other............... 8,500 6,514 3,643 90 --
-------------- --------------- ------------- -------------- ---------------
Total revenues........................... 27,093 30,588 82,810 29,461 --
Cost of revenues:
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<PAGE>
Royalties and license fees.................. 2,200 694 456 -- --
Development systems and other............... 3,451 3,231 2,136 43 --
-------------- --------------- ------------- -------------- ---------------
Total cost of revenues................... 5,651 3,925 2,592 43 --
-------------- --------------- ------------- -------------- ---------------
Gross profit................................... 21,442 26,663 80,218 29,418 --
Operating expenses:
Research and development.................... 30,050 28,182 18,360 2,664 --
Sales and marketing......................... 15,176 5,746 2,734 -- --
General and administrative.................. 6,033 6,501 4,393 923 --
Stock incentive............................. 8,359 -- -- -- --
-------------- --------------- ------------- -------------- ---------------
Total operating expenses................. 59,618 40,429 25,487 3,587 --
-------------- --------------- ------------- -------------- ---------------
Operating income............................... (38,176) (13,766) 54,731 25,831 --
Gain on sale of hardware systems assets........ -- -- -- 18,032 --
Net interest and other income (expense)........ -- -- -- -- --
-------------- --------------- ------------- -------------- ---------------
Income before taxes............................ $(38,176) $(13,766) $54,731 $43,863 --
-------------- --------------- ------------- -------------- ---------------
CONSOLIDATED SOFTWARE PUBLISHING AND HARDWARE
SYSTEMS
Income (loss) before taxes..................... $(45,409) $(27,792) $17,346 $22,756 $(12,976)
Income and foreign withholding taxes........... 853 6,876 4,075 219 191
Net income (loss).............................. $(46,262) $(34,668) $13,271 $22,537 $(13,167)
Basic net income (loss) per share.............. $(2.04) $(1.36) $0.48 $0.85 $(0.51)
Diluted net income (loss) per share............ $(2.04) $(1.36) $0.46 $0.83 $(0.51)
</TABLE>
(1) For presentation purposes, net interest and other income (expense) has
been allocated to software publishing.
<TABLE>
<CAPTION>
MARCH 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments. $14,346 $50,145 $33,617 $34,584 $13,851
Working capital................................... 10,826 (6,951) 14,067 28,769 15,675
Total assets...................................... 34,161 63,330 44,954 40,447 40,488
Short-term debt................................... -- -- -- -- 9,505
Total long-term liabilities....................... 6,529 1,831 1,715 -- --
Total stockholders' equity........................ 15,685 131 21,399 33,578 20,115
</TABLE>
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FORWARD-LOOKING STATEMENTS
This Form 10-K 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" and "Business."
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 Form 10-K.
These forward-looking statements apply only as of the date of this Form 10-K.
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:
- our proposed public offering of common stock;
- 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 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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 FORM 10-K. THIS FORM
10-K 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
FORM 10-K. 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.
We filed a registration statement on Form S-3 with the Securities and
Exchange Commission on June 9, 1999 in connection with a proposed public
offering of up to $34.5 million of our Common Stock
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
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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.
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".
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.
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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. 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>
1997 1998 1999
---- ---- ----
YEAR ENDED MARCH 31,
<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.
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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 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.
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<PAGE>
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 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.
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
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<PAGE>
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 the offering of up to $34.5 million of
our Common Stock, 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.
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<PAGE>
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.
As of March 31, 1999, our overall progress by phase was as follows:
<TABLE>
<CAPTION>
PERCENTAGE EXPECTED
COMPLETED AS OF COMPLETION
PHASE MARCH 31, 1999 DATE
------------------------------------ ---------------------------- -----------------------
<S> <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.
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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.
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
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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.
ITEM 7(a). 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(1) Interest Rate Cost Fair Value
---------------- ----------------- -----------------
<S> <C> <C> <C>
Fixed rate 6.00% $ 11,538 $ 11,573
Variable rate 4.18% 22 22
</TABLE>
(1) See definition in Note A to our Consolidated Financial
Statements.
The aggregate fair value of our 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>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The Independent Auditors' Report, Consolidated Financial Statements and Notes
to Consolidated Financial Statements follow on Pages 30 through 47.
29
<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
30
<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 issued and
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.
31
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
SOFTWARE PUBLISHING YEARS ENDED MARCH 31,
----------------------------------------
1997 1998 1999
------------- ------------ -------------
<S> <C> <C> <C>
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.
32
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
(in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TREASURY
------------------ PAID-IN COMPREHENSIVE ACCUMULATED STOCK STOCKHOLDERS' COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME DEFICIT AT COST EQUITY INCOME (LOSS)
--------- -------- ------------ ------------- ----------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of March 31, 1996 26,003 $ 260 $ 150,541 $ (189) $(150,481) -- $ 131
Comprehensive Income:
Net income 13,271 13,271 $ 13,271
Other comprehensive income
(loss)
Unrealized gain from -- -- -- 36 -- -- 36 36
investments
Foreign currency translation -- -- -- (11) -- -- (11) (11)
--------------
Comprehensive income $ 13,296
==============
Issuance of common stock for
acquisition 1,610 16 5,664 -- -- -- 5,680
Sale of common stock through
employee stock plans and other
plans 709 7 1,844 -- -- -- 1,851
Common stock issued under stock
incentive program 47 1 440 -- -- -- 441
-------- -------- ------------ ------------- ----------- ---------- -------------
Balances as of March 31, 1997 28,369 $ 284 $ 158,489 $ (164) $(137,210) -- $ 21,399
Comprehensive Income:
Net income -- -- -- 22,537 -- 22,537 $ 22,537
Other comprehensive loss
Unrealized loss from -- -- -- (112) -- -- (112) (112)
investments
Foreign currency translation -- -- -- (14) -- -- (14) (14)
--------------
Comprehensive income $ 22,411
==============
Sale of common stock through
employee stock plans and other
plans 649 6 1,449 -- -- -- 1,455
Repurchase of 3DO shares -- -- -- (11,687) (11,687)
-------- -------- ------------ ------------- ----------- ---------- -------------
Balances as of March 31, 1998 29,018 $ 290 $ 159,938 $ (290) $(114,673) $(11,687) $ 33,578
Comprehensive Income:
Net loss -- -- -- -- (13,167) -- (13,167) $ (13,167)
Other comprehensive income
Unrealized gain from -- -- -- 35 -- -- 35 35
investments
--------------
Comprehensive loss $ (13,132)
==============
Sale of common stock through
employee stock plans and other
plans 742 7 2,037 -- -- -- 2,044
Repurchase of 3DO shares -- -- (2,375) (2,375)
======== ======== ============ ============= =========== ========== =============
Balances as of March 31, 1999 29,760 $ 297 $ 161,975 $ (255) $(127,840) $(14,062) $ 20,115
======== ======== ============ ============= =========== ========== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
<PAGE>
THE 3DO COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS 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 assets -- (18,032) --
Revenue recognized in exchange for 3DO shares -- (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 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 3DO shares -- (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.
34
<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.
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
35
<PAGE>
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 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
36
<PAGE>
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.
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 YEARS ENDED MARCH 31,
------------------------------------------------
1997 1998 1999
-------------- ------------- --------------
<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.
B. AVAILABLE-FOR-SALE SECURITIES
37
<PAGE>
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 --
Asset backed repurchase agreements -- --
---------------- ----------------
Total cash equivalents 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 the years ended March 31, 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>
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>
38
<PAGE>
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, 1999 and 1998, 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, 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.
39
<PAGE>
Transactions for the years ended March 31, 1997, 1998 and 1999, were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------
OPTIONS WEIGHTED
AVAILABLE FOR AVERAGE
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.
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>
40
<PAGE>
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>
YEARS 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 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%
2 years with 6 month
Expected life of options/rights (in 3.5 3.5 3.5 increments
years)
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.
41
<PAGE>
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.
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 years ended March 31, 1997, 1998
and 1999, consisted of the following:
<TABLE>
<CAPTION>
YEARS 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>
42
<PAGE>
K. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS 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 the years ended March 31, 1997, 1998 and 1999 were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1997 1998 1999
----------- --------- ----------
<S> <C> <C> <C>
Statutary 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>
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
43
<PAGE>
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>
OPERATING
MARCH 31, 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.
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
44
<PAGE>
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.
Pro forma financial information:
<TABLE>
<CAPTION>
FOR YEAR ENDED
MARCH 31, 1997
---------------------
<S> <C>
Revenue $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.
45
<PAGE>
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>
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.
46
<PAGE>
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
47
<PAGE>
PART III
ITEM 10. EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
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
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
48
<PAGE>
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.
49
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION TABLES
Summary Compensation Table. The following table sets forth the compensation
paid by the Company to the Chief Executive Officer and the four most highly
compensated executive officers of the Company other than the Chief Executive
Officer (collectively the "Named Officers") during the last fiscal year.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION ALL OTHER
FISCAL ANNUAL COMPENSATION OPTIONS/SARS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS # (1)
--------------------------- -------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Trip Hawkins 1999 $ 295,792 -0- 440,000 $ 840
Chairman and Chief 1998 $ 295,792 -0- 1,760,000 (2) $ 660
Executive Officer 1997 $ 295,000 $35,128 2,620,000 (3) $ 660
James Alan Cook 1999 $ 289,954 -0- 40,000 $ 840
Executive Vice President, 1998 $ 275,504 $100,000 704,000 (4) $ 660
General Counsel, and 1997 $ 243,552 $20,408 738,000 (5) $ 660
Secretary
Stephen E. Fowler 1999 $ 212,023 -0- 60,000 $ 9,085 (6)
Senior Vice President, 1998 $ 199,473 -0- 307,000 (7) $ 3,265 (8)
Sales & Operations
Richard J. Hicks III 1999 $ 180,262 -0- 120,000 $ 10,498 (9)
Senior Vice President, 1998 $ 75,810 -0- 185,000 $ -0-
Product Development
John Adams 1999 $ 154,929 -0- 30,000 $ 538
Chief Financial Officer 1998 $ 8,654 -0- 150,000 $ -0-
(from March 1998)
</TABLE>
(1) The amounts include premiums paid by the Company for group term life
insurance.
(2) Includes 1,560,000 options granted in previous fiscal years that in fiscal
1998 were exchanged for new options at $3.25 per share after Mr. Hawkins
agreed to certain adjustments to the option vesting schedules.
(3) Includes 500,000 options that were originally granted in fiscal 1994,
10,000 options that were originally granted in fiscal 1995 at $11.00 per
share, and 50,000 options that were originally granted in fiscal 1996 at
$11.875 per share that in fiscal 1997 were twice exchanged for new
options, first at $8.25 per share and later at $5.50 per share, after Mr.
Hawkins agreed to certain adjustments to the option vesting schedules.
(4) Includes 594,000 options granted in previous fiscal years that in fiscal
1998 were exchanged for new options at $3.25 per share after Mr. Cook agreed
to certain adjustments to the option vesting schedules.
(5) Includes 4,000 options granted in fiscal 1995 at $9.875 per share, 12,000
options granted in fiscal 1995 at $10.75 per share, 10,000 options granted
in fiscal 1995 at $11.00 per share, 28,000 options granted in fiscal 1996
at $11.875 per share, and 40,000 options granted in fiscal 1996 at $11.50
per share that in fiscal 1997 were twice exchanged for new options, first
at $8.25 per share and later at $5.50 per share, after Mr. Cook agreed to
certain adjustments to the option vesting schedules. Also includes 150,000
options granted in fiscal 1997 at $8.25 per share that were exchanged for
new options at $5.50 per share, after Mr. Cook agreed to certain
adjustments to the option vesting schedule.
(6) Includes a gain of $8,245 realized upon the sale of shares acquired through
the Employee Stock Purchase Plan.
(7) Includes 150,000 options granted in previous fiscal years that in fiscal
1998 were exchanged for new options at $3.25 per share after Mr. Fowler
agreed to certain adjustments to the option vesting schedules.
(8) Includes a gain of $2,739 realized upon the sale of shares acquired through
the Employee Stock Purchase Plan.
50
<PAGE>
(9) Includes a gain of $9,893 realized upon the sale of shares acquired through
the Employee Stock Purchase Plan.
Option Grants in Last Fiscal Year. The following table sets forth certain
information concerning grants of stock options to each of the Named Officers
during the fiscal year ended March 31, 1999. The table also sets forth
hypothetical gains or "opinion spreads" for the options at the end of their
respective ten-year terms. These gains are based on the assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted over the full option term. Actual gains, if any, on option exercises are
dependent on the future performance of the Company's Common Stock and overall
market conditions.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATE OF
GRANTED TO STOCK PRICE
EMPLOYEES EXERCISE APPRECIATION
DATE OPTIONS IN FISCAL PRICE EXPIRATION FOR OPTIONS TERM(2)
NAME GRANTED GRANTED(1) YEAR PER SHARE DATE 5% 10%
----------------- --------- ------------ ---------- ------------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
John Adams 7/28/98 10,000 0.2030 $ 3.3750 7/28/08 $ 21,225.19 $ 53,788.81
2/18/99 20,000 0.4060 $ 3.8437 2/18/09 $ 48,345.65 $ 122,517.36
------ ------ --------- ----------
Total 30,000 0.6090 $ 69,570.84 $ 176,306.17
James Alan Cook 7/28/98 20,000 0.4060 $ 3.3750 7/28/08 $ 42,450.39 $ 107,577.62
2/18/99 20,000 0.4060 $ 3.8437 2/18/09 $ 48,345.65 $ 122,517.36
------ ------ --------- ----------
Total 40,000 0.8120 $ 90,796.04 $ 230,094.98
Stephen E. Fowler 7/28/98 10,000 0.2030 $ 3.3750 7/28/08 $ 21,225.19 $ 53,788.81
2/18/99 50,000 1.0150 $ 3.8437 2/18/09 $ 120,864.11 $ 306,293.39
------ ------ ---------- ----------
Total 60,000 1.2180 $ 142,089.30 $ 360,082.20
Trip Hawkins 7/28/98 240,000 4.8719 $ 3.3750 7/28/08 $ 509,404.65 $ 1,290,931.39
2/18/99 200,000 4.0599 $ 3.8437 2/18/09 $ 483,456.45 $ 1,225,173.58
------ ------ ---------- ------------
Total 440,000 8.9317 $ 992,861.10 $ 2,516,104.97
Richard J. Hicks III 7/28/98 20,000 0.4060 $ 3.3750 7/28/08 $ 42,450.39 $ 107,577.62
11/5/98 100,000 2.0299 $ 3.0312 11/05/08 $ 190,630.54 $ 483,095.21
------ ------ ---------- ----------
Total 120,000 2.4359 $ 233,080.93 $ 590,672.83
</TABLE>
(1) The options referenced in the foregoing table are intended to be incentive
stock options to the extent permitted by applicable law. The Company's 1993
Incentive Stock Plan (the "Incentive Plan") also provides for the grant of
non-qualified stock options. Incentive stock options may be granted under
the Incentive Plan at an exercise price no less than market value on the
date of grant. For so long as the Company's Common Stock is listed on the
Nasdaq National Market, the fair market value is the closing sale price for
the Common Stock. Non-qualified options may be granted at an exercise price
of no less than 85% of market value on the date of grant. Options generally
become exercisable as to 20% of the shares subject to the option one year
after commencement of employment, and as to the remainder in equal monthly
installments (accrued on a monthly basis) over the succeeding 48 months. In
addition, options accelerate in full and become immediately exercisable upon
a merger, unless such options are assumed or replaced by equivalent options
by the successor corporation. Options generally terminate on the earlier of
three months after termination of the optionee's employment by or services
to the Company, or ten years after grant.
(2) The 5% and 10% assumed annualized rates of compound stock price
appreciation are based on the exercise prices shown in the table, are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or a projection by the Company of future
Common Stock prices.
51
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED VALUE AT MARCH 31, 1998 AT MARCH 31, 1998
---------------------------- -----------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------- --------------------------- ----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Adams, John 0 $ 0.00 30,000 150,000 $ 96,561.00 $ 435,931.00
Cook, James Alan 0 $ 0.00 426,835 417,165 $1,031,789.81 $ 902,168.97
Fowler, Stephen E 0 $ 0.00 145,166 236,834 $ 357,183.67 $ 499,424.71
Hawkins, Trip 0 $ 0.00 1,062,166 1,137,834 $2,276,356.19 $2,406,043.79
Richard J. Hicks, III 0 $ 0.00 51,167 253,833 $ 98,109.17 $ 532,982.32
GRAND TOTAL 0 $ 0.00 2,603,137 4,867,963 $3,859,999.84 $4,776,550.79
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information known to us for the beneficial
ownership of our common stock as of March 31, 1999 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>
NUMBER PERCENT
------ -------
SHARES BENEFICIALLY OWNED
--------------------
<S> <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
William A. Hall (3)........................................... 45,383 *
H. William Jesse, Jr. (4)..................................... 38,333 *
Hugh C. Martin (5)............................................ 36,667 *
James A. Cook (6)............................................. 461,085 1.8
Stephen E. Fowler (7)......................................... 159,116 *
Richard J. Hicks, III (8)..................................... 62,133 *
John W. Adams (9)............................................. 35,818 *
All executive officers and directors as a group 7,140,230 26.0%
(11 persons) (10).............................................
</TABLE>
52
<PAGE>
* 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.
(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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this Item is incorporated herein by reference to the
Company's Proxy Statement for the 1999 annual meeting of stockholders.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
<TABLE>
<CAPTION>
PAGE(S) IN
FORM 10-K
<S> <C>
1. Index to Consolidated Financial Statements
Independent Auditors' Report 30
Consolidated Balance Sheets as of March 31, 1999 and 1998 31
Consolidated Statements of Operations for the years ended
March 31, 1999, 1998 and 1997. 32
Consolidated Statements of Stockholders' Equity
for the years ended March 31, 1999, 1998 and 1997. 33
Consolidated Statements of Cash Flows for the years ended
March 31, 1999, 1998 and 1997. 34
Notes to Consolidated Financial Statements 35-47
2. Financial Statement Schedules
Information required by this Item is included in the Notes to
53
<PAGE>
<CAPTION>
<S> <C>
Consolidated Financial Statements
3. Exhibits
</TABLE>
54
<PAGE>
The following exhibits are filed as part of, or incorporated by reference into,
this report:
<TABLE>
<CAPTION>
NUMBER EXHIBIT TITLE
<C> <S>
3.01 -- Registrant's Restated Certificate of Incorporation.
3.05 -- Registrant's Delaware Bylaws, as amended.
4.01 -- Form of Specimen Certificate for Registrant's Common
Stock.(2)
10.01 -- 1991 Incentive Stock Plan of the Registrant.(2)
10.02 -- 1993 Incentive Stock Plan of the Registrant.(2)
10.03 -- Form of Restricted Stock Purchase Agreement of the
Registrant.(2)
10.04 -- Form of Incentive Stock Option Agreement of the
Registrant.(2)
10.05 -- Form of Nonstatutory Stock Option Agreement of the
Registrant.(2)
10.06 -- 401(k) Plan of the Registrant.(2)
10.07 -- Employment Agreement between the Registrant and William M.
Hawkins III dated as of February 1993.(2)
10.07A -- Amendment to Employment Agreement between the Registrant and
William M. Hawkins III, dated as of March 22, 1994.(3)
10.08 -- Form of Indemnity Agreement.(2)
10.09 -- Lease between Seaport Centre Venture Phase I and the
Registrant for office space at 600 Galveston Drive,
Building 5, Redwood City, California.(4)
10.09A -- First Amendment to Lease between Seaport Centre Venture
Phase I and the Registrant for office space at 600 Galveston
Drive, Building 5, Redwood City, California.(3)
10.09B -- Second Amendment to Lease between Seaport Centre Venture
Phase I and the Registrant for office space at 600 Galveston
Drive, Building 5, Redwood City, California.(5)
10.10 -- 1994 Employee Stock Purchase Plan of the Registrant (6)
10.11 -- 1995 Director Option Plan of the Registrant (6)
10.12 -- Asset Purchase Agreement between the Registrant and Samsung
Electronics Co., Ltd. (1)(6)
10.13 -- Second Addendum dated July 23, 1997, to Technology Licensing
Agreement between the Registrant and Matsushita Electronic
Industrial Co., Ltd., dated December 7, 1995 (1) (6)
10.14 -- WCWA Loan Agreement between the Registrant and
Merrill Lynch & Co. dated November 3, 1998.
10.15 -- Loan and Security Agreement between the Registrant and
Coast Business Credit dated March 18, 1999.
21.01 -- List of Subsidiaries of the Registrant.
23.01 -- Consent of Independent Auditors.
24.01 -- Power of Attorney.
</TABLE>
(1) Confidential treatment has been granted with respect to certain portions
of this document.
(2) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-59166
(3) Incorporated by reference to exhibits 10.21A, 10.34A, 10.36, 10.37, 10.38
and 10.39 filed with the Registrant's Registration Statement on Form S-1
No. 33-71364.
(4) Incorporated by reference to exhibits 10.34, 10.40 and 10.41 filed with the
Registrant's Annual Report on Form 10-K for the year ended March 31, 1994
(5) Incorporated by reference to exhibit 10.34B filed with the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1995
(6) Incorporated by reference to exhibits 10.46, 10.47, 10.48 and 10.49
filed with the Registrant's Annual Report on Form 10-K for the year
ended March 31, 1997.
55
<PAGE>
(b) Reports on Form 8-K:
No Reports on Form 8-K were filed during the quarter ended March 31, 1999.
(c) Exhibits:
The registrant hereby incorporates as part of this Form 10-K the exhibits
listed in Item 14(a)3, as set forth above.
(d) Financial Statement Schedules:
Information required by this Item is included in Notes to Consolidated
Financial Statements.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized:
THE 3DO COMPANY
a Delaware Corporation
By: /s/ JOHN ADAMS
----------------------------------
John Adams
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
(Duly Authorized Officer)
Date: June 17, 1999
57
<PAGE>
THE 3DO COMPANY
Report on form 10-K for
the year ended March 31, 1999
INDEX TO EXHIBITS*
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER EXHIBIT NAME NUMBERED PAGE
<C> <S> <C>
10.14 WCWA Loan Agreement between the Registrant and
Merrill Lynch & Co. dated November 3, 1998.
10.15 Loan and Security Agreement between the Registrant
and Coast Business Credit dated March 18, 1999.
21.01 List of Subsidiaries of the Registrant.
23.01 Consent of Independent Auditors.
24.01 Power of Attorney.
27.01 Financial Data Schedule.
</TABLE>
* Only exhibits actually filed are listed. Exhibits incorporated by reference
are set forth in the exhibit listing included in Item 14 of the Report on
Form 10-K.
58
<PAGE>
Exhibit 10.14
[LOGO] MERRILL LYNCH WCMA*LOAN AGREEMENT
- ------------------------------------------------------------------------------
WCMA LOAN AGREEMENT NO. 26M-07P21 ("Loan Agreement") dated as of November 3,
1998, between THE 3DO COMPANY, a corporation organized and existing under the
laws of the State of California having its principal office at 600 Galveston
Drive, Redwood City, CA 94063 ("Customer"), and MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC., a corporation organized and existing under the laws
of the State of Delaware having its principal office at 33 West Monroe
Street, Chicago, IL 60603 ("MLBFS").
In accordance with that certain WORKING CAPITAL MANAGEMENT* ACCOUNT AGREEMENT
NO. 26M-07P21 ("WCMA Agreement") between Customer and MLBFS' affiliate,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED ("MLPF&S"), Customer has
subscribed to the WCMA Program described in the WCMA Agreement. The WCMA
Agreement is by this reference incorporated as a part hereof, in conjunction
therewith and as part of the WCMA Program, Customer has requested that MLBFS
provide, and subject to the terms and conditions herein set forth MLBFS has
agreed to provide, a commercial line of credit for Customer (the "WCMA Line
of Credit").
Accordingly, and in consideration of the premises and of the mutual covenants
of the parties hereto, Customer and MLBFS hereby agree as follows:
1. DEFINITIONS
(a) SPECIFIC TERMS, in addition to terms defined elsewhere in this Loan
Agreement, when used herein the following terms shall have the following
meanings:
(i) "Activation Date" shall mean the date upon which MLBFS shall cause the
WCMA Line of Credit to be fully activated under MLPF&S' computer system as
part of the WCMA Program.
(ii) "Additional Agreements" shall mean all agreements, instruments,
documents and opinions other than this Loan Agreement, whether with or from
Customer or any other party, which are contemplated hereby or otherwise
reasonably required by MLBFS in connection herewith, or which evidence the
creation, guaranty or collateralization of any of the Obligations or the
granting or perfection of liens or security interests upon any collateral for
the Obligations.
(iii) "Bankruptcy Event" shall mean any of the following: (A) a proceeding
under any bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt or receivership law or statute shall be filed or consented to by
Customer or any Guarantor; or (B) any such proceeding shall be filed against
Customer or any Guarantor and shall not be dismissed or withdrawn within
sixty (60) days after filing; or (C) Customer or any Guarantor shall make a
general assignment for the benefit of creditors; or (D) Customer or any
Guarantor shall generally fail to pay or admit in writing its inability to
pay its debts as they become due; or (E) Customer or any Guarantor shall be
adjudicated as bankrupt or insolvent.
(iv) "Business Day" shall mean any day other than a Saturday, Sunday, federal
holiday or other day on which the New York Stock Exchange is regularly closed.
(v) "Commitment Expiration Date" shall mean November 29, 1998.
(vi) "Default" shall mean an "Event of Default" as defined in Section 7
hereof, or an event which with the giving of notice, passage of time, or
both, would constitute such an Event of Default.
(vii) "General Funding Conditions" shall mean each of the following
conditions to any WCMA Loan by MLBFS hereunder: (A) no Default shall have
occurred and be continuing or would result from the making of any WCMA Loan
hereunder by MLBFS; (B) there shall not have occurred and be continuing any
material adverse change in the business or financial condition of Customer or
any Guarantor; (C) all representations and warranties of Customer or any
Guarantor herein or in any Additional Agreements shall then be true and
correct in all material respects; (D) MLBFS shall have received this Loan
Agreement and all of the Additional Agreements, duly executed and filed or
recorded where applicable, all of which shall be in form and substance
reasonably satisfactory to MLBFS; (E) MLBFS shall have received evidence
reasonably satisfactory to it as to the ownership of and the perfection and
priority of MLBFS' liens and security interests on any collateral for the
Obligations furnished pursuant to any of the Additional Agreements; and (F)
any additional conditions specified in the "WCMA Line of Credit Approval"
letter executed by MLBFS with respect to the transactions contemplated hereby
shall have been met to the reasonable satisfaction of MLBFS.
(viii) "Guarantor" shall mean a person or entity who has either guaranteed or
provided collateral for any or all of the Obligations.
(ix) "Initial Maturity Date" shall mean the first date upon which the WCMA
Line of Credit will expire (subject to renewal in accordance with the terms
hereof); to wit: November 23, 2000.
(x) "Interest Due Date" shall mean the last Business Day of each calendar
month during the term hereof (or, if Customer makes special arrangements with
MLPF&S, the last Friday of each calendar month during the term hereof).
(xi) "Interest Rate" shall mean a variable per annum rate of interest equal
to the sum of 2.10% and the 30-Day Commercial Paper Rate. The "30-Day
Commercial Paper Rate" shall mean, as of the date of any determination, the
interest rate from time to time published in the "Money Rates" section of THE
WALL STREET JOURNAL for 30-day high-grade unsecured notes sold through
dealers by major corporations. The Interest Rate will change as of the date
of publication in THE WALL STREET JOURNAL of a 30-Day Commercial Paper Rate
that is different from that published on the preceding Business Day. In the
event
<PAGE>
that THE WALL STREET JOURNAL shall, for any reason, fail or cease to publish
the 30-Day Commercial Paper Rate, MLBFS will choose a reasonably comparable
index or source to use as the basis for the Interest Rate.
(xii) "Line Fee" shall mean the fee of $75,000.00 payable from time to time
in accordance with the provisions of Section 3(k) hereof.
(xiii) "Maturity Date" shall mean the date of expiration of the WCMA Line of
Credit.
(xiv) "Maximum WCMA Line of Credit" shall mean $20,000,000.00.
(xv) "Obligations" shall mean all liabilities, indebtedness and other
obligations of Customer to MLBFS, howsoever created, arising or evidenced,
whether now existing or hereafter arising, whether direct or indirect,
absolute or contingent, due or to become due, primary or secondary or joint
or several, and without limiting the foregoing, shall include interest
accruing after the filing of any petition in bankruptcy, and all present and
future liabilities, indebtedness and obligations of Customer under this Loan
Agreement.
(xvi) "Renewal Year" shall mean and refer to the 12-month period immediately
following the Initial Maturity Date and each 12-month period thereafter.
(xvii) "WCMA Account" shall mean and refer to the Working Capital Management
Account of Customer with MLPF&S identified as Account No. 26M-07P21 and any
successor WCMA account.
(xviii) "WCMA Loan" shall mean each advance made by MLBFS pursuant to this
Loan Agreement.
(xix) "WCMA Loan Balance" shall mean an amount equal the aggregate unpaid
principal amount of all WCMA Loans.
(b) OTHER TERMS. Except as otherwise defined herein: (i) all terms used in
this Loan Agreement which are defined in the Uniform Commercial Code of
Illinois ("UCC") shall have the meanings set forth in the UCC, and (ii)
capitalized terms used herein which are defined in the WCMA Agreement shall
have the meanings set forth the WCMA Agreement.
2. WCMA PROMISSORY NOTE
FOR VALUE RECEIVED, Customer hereby promises to pay to the order of MLBFS, at
the times and in the manner set forth in this Loan Agreement, or in such
other manner and at such place as MLBFS may hereafter designate in writing
[which if other than by a direct payment to MLBFS at its principal office shall
be approved in writing by Customer (such approval not to be unreasonably
withheld)], the following: (a) on the Maturity Date, or if earlier, on the
date of termination of the WCMA Line of Credit, the WCMA Loan Balance; (b)
interest at the Interest Rate on the outstanding WCMA Loan Balance, from and
including the date on which the initial WCMA Loan is made until the date of
payment of all WCMA Loans in full; and (c) on demand, all other sums payable
pursuant to this Loan Agreement, including, but not limited to, the periodic
Line Fee and any late charges. Except as otherwise expressly set forth
herein, Customer hereby waives presentment, demand for payment, protest and
notice of protest, notice of dishonor, notice of acceleration, notice of
intent to accelerate and all other notices and formalities in connection with
this WCMA Promissory Note and this Loan Agreement.
3. WCMA LOANS
(a) ACTIVATION DATE. Provided that: (i) the Commitment Expiration Date shall
not then have occurred, and (ii) Customer shall have subscribed to the WCMA
Program and its subscription to the WCMA Program shall then be in effect, the
Activation Date shall occur on or promptly after the date, following the
acceptance of this Loan Agreement by MLBFS at its office in Chicago,
Illinois, upon which each of the General Funding Conditions shall have been
met or satisfied to the reasonable satisfaction of MLBFS. No activation by
MLBFS of the WCMA Line of Credit for a nominal amount shall be deemed
evidence of the satisfaction of any of the conditions herein set forth, or a
waiver of any of the terms or conditions hereof.
(b) WCMA LOANS. Subject to the terms and conditions hereof, during the period
from and after the Activation Date to the first to occur of the Maturity Date
or the date of termination of the WCMA Line of Credit pursuant to the terms
hereof, and in addition to WCMA Loans automatically made to pay accrued
interest, as hereafter provided: (i) MLBFS will make WCMA Loans to Customer
in such amounts as Customer may from time to time request in accordance with
the terms hereof, up to an aggregate outstanding amount not to exceed the
Maximum WCMA Line of Credit, and (ii) Customer may repay any WCMA Loans in
whole or in part at any time, and request a re-borrowing of amounts repaid on
a revolving basis. Customer may request such WCMA Loans by use of WCMA
Checks, FTS, Visa-Registered Trademark- charges, wire transfers, or such
other means of access to the WCMA Line of Credit as may be permitted by MLBFS
from time to time; it being understood that so long as the WCMA Line of
Credit shall be in effect, any charge or debit the WCMA Account which but for
the WCMA Line of Credit would under the terms of the WCMA Agreement result in
an overdraft, shall be deemed a request by Customer for a WCMA Loan.
(c) CONDITIONS OF WCMA LOANS. Notwithstanding the foregoing, MLBFS shall not
be obligated to make any WCMA Loan, and may without notice refuse to honor
any such request by Customer, if at the time of receipt by MLBFS of
Customer's request: (i) the making of such WCMA Loan would cause the Maximum
WCMA Line of Credit to be exceeded; or (ii) the Maturity Date shall have
occurred, or the WCMA Line of Credit shall have otherwise been terminated in
accordance with the terms hereof; or (iii) Customer's subscription to the
WCMA Program shall have been terminated; or (iv) an event shall have occurred
and be continuing which shall have caused any of the General Funding
Conditions to not then be met or satisfied to the reasonable satisfaction of
MLBFS. The making by MLBFS of any WCMA Loan at a time when any one or more of
said conditions shall not have been met shall not in any event be construed
as a waiver of said condition or conditions or of any Default, and shall not
prevent MLBFS at any time thereafter while any condition shall not have been
met from refusing to honor any request by Customer for a WCMA Loan.
(d) LIMITATION OF LIABILITY. MLBFS shall not be responsible, and shall have
no liability to Customer or any other party, for any delay or failure of
MLBFS to honor any request of Customer for a WCMA Loan or any other act or
omission of MLBFS, MLPF&S or any of their affiliates due to or resulting from
any
<PAGE>
system failure, error or delay in posting or other clerical error, loss of
power, fire, Act of God or other cause beyond the reasonable control of
MLBFS, MLPF&S or any of their affiliates unless directly arising out of the
willful wrongful act or active gross negligence of MLBFS. In no event shall
MLBFS be liable to Customer or any other party for any incidental or
consequential damages arising from any act or omission by MLBFS, MLPF&S or
any of their affiliates in connection with the WCMA Line of Credit or this
Loan Agreement. As used herein, the term "active gross negligence" shall mean
gross negligence arising out of an affirmative act by MLBFS. It should be
distinguished from "passive" or "imputed" gross negligence.
(e) INTEREST. (i) An amount equal to accrued interest on the WCMA Loan
Balance shall be payable by Customer monthly on each Interest Due Date
commencing with the Interest Due Date occurring in the calendar month in
which the Activation Date shall occur. Unless otherwise hereafter directed in
writing by MLBFS on or after the first to occur of the Maturity Date or the
date of termination of the WCMA Line of Credit pursuant to the terms hereof,
such interest will be automatically charged to the WCMA Account on the
applicable Interest Due Date, and, to the extent not paid with free credit
balances or the proceeds of sales of any Money Accounts then in the WCMA
Account, as hereafter provided, paid by a WCMA Loan and added to the WCMA
Loan Balance. All interest shall be computed for the actual number of days
elapsed on the basis of a year consisting of 360 days.
(ii) Notwithstanding any provision to the contrary in this Agreement or any
of the Additional Agreements, no provision of this Agreement or any of the
Additional Agreements shall require the payment or permit the collection of
any amount in excess of the maximum amount of interest permitted to be
charged by law ("Excess Interest"). In any Excess Interest is provided for,
or is adjudicated as being provided for, in this Agreement or any of the
Additional Agreements, then: (A) Customer shall not be obligated to pay any
Excess Interest; and (B) any Excess Interest that MLBFS may have received
hereunder or under any of the Additional Agreements shall, at the option of
MLBFS, be: (1) applied as a credit against the then unpaid WCMA Loan Balance,
(2) refunded to the payer thereof, or (3) any combination of the foregoing.
(f) PAYMENTS. All payments required or permitted to be made pursuant to this
Loan Agreement shall be made in lawful money of the United States. Unless
otherwise directed by MLBFS, payments on account of the WCMA Loan Balance may
be made by the delivery of checks (other than WCMA Checks), or by means of
FTS or wire transfer of funds (other than funds from the WCMA Line of Credit)
to MLPF&S for credit to Customer's WCMA Account. Notwithstanding anything in
the WCMA Agreement to the contrary, Customer hereby irrevocably authorizes
and directs MLPF&S to apply available free credit balances in the WCMA
Account to the repayment of the WCMA Loan Balance prior to application for
any other purpose. Payments to MLBFS from funds in the WCMA Account shall be
deemed to be made by Customer upon the same basis and schedule as funds are
made available for investment in the Money Accounts in accordance with the
terms of the WCMA Agreement. All funds received by MLBFS from MLPF&S pursuant
to the aforesaid authorization shall be applied by MLBFS to repayment of the
WCMA Loan Balance. The acceptance by or on behalf of MLBFS of a check or
other payment for a lesser amount than shall be due from Customer, regardless
of any endorsement or statement thereon or transmitted therewith, shall not
be deemed an accord and satisfaction or anything other than a payment on
account, and MLBFS or anyone acting on behalf of MLBFS may accept such check
or other payment without prejudice to the rights of MLBFS to recover the
balance actually due or to pursue any other remedy under this Loan Agreement
or applicable law for such balance. All checks accepted by or on behalf of
MLBFS in connection with the WCMA Line of Credit are subject to final
collection.
(g) IRREVOCABLE INSTRUCTIONS TO MLPF&S. In order to minimize the WCMA Loan
Balance, Customer hereby irrevocably authorizes and directs MLPF&S, effective
on the Activation Date and continuing thereafter so long as this Agreement
shall be in effect: (i) to immediately and prior to application for any other
purpose pay to MLBFS to the extent of any WCMA Loan Balance or other amounts
payable by Customer hereunder all available free credit balances from time to
time in the WCMA Account; and (ii) if such available free credit balances are
insufficient to pay the WCMA Loan Balance and such other amounts, and there
are in the WCMA Account at any time any investments in Money Accounts (other
than any investments constituting any Minimum Money Accounts Balance under
the WCMA Directed Reserve Program), to immediately liquidate such investments
and pay to MLBFS to the extent of any WCMA Loan Balance and such other
amounts the available proceeds from the liquidation of any such Money
Accounts.
(h) STATEMENTS. MLPF&S will include in each monthly statement it issues under
the WCMA Program information with respect to WCMA Loans and the WCMA Loan
Balance. Any questions that Customer may have with respect to such
information should be directed to MLBFS; and any questions with respect to
any other matter in such statements or about or affecting the WCMA Program
should be directed to MLPF&S.
(i) USE OF LOAN PROCEEDS; SECURITIES TRANSACTIONS. The proceeds of each WCMA
Loan shall be used by Customer solely for working capital in the ordinary
course of its business, or, with the prior written consent of MLBFS, for
other lawful business purposes of Customer not prohibited hereby. CUSTOMER
AGREES THAT UNDER NO CIRCUMSTANCES WILL FUNDS BORROWED FROM MLBFS THROUGH THE
WCMA LINE OF CREDIT BE USED: (i) FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES
OF ANY PERSON WHATSOEVER, OR (ii) TO PURCHASE, CARRY OR TRADE IN SECURITIES,
OR REPAY DEBT INCURRED TO PURCHASE, CARRY OR TRADE IN SECURITIES, WHETHER IN
OR IN CONNECTION WITH THE WCMA ACCOUNT, ANOTHER ACCOUNT OF CUSTOMER WITH
MLPF&S OR AN ACCOUNT OF CUSTOMER AT ANY OTHER BROKER OR DEALER IN SECURITIES.
(j) RENEWAL AT OPTION OF MLBFS; RIGHT OF CUSTOMER TO TERMINATE. MLBFS may at
any time, in its sole discretion and at its sole option, renew the WCMA Line
of Credit for one or more Renewal Years; it being understood, however, that
no such renewal shall be effective unless set forth in a writing executed by
a duly authorized representative of MLBFS and delivered to Customer. Unless
any such renewal is accompanied by a proposed change in the terms of the WCMA
Line of Credit (other than the extension of the Maturity Date), no such
renewal shall require Customer's approval. Customer shall, however, have the
right to terminate the WCMA Line of Credit at any time upon written notice to
MLBFS.
(k) LINE FEES. (i) In consideration of the extension of the WCMA Line of
Credit by MLBFS to Customer during the period from the Activation Date to and
including the last day of November in the calendar year immediately following
the calendar year in which the Activation Date shall occur (the "Initial Line
Period"), Customer has paid or shall pay the initial Line Fee to MLBFS. If
the initial Line Fee has not heretofore been paid by Customer, Customer
hereby authorizes MLBFS, at its option, to either cause the initial Line Fee
to be paid on the Activation Date with a WCMA Loan, or invoice Customer for
such initial Line Fee (in which event Customer shall pay said fee within 5
Business Days after receipt of such invoice). No delay in the Activation
Date, howsoever caused, shall entitle Customer to any rebate or reduction in
the Line Fee or to any extension of the Initial Maturity Date.
<PAGE>
(iii) Customer shall pay an additional Line Fee for each 12-month period
following the Initial Line Period to the Initial Maturity Date, and for each
Renewal Year. In connection therewith, Customer hereby authorizes MLBFS, at
its option, to either cause each such additional Line Fee to be paid with a
WCMA Loan on or at any time after the first Business Day of such 12-month
period or Renewal Year, as applicable, or invoiced to Customer at such time
(in which event Customer shall pay such Line Fee within 5 Business Days after
receipt of such invoice). Each Line Fee shall be deemed fully earned by MLBFS
on the date payable by Customer, and no termination of the WCMA Line of
Credit, howsoever caused, shall entitle Customer to any rebate or refund of
any portion of such Line Fee; provided, however, that if Customer shall
terminate the WCMA Line of Credit not later than 5 Business Days after the
receipt by Customer of notice from MLBFS of a renewal of the WCMA Line of
Credit, Customer shall be entitled to a refund of any Line Fee charged by
MLBFS for the ensuing Renewal Year.
4. REPRESENTATIONS AND WARRANTIES.
Customer represents and warrants to MLBFS that:
(a) ORGANIZATION AND EXISTENCE. Customer is a corporation, duly organized and
validly existing in good standing under the laws of the State of California
and is qualified to do business and in good standing in each other state
where the nature of its business or the property owned by it make such
qualification necessary.
(b) EXECUTION, DELIVERY AND PERFORMANCE. The execution, delivery and
performance by Customer of this Loan Agreement and by Customer and each
Guarantor of such of the Additional Agreements to which it is a party: (i)
have been duly authorized by all requisite action, (ii) do not and will not
violate or conflict with any law or other governmental requirement, or any of
the agreements, instruments or documents which formed or govern Customer or
any such Guarantor, and (iii) do not and will not breach or violate any of
the provisions of, and will not result in a default by Customer or any such
Guarantor under, any other agreement, instrument or document to which it is a
party or by which it or its properties are bound.
(c) NOTICES AND APPROVALS. Except as may have been given or obtained, no
notice to or consent or approval of any governmental body or authority or
other third party whatsoever (including, without limitation, any other
creditor) is required in connection with the execution, delivery or
performance by Customer or any Guarantor of such of this Loan Agreement and
the Additional Agreements to which it is a party.
(d) ENFORCEABILITY. This Loan Agreement and such of the Additional Agreements
to which Customer or any Guarantor is a party are the respective legal, valid
and binding obligations of Customer and such Guarantor, enforceable against
it or them, as the case may be, in accordance with their respective terms,
except as enforceability may be limited by bankruptcy and other similar laws
affecting the rights of creditors generally or by general principles of
equity.
(e) FINANCIAL STATEMENTS. Except as expressly set forth in Customer's
financial statements, all financial statements of Customer furnished to MLBFS
have been prepared in conformity with generally accepted accounting principles,
consistently applied, are true and correct in all material respects, and
fairly present the financial condition of it as at such dates and the results
of its operations for the periods then ended (subject, in the case of interim
unaudited financial statements, to normal year-end adjustments); and since
the most recent date covered by such financial statements, there has been no
material adverse change in any such financial condition or operation. All
financial statements furnished to MLBFS of any Guarantor are true and correct
in all material respects and fairly represent such Guarantor's financial
condition as of the date of such financial statements, and since the most
recent date of such financial statements, there has been no material adverse
change in such financial condition.
(f) LITIGATION. No litigation, arbitration, administrative or governmental
proceedings are pending or, to the knowledge of Customer, threatened against
Customer or any Guarantor, which would, if adversely determined, materially
and adversely affect the liens and security interests of MLBFS hereunder or
under any of the Additional Agreements, the financial condition of Customer
or any such Guarantor or the continued operations of Customer.
(g) TAX RETURNS. All federal, state and local tax returns, reports and
statements required to be filed by Customer any each Guarantor have been
filed with the appropriate governmental agencies and all taxes due and
payable by Customer and each Guarantor have been timely paid (except to the
extent that any such failure to file or pay will not materially and adversely
affect either the liens and security interests of MLBFS hereunder or under
any of the Additional Agreements, the financial condition of Customer or any
Guarantor, or the continued operations of Customer).
Each of the foregoing representations and warranties: (i) has been and will be
relied upon as an inducement to MLBFS to prove the WCMA Line of Credit, and
(ii) is continuing and shall be deemed remade by Customer concurrently with
each request for a WCMA Loan.
5. FINANCIAL AND OTHER INFORMATION
Customer shall furnish or cause to be furnished to MLBFS during the term of
this Loan Agreement all of the following:
(a) SEC REPORTS. Not later than 15 days after filing with the SEC, Customer
shall furnish or cause to be furnished to MLBFS a copy of each of its 10K,
10Q and 8K report filed with the SEC.
(b) OTHER INFORMATION. Customer shall furnish or cause to be furnished to
MLBFS such other information as MLBFS may from time to time reasonably
request relating to Customer or any Guarantor.
<PAGE>
6. OTHER COVENANTS
Customer further covenants and agrees during the term of this Loan Agreement
that:
(a) FINANCIAL RECORDS; INSPECTION. Customer will: (i) maintain at its
principal place of business complete and accurate books and records, and
maintain all of its financial records in a manner consistent with the
financial statements heretofore furnished to MLBFS, or prepared on such other
basis as may be approved in writing by MLBFS; and (ii) permit MLBFS or its
duly authorized representatives, upon reasonable notice and at reasonable
times, to inspect its properties (both real and personal), operations, books
and records.
(b) TAXES. Customer and each Guarantor will pay when due all taxes,
assessments and other governmental charges, howsoever designated, and all
other liabilities and obligations, except to the extent that any such failure
to pay will not materially and adversely affect either any liens and security
interest of MLBFS under any Additional Agreements, the financial condition of
Customer or any Guarantor or the continued operations of Customer.
(c) COMPLIANCE WITH LAWS AND AGREEMENTS. Neither Customer nor any Guarantor
will violate any law, regulation or other governmental requirement, any
judgment or order of any court or governmental agency or authority, or any
agreement, instrument or document to which it is a party or by which it is
bound, if any such violation will materially and adversely affect either any
liens and security interests of MLBFS under any Additional Agreements, the
financial condition of Customer or any Guarantor, or the continued
operations of Customer.
(d) NOTIFICATION BY CUSTOMER. Customer shall provide MLBFS with prompt
written notification of: (i) any Default; (ii) any materially adverse change
in the business, financial condition or operations of Customer; and (iii) any
information which indicates that any financial statements of Customer or any
Guarantor fail in any material respect to present fairly the financial
condition and results of operations purported to be presented in such
statements. Each notification by Customer pursuant hereto shall specify the
event or information causing such notification, and, to the extent
applicable, shall specify the steps being taken to rectify or remedy such
event or information.
(e) NOTICE OF CHANGE. Customer shall give MLBFS not less than 30 days prior
written notice of any change in the name (including any fictitious name) or
principal place of business or residence of Customer or any Guarantor.
(f) CONTINUITY. Except upon the prior written consent of MLBFS, which consent
will not be unreasonably withheld: (i) Customer shall not be a party to any
merger or consolidation with, or purchase or otherwise acquire all or
substantially all of the assets of, or any material stock, partnership, joint
venture or other equity interest in, any person or entity, or sell, transfer
or lease all or any substantial part of its assets, if any such action would
result in either: (A) a material change in the principal business, ownership
or control of Customer, or (B) a material adverse change in the financial
condition or operations of Customer; (ii) Customer shall preserve its
existence and good standing in the jurisdiction(s) of establishment and
operation; (iii) Customer shall not engage in any material business
substantially different from its business in effect as of the date of
application by Customer for credit from MLBFS, or cease operating any such
material business; (iv) Customer shall not cause or permit any other person
or entity to assume or succeed to any material business or operations of
Customer; and (v) Customer shall not cause or permit any material change in
its controlling ownership.
7. EVENTS OF DEFAULT
The occurrence of any of the following events shall constitute an "Event of
Default" under this Loan Agreement:
(a) EXCEEDING THE MAXIMUM WCMA LINE OF CREDIT. If the WCMA Loan Balance shall
at any time exceed the Maximum WCMA Line of Credit and Customer shall fail to
deposit sufficient funds into the WCMA Account to reduce the WCMA Loan
Balance below the Maximum WCMA Line of Credit within five (5) Business Days
after written notice thereof shall have been given by MLBFS to Customer.
(b) OTHER FAILURE TO PAY. Customer shall fail to pay to MLBFS or deposit into
the WCMA Account when due any other amount owing or required to be paid or
deposited by Customer under this Loan Agreement, or shall fail to pay when
due any other Obligations, and any such failure shall continue for more than
five (5) Business Days after written notice thereof shall have been given by
MLBFS to Customer.
(c) FAILURE TO PERFORM. Customer or any Guarantor shall default in the
performance or observance of any covenant or agreement on its part to be
performed or observed under this Loan Agreement or any of the Additional
Agreements (not constituting an Event of Default under any other clause of
this Section), and such default shall continue unremedied for ten (10)
Business Days after written notice thereof shall have been given by MLBFS to
Customer.
(d) BREACH OF WARRANTY. Any representation or warranty made by Customer or
any Guarantor contained in this Loan Agreement or any of the Additional
Agreements shall at any time prove to have been incorrect in any material
respect when made.
(e) DEFAULT UNDER OTHER AGREEMENT. A default or Event of Default by Customer
or any Guarantor shall occur under the terms of any other agreement,
instrument or document with or intended for the benefit of MLBFS, MLPF&S or
any of their affiliates, and any required notice shall have been given and
required passage of time shall have elapsed.
(f) BANKRUPTCY EVENT. Any Bankruptcy Event shall occur.
(g) MATERIAL IMPAIRMENT. Any event shall occur which shall reasonably cause
MLBFS to in good faith believe that the prospect of full payment or
performance by Customer or any Guarantor of any of their respective
liabilities or obligations under this Loan Agreement or any of the Additional
Agreements to which Customer or such Guarantor is a party has been materially
impaired. The existence of such a material impairment shall be determined in
a manner consistent with the intent of Section 1-208 of the UCC.
<PAGE>
(h) ACCELERATION OF DEBT OTHER CREDITORS. Any event shall occur which results
in the accelerating of the maturity of any indebtedness of $100,000.00 or
more of Customer or any Guarantor to another creditor under any indenture,
agreement, undertaking, or otherwise.
8. REMEDIES
(a) REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of
any Event of Default, MLBFS may at its sole option do any one or more or all
of the following, at such time and in such order as MLBFS any in its sole
discretion choose:
(i) TERMINATION. MLBFS may without notice terminate the WCMA Line of Credit
and all obligations to provide the WCMA Line of Credit or otherwise extend
any credit to or for the benefit of Customer at being understood, however,
that upon the occurrence of any Bankruptcy Event the WCMA Line of Credit and
all such obligations shall automatically terminate without any action on the
part of MLBFS); and upon any such termination MLBFS shall be relieved of all
such obligations.
(ii) ACCELERATION. MLBFS may declare the principal of and interest on the WCMA
Loan Balance, and all other Obligations to be forthwith due and payable,
whereupon all such amounts shall be immediately due and payable, without
presentment, demand for payment, protest and notice of protest, notice of
dishonor, notice of acceleration, notice of intent to accelerate or other
notice or formality of any kind, all of which are hereby expressly waived;
provided, however, that upon the occurrence of any Bankruptcy Event all such
principal, interest and other Obligations shall automatically become due and
payable without any action of the part of MLBFS.
(b) SET-OFF. MLBFS shall have the further right upon the occurrence and
during the continuance of an Event of Default to set-off, appropriate and
apply toward payment of any of the Obligations, in such order of application
as MLBFS may from time to time and at any time elect, any cash, credit,
deposits, accounts, securities and any other property of Customer which is in
transit to or in the possession, custody or control of MLBFS, MLPF&S or any
agent, bailee, or affiliate of MLBFS or MLPF&S, including, without
limitation, the WCMA Account and any Money Accounts, and all cash, securities
and other financial assets therein or controlled thereby, and all proceeds
thereof. Customer hereby collaterally assigns and grants to MLBFS a
continuing security interest in all such property as additional security for
the Obligations. Upon the occurrence and during the continuance of an Event
of Default, MLBFS shall have all rights in such property available to
collateral assignees and secured parties under all applicable laws,
including, without limitation, the UCC.
(c) REMEDIES ARE SEVERABLE AND CUMULATIVE. All rights and remedies of MLBFS
herein are severable and cumulative and in addition to all other rights and
remedies available in the Additional Agreements, at law or in equity, and
any one or more of such rights and remedies may be exercised simultaneously
or successively.
9. MISCELLANEOUS
(a) NON-WAIVER. No failure or delay on the party of MLBFS in exercising any
right, power or remedy pursuant to this Loan Agreement or any of the
Additional Agreements shall operate as a waiver thereof, and no single or
partial exercise of any such right, power or remedy shall preclude any other
or further exercise thereof, or the exercise of any other right, power or
remedy. Neither any waiver of any provision of this Loan Agreement or any of
the Additional Agreements, nor any consent to any departure by Customer
therefrom, shall be effective unless the same shall be in writing and signed
by MLBFS. Any waiver of any provision of this Loan Agreement or any of the
Additional Agreements and any consent to any departure by Customer from the
terms of this Loan Agreement or any of the Additional Agreements shall be
effective only in the specific instance and for the specific purpose for
which given. Except as otherwise expressly provided herein, no notice to or
demand on Customer shall in any case entitle Customer to any other or further
notice or demand in similar or other circumstances.
(b) DISCLOSURE. Customer hereby irrevocably authorizes MLBFS and each of its
affiliates, including without limitation MLPF&S, to at any time (whether or
not an Event of Default shall have occurred) obtain from and disclose to each
other any and all financial and other information about Customer. In
connection with said authorization, the parties recognize that in order to
provide a WCMA Line of Credit certain information about Customer is required
to be made available on a computer network accessible by certain affiliates
of MLBFS, including MLPF&S.
(c) COMMUNICATIONS. All notices and other communications required or
permitted hereunder shall be in writing, and shall be either delivered
personally, mailed by postage prepaid certified mail or sent by express
overnight courier or by facsimile. Such notices and communications shall be
deemed to be given on the date of personal delivery, facsimile transmission
or actual delivery of certified mail, or one Business Day after delivery to
an express overnight courier. Unless otherwise specified in a notice sent or
delivered in accordance with the terms hereof, notices and other
communications in writing shall be given to the parties hereto at their
respective addresses set forth at the beginning of this Loan Agreement, or,
in the case of facsimile transmission, to the parties at their respective
regular facsimile telephone number.
(d) COSTS, EXPENSES AND TAXES. Customer shall upon demand pay or reimburse
MLBFS for: (i) all Uniform Commercial Code filing and search fees and
expenses incurred by MLBFS in connection with the verification, perfection or
preservation of MLBFS' rights hereunder or in any collateral for the
Obligations; (ii) any and all stamp, transfer and other taxes and fees
payable or determined to be payable in connection with the execution,
delivery and/or recording of this Loan Agreement or any of the Additional
Agreements; and (iii) all reasonable fees and out-of-pocket expenses
(including, but not limited to, reasonable fees and expenses of outside
counsel) incurred by MLBFS in connection with the collection of any sum
payable hereunder or under any of the Additional Agreements not paid when
due, the enforcement of this Loan Agreement or any of the Additional
Agreements and the protection of MLBFS' rights hereunder or thereunder,
excluding, however, salaries and normal overhead attributable to MLBFS'
employees. The obligations of Customer under this paragraph shall survive the
expiration or termination of this Loan Agreement and the discharge of the
other Obligations.
(e) RIGHT TO PERFORM OBLIGATIONS. If Customer shall fail to do any act or
thing which it has covenanted to do under this Loan Agreement or any
representation or warranty on the part of Customer contained in this Loan
Agreement shall be breached, MLBFS may, in its sole discretion, after 5
Business
<PAGE>
Days written notice is sent to Customer (or such lesser notice, including no
notice, as is reasonable under the circumstances), do the same or cause it to
be done or remedy any such breach, and may expend its funds for such purpose.
Any and all reasonable amounts so expended by MLBFS shall be repayable to
MLBFS by Customer upon demand, with interest at the Interest Rate during the
period from and including the date funds are so expended by MLBFS to the date
of repayment, and all such amounts shall be additional Obligations. The
payment or performance by MLBFS of any of Customer's obligations hereunder
shall not relieve Customer of said obligations or of the consequences of
having failed to pay or perform the same, and shall not waive or be deemed a
cure of any Default.
(f) LATE CHARGE. Any payment required to be made by Customer pursuant to this
Loan Agreement not paid within ten (10) days of the applicable due date shall
be subject to a late charge in an amount equal to the lesser of: (i) 5% of
the overdue amount, or (ii) the maximum amount permitted by applicable law.
Such late charge shall be payable on demand, or, without demand, may in the
sole discretion of MLBFS be paid by a WCMA Loan and added to the WCMA Loan
Balance in the same manner as provided herein for accrued interest.
(g) FURTHER ASSURANCES. Customer agrees to do such further acts and things
and to execute and deliver to MLBFS such additional agreements, instruments
and documents as MLBFS may reasonably require or deem advisable to effectuate
the purposes of this Loan Agreement or any of the Additional Agreements.
(h) BINDING EFFECT. This Loan Agreement and the Additional Agreements shall
be binding upon, and shall inure to the benefit of MLBFS, Customer and their
respective successors and assigns. Customer shall not assign any of its
rights or delegate any of its obligations under this Loan Agreement or any of
the Additional Agreements without the prior written consent of MLBFS. Unless
otherwise expressly agreed to in a writing signed by MLBFS, no such consent
shall in any event relieve Customer of any of its obligations under this Loan
Agreement or the Additional Agreements.
(i) HEADINGS. Captions and section and paragraph headings in this Loan
Agreement are inserted only as a matter of convenience, and shall not affect
the interpretation hereof.
(j) GOVERNING LAW. This Loan Agreement, and, unless otherwise expressly
provided therein, each of the Additional Agreements, shall be governed in all
respects by the laws of the State of Illinois.
(k) SEVERABILITY OF PROVISIONS. Whenever possible, each provision of this
Loan Agreement and the Additional Agreements shall be interpreted in such
manner as to be effective and valid under applicable law. Any provision of
this Loan Agreement or any of the Additional Agreements which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective only to the extent of such prohibition or unenforceability
without invalidating the remaining provisions of this Loan Agreement and the
Additional Agreements or affecting the validity or enforceability of such
provision in any other jurisdiction.
(l) TERM. This Loan Agreement shall become effective on the date accepted by
MLBFS at its office in Chicago, Illinois, and, subject to the terms hereof,
shall continue in effect so long thereafter as the WCMA Line of Credit shall
be in effect or there shall be any Obligations outstanding.
(m) COUNTERPARTS. This Loan Agreement may be executed in one or more
counterparts which, when taken together, constitute one and the same agreement.
(n) JURISDICTION; WAIVER. CUSTOMER ACKNOWLEDGES THAT THIS LOAN AGREEMENT IS
BEING ACCEPTED BY MLBFS IN PARTIAL CONSIDERATION OF MLBFS' RIGHT AND OPTION,
IN ITS SOLE DISCRETION, TO ENFORCE THIS LOAN AGREEMENT AND THE ADDITIONAL
AGREEMENTS IN EITHER THE STATE OF ILLINOIS OR IN ANY OTHER JURISDICTION WHERE
CUSTOMER OR ANY COLLATERAL FOR THE OBLIGATIONS MAY BE LOCATED. CUSTOMER
CONSENTS TO JURISDICTION IN THE STATE OF ILLINOIS AND VENUE IN ANY STATE OR
FEDERAL COURT IN THE COUNTY OF COOK FOR SUCH PURPOSES, AND CUSTOMER WAIVES
ANY AND ALL RIGHTS TO CONTEST SAID JURISDICTION AND VENUE. CUSTOMER FURTHER
WAIVES ANY RIGHTS TO COMMENCE ANY ACTION AGAINST MLBFS IN ANY JURISDICTION
EXCEPT IN THE COUNTY OF COOK AND STATE OF ILLINOIS. MLBFS AND CUSTOMER HEREBY
EACH EXPRESSLY WAIVE ANY AND ALL RIGHTS TO A TRIAL BY JURY IN ANY ACTION,
PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES AGAINST THE OTHER
PARTY WITH RESPECT TO ANY MATTER RELATING TO, ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THE WCMA LINE OF CREDIT, THIS LOAN AGREEMENT, ANY ADDITIONAL
AGREEMENTS AND/OR ANY OF THE TRANSACTIONS WHICH ARE THE SUBJECT MATTER OF
THIS LOAN AGREEMENT.
(o) INTEGRATION. THIS LOAN AGREEMENT, TOGETHER WITH THE ADDITIONAL
AGREEMENTS, CONSTITUTES THE ENTIRE UNDERSTANDING AND REPRESENTS THE FULL AND
FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT TO THE SUBJECT MATTER
HEREOF, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR WRITTEN AGREEMENTS
OR PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS OF THE PARTIES. WITHOUT LIMITING THE
FOREGOING, CUSTOMER ACKNOWLEDGES THAT EXCEPT AS OTHERWISE EXPRESSLY PROVIDED
HEREIN: (i) NO PROMISE OR COMMITMENT HAS BEEN MADE TO IT BY MLBFS, MLPF&S OR
ANY OF THEIR RESPECTIVE EMPLOYEES, AGENTS OR REPRESENTATIVES TO EXTEND THE
AVAILABILITY OF THE WCMA LINE OF CREDIT OR THE MATURITY DATE, OR TO INCREASE
THE MAXIMUM WCMA LINE OF CREDIT, OR OTHERWISE EXTEND ANY OTHER CREDIT TO
CUSTOMER OR ANY OTHER PARTY; (ii) NO PURPORTED EXTENSION OF THE MATURITY
DATE, INCREASE IN THE MAXIMUM WCMA LINE OF CREDIT OR OTHER EXTENSION OR
AGREEMENT TO EXTEND CREDIT SHALL BE VALID OR BINDING UNLESS EXPRESSLY SET
FORTH IN A WRITTEN INSTRUMENT SIGNED BY MLBFS; AND (iii) THIS LOAN AGREEMENT
SUPERSEDES AND REPLACES ANY AND ALL PROPOSALS, LETTERS OF INTENT AND APPROVAL
AND COMMITTMENT LETTERS FROM MLBFS TO CUSTOMER, NONE OF WHICH SHALL BE
CONSIDERED AN ADDITIONAL AGREEMENT. NO AMENDMENT OR MODIFICATION OF THIS
AGREEMENT OR ANY OF THE ADDITIONAL AGREEMENTS TO WHICH CUSTOMER IS A PARTY
SHALL BE EFFECTIVE UNLESS IN A WRITING SIGNED BY BOTH MLBFS AND CUSTOMER.
<PAGE>
IN WITNESS WHEREOF, this Loan Agreement has been executed as of the day and
year first above written.
THE 3DO COMPANY
By: /s/ Trip Hawkins /s/ John Adams
----------------------------------------------------------------------------
Signature (1) Signature (2)
TRIP HAWKINS JOHN ADAMS
- -------------------------------------------------------------------------------
Printed Name Printed Name
CEO CFO
- -------------------------------------------------------------------------------
Title Title
Accepted at Chicago, Illinois;
MERRILL LYNCH BUSINESS FINANCIAL
SERVICES, INC.
By: /s/ ILLEGIBLE
-----------------------------------------
<PAGE>
[LOGO] MERRILL LYNCH SECRETARY'S CERTIFICATE
- -------------------------------------------------------------------------------
The undersigned hereby certifies to MERRILL LYNCH BUSINESS FINANCIAL SERVICES
INC. that the undersigned is the duly appointed and active Secretary (or
Assistant Secretary) of THE 3DO COMPANY, a corporation duly organized,
validly existing and in good standing under the laws of the State of
California; and that the following is a true, accurate and compared
transcript of resolutions duly, validly and lawfully adopted on the 10th day
of November 1998 by the Board of Directors of said Corporation acting in
accordance with the laws of the state of incorporation and the charter and
by-laws of said Corporation;
"RESOLVED, that this Corporation is authorized and empowered, now and from
time to time hereafter, to borrow and/or obtain credit from, and/or enter
into other financial arrangements with, MERRILL LYNCH BUSINESS FINANCIAL
SERVICES INC. ("MLBFS") and in connection therewith to grant to MLBFS liens
and security interests on any or all property belonging to this Corporation;
all such transactions to be on such terms and conditions as may be mutually
agreed from time to time between this Corporation and MLBFS; and
"FURTHER RESOLVED, that the President, any Vice President, Treasurer,
Secretary or other officer of this Corporation, or any one or more of them, be
and each of the hereby is authorized and empowered to: (a) execute and
deliver to MLBFS on behalf of this Corporation any and all loan agreements,
promissory notes, security agreements, pledge agreements, financing
statements, mortgages, deeds of trust, leases and/or all other agreements,
instruments and documents required by MLBFS in connection therewith, and any
present or future extensions, amendments, supplements, modifications and
restatements thereof; all in such form as any such officer shall approve, and
conclusively evidenced by his or her signature thereon, and (b) do and perform
all such acts and things deemed by any such officer to be necessary or
advisable to carry out and perform the undertakings and agreements of this
Corporation in connection therewith; and any and all prior acts of each of
said officers in these premises are hereto ratified and confirmed in all
respects; and
"FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation from
an authorized officer of this Corporation, which change or revocation shall
not in any event affect the obligations of this Corporation with respect to
any transaction conditionally agreed or committed to by MLBFS or having its
inception prior to the receipt of such notice by MLBFS."
THE UNDERSIGNED FURTHER CERTIFIES that: (a) the foregoing resolutions have
not been rescinded, modified or repealed in any manner, are not in conflict
with any agreement of said Corporation and are in full force and effect as of
the date of this Certificate, and (b) the following individuals are now the
duly elected and acting officers of said Corporation and the signatures set
forth below are the true signatures of said officers:
President:
----------------------------------------------------
Vice President:
-----------------------------------------------
Treasurer: /s/ James Alan Cook
----------------------------------------------------
Secretary: /s/ James Alan Cook
----------------------------------------------------
--------------------------------------------------------------
Additional Title
IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said Corporation hereto, pursuant to due authorization,
all as of this 23rd day of November 1998.
(CORPORATE SEAL) /s/ James Alan Cook
----------------------------------------
Secretary
Printed Name: James Alan Cook
----------------------------------------
<PAGE>
[LOGO] MERRILL LYNCH FINANCIAL ASSETS SECURITY AGREEMENT
- -------------------------------------------------------------------------------
FINANCIAL ASSETS SECURITY AGREEMENT ("Security Agreement") dated as of
November 3, 1998, given by THE 3DO COMPANY, a corporation organized and
existing under the laws of the State of California ("Customer") to MERRILL
LYNCH FINANCIAL SERVICES INC. ("MLBFS").
1. DEFINITIONS. (a) In addition to terms defined elsewhere in this Security
Agreement, when used herein the following terms shall have the following
meanings:
(i) "Bankruptcy Event" shall mean any of the following: (A) a proceeding
under any bankruptcy, reorganization, arrangement, insolvency, readjustment
of debt or receivership law or statute shall be filed or consented to by
Customer; or (B) any such proceeding shall be filed against Customer and
shall not be dismissed or withdrawn within sixty (60) days after filing; or
(C) Customer shall make a general assignment for the benefit of creditors; or
(D) Customer shall become insolvent or generally fail to pay or admit in
writing its inability to pay is debts as they become due; or (E) Customer
shall be adjudicated as bankrupt or insolvent.
(ii) "Business Day" shall mean any day other than Saturday, Sunday, federal
holiday or other day on which the New York Stock Exchange is regularly closed.
(iii) "Collateral" shall mean: (A) the Securities Account, (B) any free
credit balances now or hereafter credited to or owing from MLPF&S to Customer
in respect of the Securities Account, (C) all financial assets (including,
without limitation, all stock, bonds, mutual funds, certificates of deposit,
commodities, contracts and other securities), money market deposit accounts,
instruments, general intangibles and other property of whatever kind or
description now and hereafter in or controlled by the Securities Account or
listed on any confirmation or periodic report from MLPF&S as being in or
controlled by the Securities Account, whether now owned or hereafter
acquired, (D) all proceeds of the sale, exchange, redemption or exercise of
any of the foregoing, including, without limitation, all dividends, interest
payments and other distributions of cash or property in respect thereof, and
(E) all rights incident to the ownership of any of the foregoing.
(iv) "Loan Agreement" shall mean that certain WCMA LOAN AGREEMENT NO.
26M-07P21 between Customer and MLBFS, as the same may from time to time be or
have been amended, restated, extended or supplemented.
(v) "Minimum Value" shall mean $22,000,000.00.
(vi) "MLPF&S" shall mean MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
and its successors and assigns.
(vii) "Obligations" shall mean all obligations, liabilities and indebtedness
of every kind and nature now or hereafter owing, arising, due or payable from
Customer to MLBFS, howsoever created, arising, or evidenced, whether direct
or indirect, absolute or contingent, or due or to become due, including,
without limitation, interest accruing after the filing of any petition in
bankruptcy, and all present and future obligations, liabilities and
indebtedness of Customer to MLBFS under the Loan Agreement and the
agreements, instruments and documents executed pursuant thereto, including,
without limitation, this Security Agreement.
(viii) "Permitted Liens" shall mean: (A) liens in favor of MLBFS; (B) liens
for current taxes not delinquent and, if MLBFS' rights to and interest in the
Collateral are not materially and adversely affected thereby, liens for taxes
being contested in good faith by appropriate proceedings; (C) any trade
settlement liens of MLPF&S; and (D) other liens permitted in writing by MLBFS.
(ix) "Securities Account" shall mean that certain MLPF&S securities account
number 26M-07P20 in the name of Customer and any and all successor securities
accounts at MLPF&S.
(b) All terms used in this Security Agreement which are defined in the
Uniform Commercial Code of Illinois ("UCC") shall have the meanings set
forth in the UCC. Without limiting the foregoing, the term "financial assets"
shall have the meaning set forth in Section 8-102 of the UCC.
2. GRANT OF SECURITY INTEREST. In order to secure payment and performance of
the Obligations, Customer hereby pledges, grants and conveys and assigns to
MLBFS a continuing first lien and security interest upon the Collateral
subject only to any Permitted Liens. In furtherance thereof, Customer hereby
irrevocably: (i) authorizes and directs MLPF&S to name or rename the
Securities Account on its books and records as the "THE 3DO COMPANY PLEDGED
COLLATERAL ACCOUNT F/B/O MLBFS", (ii) authorizes and directs MLPF&S and every
other person or entity now or hereafter holding or otherwise having
possession or control of any collateral to hold, possess or control such
Collateral as agent for MLBFS and subject to the rights, direction, control
and security interest of MLBFS, (iii) authorizes and directs MLPF&S and all
such other persons or entities to comply with any and all present and future
orders or directions of MLBFS with respect to all or any part of the
Collateral, notwithstanding any contrary direction or dispute by Customer or
any other party (unless prohibited by law or the order of a judicial body
having appropriate jurisdiction), and without making any inquiry whatsoever
as to MLBFS' right or authority to give such order to direction or as to the
application of any payment pursuant thereto, and (iv) waives and releases
MLPF&S and all such other persons and entities from, and agrees to indemnify
and hold harmless MLPF&S and all such other persons and entities from and
against, any liability whatsoever for complying with any such orders or
directions of MLBFS. So long as no Event of Default shall have occurred and
be continuing, MLBFS will not issue any orders or directions to MLPF&S with
respect to the Collateral unless such orders or directions are approved in
writing by Customer.
<PAGE>
3. RIGHTS AND LIMITATIONS OF CUSTOMER. (a) Except upon the prior written
consent of MLBFS, Customer shall not: (i) purchase any financial assets or
other property with funds in the Securities Account other than: (A) publicly
held domestic money market funds, (B) obligations of or guaranteed or
insured by the U.S. Government (including insured certificates of deposit),
or (C) if the overall investment quality of the Collateral is not thereby
materially reduced, stocks, bonds and other financial assets purchased with
the proceeds of other Collateral which has been sold by Customer, (ii) borrow
any funds on margin or otherwise from anyone other than MLBFS using the
Securities Account, any financial assets in or controlled by the Securities
Account or any other Collateral as collateral; (iii) otherwise grant or
permit to exist any lien or security interest upon any part of the Collateral
other than Permitted Liens, or (iv) directly or indirectly withdraw any
financial assets or other property from the Securities Account except in
connection with a sale permitted hereby.
(b) So long as no Event of Default shall have occurred and be continuing,
Customer may without the consent of MLBFS: (i) retain any financial assets
and other property which are in or controlled by the Securities Account on
the date hereof; (ii) sell any such financial assets or other property at any
time so long as the proceeds are either held in the Securities Account or
used to purchase other financial assets permitted hereby which are held in or
controlled by the Securities Account; and (iii) exercise any voting and
consensual rights with respect to the financial assets and other property
included in the Collateral for any purpose not inconsistent with this
Security Agreement.
4. WARRANTIES. Customer warrants to MLBFS on a continuing basis that:
(a) OWNERSHIP AND PRIORITY. Except for the rights of MLBFS hereunder and for
any Permitted Liens: (i) Customer is the owner of the Securities Account and
all other Collateral free and clear of any interest or lien of any third
party, and (ii) upon the acknowledgment of this Security Agreement by MLPF&S,
the filing of all Uniform Commercial Code financing statements executed by
Customer with respect to the Collateral in the appropriate jurisdiction(s)
and/or the completion of any other action required by applicable law to
perfect its security interest hereunder, MLBFS will have a valid and
perfected first lien and security interest upon all of the Collateral.
(b) COLLATERAL NOT RESTRICTED; ENFORCEABILITY. Except as enforceability may
be limited by bankruptcy and other similar laws affecting the rights of
creditors generally or by general principles of equity: (i) neither Customer
nor any part of the Collateral is subject to any legal, contractual or other
restrictions which might hinder or prevent the grant to or enforcement by
MLBFS of the security interest in the Collateral pursuant to this Security
Agreement, and (ii) this Security Agreement is the legal, valid and binding
obligation of Customer, enforceable against Customer in accordance with its
terms.
(c) RIGHT, POWER AND AUTHORITY. Customer has the full right, power and
authority to make, execute and deliver this Security Agreement.
5. COVENANTS.
(a) NO OTHER LIENS. Except upon the prior written consent of MLBFS, Customer
will not cause or permit to exist any security interests or liens upon the
Collateral other than Permitted Liens.
(b) MAINTENANCE OF PERFECTION. Customer will execute and deliver to MLBFS
such Uniform Commercial Code financing statements, continuation statements
and other agreements, instruments and documents as MLBFS may from time
reasonably require in order to establish, perfect and maintain perfected the
lien and security interest of MLBFS hereunder.
(c) CHANGE IN PRINCIPAL PLACE OF BUSINESS. Customer will provide not less
than 30 days prior written notice of any change in Customer's principal place
of business.
(d) CHANGE WITH MLPF&S. Customer will provide MLBFS with prompt written
notice of any change known to Customer in the account number of the
Securities Account, the Financial Consultant at MLPF&S assigned to Customer or
the address of said Financial Consultant's office at MLPF&S.
(e) MINIMUM COLLATERAL VALUE. Customer further warrants and agrees that the
aggregate immediate market value of the Collateral will at all times be not
less than the Minimum Value. In determining the value of the Collateral for
the purposes of this Section, no value will be given to any shares or
securities in or controlled through the Securities Account for less than 30
calendar days where such shares or securities either: (i) have been issued by
an open-end investment company (including money market funds and other
open-end mutual funds) other than in connection with reinvestment of
dividends; or (ii) are part of a new issue with respect to which MLPF&S
participated as a member of the selling group or syndicate.
6. EVENT OF DEFAULT. The occurrence of any of the following will constitute
an "Event of Default" hereunder: (a) the occurrence of an Event of Default
under the terms of the Loan Agreement; or (b) if Customer shall breach or
violate any of its covenants or warranties herein contained, and does not
cure such breach or violation within 10 Business Days after notice from
MLBFS; or (c) a default or Event of Default by Customer shall occur under the
terms of any other agreement, instrument or document with or intended for the
benefit of MLBFS, MLPF&S or any of their affiliates; or (d) if Customer's
subscription to the Securities Account shall be terminated for any reason; or
(e) any event shall occur which shall reasonably cause MLBFS to in good faith
believe that the prospect of payment or performance by Customer has been
materially impaired (determined in a manner consistent with the intent of
Section 1-208 of the UCC); or (f) if at any time the aggregate immediate
market value of the Collateral shall be or become an amount less than the
Minimum Value (determined in a manner consistent with Section 5(e) hereof),
and Customer shall not within 1 Business Day of written demand by MLBFS
deposit into the Securities Account additional financial assets acceptable to
MLBFS sufficient to increase such aggregate immediate market value to at
least the Minimum Value; or (g) any Bankruptcy Event shall occur.
7. REMEDIES. Upon the occurrence of any Event of Default and at any time
thereafter during the continuance thereof, MLBFS may, at its option, and in
addition to all other rights and remedies available to MLBFS: (a) by written
notice to MLPF&S, terminate all rights of Customer with respect to control of
the Collateral (it being understood, however, that upon the occurrence of any
Bankruptcy Event all rights of Customer with respect to control of the
Collateral shall automatically terminate without notice or other action on
the part of MLBFS), and thereby obtain the right to exclusive control over
the Collateral,
2
<PAGE>
including, without limitation, the right to cancel any open orders and close
any and all outstanding contracts, liquidate all or any part of the
Collateral, transfer the Securities Account or any other Collateral to the
name of MLBFS or its nominee, and withdraw any Collateral from the Securities
Account; and (b) exercise any one or more of the rights and remedies of a
secured party under the UCC. Any sale of Collateral pursuant to this
Paragraph may be made at MLBFS' discretion on any exchange or other market
where such business is usually transacted, or at public auction or private
sale, and MLBFS or MLPF&S' agent may at any such sale by the purchaser for
the account of MLBFS or such agent. The proceeds of sale or other disposition
of any of the Collateral shall be applied by MLBFS on account of the
Obligations, with any excess paid over to Customer or its successors or
assigns, as their interests and rights may appear, or whoever else may then
be adjudged entitled thereto. To the fullest extent permitted by law,
Customer waives notice of any sale, advertisement and all other notices and
formalities whatsoever. All rights and remedies available to MLBFS hereunder
shall be cumulative and in addition to all other rights and remedies
otherwise available to it at law, in equity or otherwise, and one or more of
such rights and remedies may be executed simultaneously or successively. No
waiver by MLBFS of any Event of Default shall waive any other or subsequent
Event of Default. None of the provisions hereof shall be held to have been
waived by any act or knowledge of MLBFS, but only by a written instrument
executed by an officer of MLBFS and delivered to Customer.
8. POWER OF ATTORNEY. Customer further agrees that MLBFS shall have and
hereby irrevocably grants to MLBFS, effective upon the occurrence and during
the continuance of any Event of Default, the full and irrevocable right,
power and authority in the name of Customer or in MLBFS' own name, to demand,
collect, withdraw, receipt for and sue for the Securities Account and any or
all of the other Collateral, and all amounts due or to become due and payable
upon or with respect to the Collateral; to execute any withdrawal receipts
respecting any or all of the Collateral; to endorse the name of Customer on
any and all commercial paper and other instruments given in payment therefor;
and, in its discretion, to take any and all further action (including,
without limitation, the transfer of the Securities Account or any other
Collateral to the name of MLBFS or its nominee) which MLBFS shall deem
necessary or appropriate to preserve or protect its interests hereunder.
9. RIGHTS ABSOLUTE. The rights of MLBFS hereunder and with respect to the
Collateral are absolute and unconditional, and nothing that MLBFS does or
leaves undone shall affect such rights of MLBFS. Without limiting the
foregoing, MLBFS shall not as a condition of such rights be required to
resort to any other collateral or security, pursue or exhaust any remedy
against Customer or any other party or observe any formality of notice or
otherwise (except as expressly provided herein); and (ii) Customer hereby
consents to, and waives notice of, any extension, renewal or modification
from time to time of the Loan Agreement or any other agreement, instrument or
document evidencing or securing the Obligations, any extensions,
forbearances, compromises or releases of any of the Obligations, and the
release of any party primarily or secondarily obligated for the Obligations
or of any other collateral therefor.
10. LIMITATION OF MLBFS' OBLIGATIONS. MLBFS shall not as a result of this
Security Agreement be subjected to any obligation or liability of Customer of
any manner or type with respect to the Collateral, including, but not limited
to, the duty to perform any covenants and agreements made by Customer, all of
which obligations and liabilities shall continue to rest upon Customer as
though this Security Agreement had not been made.
11. MLPF&S NOT AUTHORIZED. CUSTOMER ACKNOWLEDGES AND AGREES THAT
NOTWITHSTANDING THE AFFILIATION BETWEEN MLBFS AND MLPF&S, AND THE AGENCY
RELATIONSHIP ACKNOWLEDGED BY MLPF&S IN THE CONSENT HERETO, NEITHER MLPF&S NOR
ANY OF ITS EMPLOYEES ARE AUTHORIZED TO WAIVE ON BEHALF OF MLBFS ANY PROVISION
HEREOF, OR CONSENT ON BEHALF OF MLBFS TO ANY ACTION OR INACTION BY CUSTOMER,
OR OTHERWISE BIND MLBFS.
12. TERM. This Security Agreement shall become effective when signed by
Customer, and shall continue in effect so long thereafter as the Loan
Agreement shall be in effect or there shall be any Obligations outstanding.
13. MISCELLANEOUS.
(a) Customer waives notice of the acceptance hereof by MLBFS.
(b) Titles to Paragraphs are for convenience only and shall not be considered
in the interpretation hereof.
(c) This Security Agreement shall be binding upon Customer and Customer's
heirs, personal representatives, successors and assigns, as applicable, and
shall inure to the benefit of MLBFS and its successors and assigns. If there
is more than one "Customer", their obligations hereunder are joint and
several.
(d) This written Security Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof, may be modified only
by a written instrument executed by both MLBFS and Customer, and may not be
contradicted by evidence of prior, contemporaneous or subsequent oral
agreements between the parties. There are no unwritten oral agreements
between the parties.
(e) This Security Agreement shall be governed in all respects by the laws of
the State of Illinois. Without limiting the right of MLBFS to enforce this
Security Agreement in any jurisdiction and venue permitted by applicable law,
Customer agrees that this Security Agreement may at the option of MLBFS be
enforced by MLBFS in any jurisdiction and venue in which the Loan Agreement
may be enforced. Customer further agrees that any claim by Customer against
MLBFS hereunder or with respect to any of the transactions contemplated
hereby shall be brought against MLBFS only in an action or proceeding in a
Federal or state court in the County of Cook and State of Illinois, and
Customer waives the right to bring any such action or proceeding or assert
any counterclaim against MLBFS in any other jurisdiction or before any other
forum.
(f) Customer and MLBFS hereby each expressly waive any and all rights to a
trial by jury in any action, proceeding or counterclaim brought by either of
the parties against the other party in any way related to or arising out of
this Security Agreement, the Loan Agreement or any of the transactions
contemplated hereby or thereby.
3
<PAGE>
Dated as of the day and year first above written.
THE 3DO COMPANY
By: /s/ Trip Hawkins /s/ John Adams
------------------------------------------------------------------
Signature (1) Signature (2)
Trip Hawkins John Adams
------------------------------------------------------------------
Printed Name Printed Name
CEO CFO
------------------------------------------------------------------
Title Title
ACCEPTED AT CHICAGO, ILLINOIS:
MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC.
By: [ILLEGIBLE]
--------------------------------
<PAGE>
[LOGO] MERRILL LYNCH SECRETARY'S CERTIFICATE
- -------------------------------------------------------------------------------
(FINANCIAL ASSET SECURITY AGREEMENT)
THE UNDERSIGNED HEREBY CERTIFIES that the undersigned is the duly appointed
and acting Secretary (or Assistant Secretary) of THE 3DO COMPANY, a
corporation duly organized, validly existing and in good standing under the
laws of the State of California, and that the following is a true, accurate
and compared transcript of resolutions duly, validly and lawfully adopted on
the 10th day of November, 1998 by the Board of Directors of said corporation
acting in accordance with the laws of the state of incorporation and the
charter and by-laws of said corporation:
"RESOLVED, that it is advisable and in the best interests of this
Corporation that this Corporation grant to MERRILL LYNCH BUSINESS
FINANCIAL SERVICES INC. ("MLBFS") a security interest in Merrill Lynch
Account No. 26M-07P20, each successor account at Merrill Lynch, and all
securities and other financial assets now and hereafter therein or
controlled thereby (collectively, the "Account") as collateral for its
obligations to MLBFS; and
"FURTHER RESOLVED, that the President, any Vice President, Treasurer,
Secretary or other officer of this Corporation, or any one or more of
them, be and each of them hereby is authorized and empowered for and on
behalf of this Corporation to: (a) grant to MLBFS a first and prior
security interest on the Account and any other property of this
Corporation; (b) execute and deliver to MLBFS: (i) a Financial Assets
Security Agreement and all other agreements, instruments and documents
now and hereafter required by MLBFS, and (ii) any present or future
amendments to any of the foregoing; all in such form as such officer
shall approve, as conclusively evidenced by his signature thereon; and
(c) do and perform all such acts and things deemed by any such officer to
be necessary or advisable to carry out and perform the undertakings and
agreements of this Corporation in connection therewith; and all prior
acts of said officers in these premises are hereby ratified and
confirmed; and
"FURTHER RESOLVED, that MLBFS is authorized to rely upon the foregoing
resolutions until it receives written notice of any change or revocation,
which change or revocation shall not in any event affect the obligations
of this Corporation with respect to any transaction committed to by MLBFS
or having its inception prior to the receipt of such notice by MLBFS."
THE UNDERSIGNED FURTHER CERTIFIES that the foregoing resolutions have not been
rescinded, modified or repealed in any manner and are in full force and
effect as of the date of this Certificate, and that the following individuals
are now the duly elected and acting officers of said Corporation, and the
signatures set forth below are the true signatures of said officers:
President:
-----------------------------------
Vice President:
------------------------------
Secretary: /s/ James Alan Cook
-----------------------------------
Treasurer: /s/ James Alan Cook
-----------------------------------
IN WITNESS WHEREOF, the undersigned has executed this Certificate and has
affixed the seal of said corporation hereto, pursuant to due authorization,
all as of this 23 day of November, 1998.
(CORPORATE SEAL) /s/ James Alan Cook
------------------------------
Secretary
James Alan Cook
------------------------------
Printed Name
<PAGE>
FR G-3
OMB No. 7100-0018
Approval Expires May 1989
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF PURPOSE FOR AN EXTENSION OF CREDIT SECURED BY MARGIN SECURITIES
BY A PERSON SUBJECT TO REGISTRATION UNDER REGULATION G
MERRILL LYNCH BUSINESS FINANCIAL SERVICES INC.
(Federal Reserve Form G-3)
This form is required by law (15 U.S.C. 78g and 78w; 12 CFR 207).
INSTRUCTIONS
1. This form must be completed when a lender subject to registration under
Regulation G extends credit secured directly or indirectly, in whole or in
part, by any margin stock.
2. The term "margin stock" is defined in Regulation G (12 CFR 207) and
includes, principally: (1) stocks that are registered on a national
securities exchange, stocks that are on the Federal Reserve Board's List of
Marginable OTC Stocks, or any OTC security designated for trading in the
National Market System; (2) debt securities (bonds) that are convertible into
margin securities; and (3) shares of most mutual funds.
3. Please print or type (if space is inadequate, attach separate sheet).
PART I To be completed by Borrower(s)
1. What is the amount of the credit being extended? $20,000,000.00
2. Will any part of this credit be used to purchase or carry margin
securities? Yes / / No /X/
IF THE ANSWER IS "NO", describe the specific purpose of the credit: To
maintain a cash position in the $15MM-$20MM range at each quarter end and
year end.
I (We) have read this form and certify that to the best of my (our) knowledge
and belief the information given is true, accurate, and complete.
Signed: THE 3DO COMPANY
/s/ Trip Hawkins /s/ John Adams
- --------------------------------------------------------------------------------
Borrower's signature Date Borrower's signature Date
Trip Hawkins John Adams
- --------------------------------------------------------------------------------
Print or type name Date Print or type name Date
THIS FORM SHOULD NOT BE SIGNED IN BLANK
A BORROWER WHO FALSELY CERTIFIES THE PURPOSE OF A CREDIT ON THIS FORM OR
OTHERWISE WILLFULLY OR INTENTIONALLY EVADES THE PROVISIONS OF REGULATION G
WILL ALSO VIOLATE FEDERAL RESERVE X, "RULES GOVERNING BORROWERS WHO OBTAIN
SECURITIES CREDIT".
<PAGE>
PART II To be completed by lender only if the purpose of the credit is to
purchase or carry margin securities (Part I(2) answered "yes")
1. List the margin stock securing this credit; do not include debt securities
convertible into margin stock. The maximum loan value of margin stock is
________ per cent of its current market value under the current Supplement to
Regulation G.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
No. of shares Issue Market Price Date and source of Total market value
per share valuation per issue
(See note below)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
2. List the debt securities convertible into margin stock securing this
credit. The maximum loan value of such debt securities is _________ per cent
of the current market value under the current Supplement to Regulation G.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Amount Issue Market Price Date and source of Total market value
valuation per issue
(See note below)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
3. List other collateral including non-margin securities securing this
credit.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Describe briefly Market Price Date and source of valuation Good faith
(See note below) loan value
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
</TABLE>
Note: Lender need not complete "Date and and source of valuation" if the
market value was obtained from regularly published information in a journal
of general circulation.
PART III To be signed by an authorized representative of the lender in all
instances
I am a duly authorized representative of the lender and understand that this
credit secured by margin stock may be subject to the credit restrictions of
Regulation G. I have read this form and any attachments, and I have accepted
the customer's statement in Part I in good faith as required by Regulation G;
and I certify that to the best of my knowledge and belief, all the
information given is true, accurate, and complete.
12/3/98 /s/ Ellen Lee
- -----------------------------------------------------------------
Date Authorized representative's signature
Div. Documentation Manager Ellen Lee
- -----------------------------------------------------------------
Title Print or type name
TO ACCEPT THE CUSTOMER'S STATEMENT IN GOOD FAITH, THE AUTHORIZED
REPRESENTATIVE OF THE LENDER MUST BE ALERT TO THE CIRCUMSTANCES SURROUNDING
THE CREDIT AND IN POSSESSION OF ANY INFORMATION THAT WOULD CAUSE A PRUDENT
PERSON NOT TO ACCEPT THE STATEMENT WITHOUT INQUIRY, MUST HAVE INVESTIGATED
AND BE SATISFIED THAT THE STATEMENT IS TRUTHFUL. AMONG THE FACTS WHICH WOULD
REQUIRE SUCH INVESTIGATION ARE RECEIPT OF THE STATEMENT THROUGH THE MAIL OR
FROM A THIRD PARTY.
This form must be retained by the creditor for
three years after the credit is extinguished.
<PAGE>
Exhibit 10.15
- ------------------------------------------------------------------------------
COAST
LOAN AND SECURITY AGREEMENT
Borrower: THE 3DO COMPANY, a California corporation
Address: 600 Galveston Drive
Redwood City, CA 94063
Date: March 18, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into and shall be effective on
the above date between COAST BUSINESS CREDIT, a division of Southern Pacific
Bank ("Coast"), a California corporation, with offices at 12121 Wilshire
Boulevard, Suite 1111, Los Angeles, California 90025, and the borrower(s)
named above (the "Borrower"), whose chief executive office is located at the
above address ("Borrower's Address"). The Schedule to this Agreement (the
"Schedule") shall for all purposes be deemed to be a part of this Agreement,
and the same is an integral part of this Agreement. (Definitions of certain
terms used in this Agreement are set forth in Section 1 below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"ACCOUNT DEBTOR" means the obligor on a Receivable or General Intangible.
"AFFILIATE" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"AUDIT" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"BORROWER" has the meaning set forth in the introduction to this
Agreement.
"BORROWER'S ADDRESS" has the meaning set forth in the introduction to
this Agreement.
"BUSINESS DAY" means a day on which Coast is open for business.
"CHANGE OF CONTROL" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty
percent (20%) of the total voting power of all classes of stock or other
ownership interests then outstanding of any Borrower normally entitled to
vote in the election of directors or analogous governing body.
"CLOSING DATE" date of the initial funding under this Agreement.
"COAST" has the meaning set forth in the introduction to this Agreement.
"CODE" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
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<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
"COLLATERAL" has the meaning set forth in Section 4 hereof.
"CREDIT LIMIT" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"DEFAULT" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"DEPOSIT ACCOUNT" has the meaning set forth in Section 9105 of the Code.
"DILUTION" means all non-cash reductions, including, but not limited to,
credit memos, discounts and journal entries, in the total amount of
Receivables, expressed as a percentage of Receivables.
"DISTRIBUTOR" means a Person who acquires inventory from Borrower with
the intent of reselling such inventory to other than the ultimate users
thereof.
"DISTRIBUTOR RECEIVABLES" means Receivables on which the Account Debtor
is a Distributor.
"DOLLARS OR $" means United States dollars.
"EARLY TERMINATION FEE" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"ELIGIBLE FOREIGN RECEIVABLES" means Receivables arising from Borrower's
customers located outside the United States which Coast otherwise approves
for borrowing in its sole and absolute discretion. Without limiting the
foregoing, Coast will consider the following in determining the eligibility
of such receivables: (i) whether the Borrower's goods are shipped backed by
an irrevocable letter of credit satisfactory to Coast (as to form, substance,
and issuer or domestic confirming bank) that has been delivered to Coast and
is directly drawable by Coast, or (ii) whether the Borrower's customer is a
large or rated company having a verifiable credit history, or (iii) whether
Borrower's customer is a foreign subsidiary of a customer of Borrower that is
a company that was formed and has its primary place of business within the
United States, or (iv) whether Borrower's customer is a foreign company with
a Dun & Bradstreet rating, or (v) whether Borrower's goods are shipped to a
company that has credit insurance.
"ELIGIBLE RECEIVABLES" means Receivables and Eligible Foreign
Receivables arising in the ordinary course of Borrower's business from the
sale of goods or rendition of services, which Coast, in its sole judgment,
shall deem eligible for borrowing, based on such considerations as Coast may
from time to time deem appropriate. Eligible Receivables shall not include
the following:
(a) Receivables that the Account Debtor has failed to pay within
90 days of invoice date or 60 days past due or Accounts with selling terms of
more than 30 days;
(b) Receivables owned by an Account Debtor or its Affiliates where
twenty-five percent (25%) or more of all Receivables owed by that Account
Debtor (or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent Borrower;
(d) Receivables with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the Account Debtor may
be conditional;
(e) Receivables, other than Eligible Foreign Receivables, that are
not payable in Dollars or with respect to which the Account Debtor: (i) does
not maintain its chief executive office in the United States or (ii) is not
organized under the laws of the United States or any State thereof, or (iii)
is the government of any foreign country or sovereign state, or of any state
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof,
unless (y) the Receivable is supported by an irrevocable letter of credit
satisfactory to Coast (as to form, substance, and issuer or domestic
confirming bank) that has been delivered to Coast and is directly drawable by
Coast, or (z) the Receivable is covered by credit insurance in form and
amount, and by an insurer, satisfactory to Coast;
2
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
(f) Receivables with respect to which the Account Debtor is either
(i) the United States or any department, agency, or instrumentality of the
United States (exclusive, however, of Accounts with respect to which Borrower
has complied, to the satisfaction of Coast, with the Assignment of Claims
Act, 31 U.S.C. Section 3727), or (ii) any State of the United States
(exclusive, however, of Receivables owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed
its liability, or has made any claim with respect to the Receivables;
(h) Receivables with respect to an Account Debtor (other than Navarre
and those Account Debtors listed on Exhibit H, as the same may be modified
from time to time) whose total obligations owing to Borrower exceed ten
percent (10%) of all Eligible Receivables, to the extent of the obligations
owing by such Account Debtor in excess of such percentage, PROVIDED, HOWEVER
at the request of Borrower Coast may in its sole discretion, on a case by
case basis, increase the concentration percentage permitted of any individual
Account Debtor;
(i) Receivables as to which Navarre is the Account Debtor exceed
fifteen percent (15%) of all Eligible Receivables, to the extent of the
obligations owing by Navarre in excess of such percentage, PROVIDED, HOWEVER
at the request of Borrower Coast may in its sole discretion, on a case by
case basis, increase the concentration percentage permitted of any individual
Account Debtor;
(j) Receivables with respect to which the Account Debtor is subject
to any reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation proceeding, or becomes insolvent, or goes
out of business;
(k) Receivables the collection of which Coast, in its reasonable
credit judgment, believes to be doubtful by reason of the Account Debtor's
financial condition;
(l) Receivables with respect to which the goods giving rise to such
Receivable have not been shipped and billed to the Account Debtor, the
services giving rise to such Receivable have not been performed and accepted
by the Account Debtor, or the Receivable otherwise does not represent a final
sale;
(m) Receivables with respect to which the Account Debtor is located
in the states of New Jersey, Minnesota, Indiana, or West Virginia (or any
other state that requires a creditor to file a Business Activity Report or
similar document in order to bring suit or otherwise enforce its remedies
against such Account Debtor in the courts or through any judicial process of
such state), unless Borrower has qualified to do business in New Jersey,
Minnesota, Indiana, West Virginia, or such other states, or has filed a
Notice of Business Activities Report with the applicable division of taxation,
the department of revenue, or with such other state offices, as appropriate,
for the then-current year, or is exempt from such filing requirement; and
(n) Receivables that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of
the subject contract for goods or services.
(o) Distributor Receivables outstanding in excess of forty percent of
the outstanding amount of all Eligible Receivables, PROVIDED, HOWEVER, at the
request of Borrower Coast may in its sole discretion, on a case by case
basis, increase the concentration percentage of any individual Account Debtor.
(p) Receivables that are outstanding with respect to computer games
for personal computers, as distinguished from any video game consoles,
including, without limitation, the Sony PlayStation game console which games
(i) are not sequels or derivatives of any previous released product, as
evidenced on the annual SKU Report, and (ii) are not planned to be used for
the development of any future sequels or other derivative works, as evidenced
on the annual SKU Report.
"EQUIPMENT" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods
and other goods (other than inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"EVENT OF DEFAULT" means any of the events set forth in Section 10.1 of
this Agreement.
3
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"GENERAL INTANGIBLES" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, investment property, inventions, designs,
drawings, blueprints, patents, patent applications, trademarks and the
goodwill of the business symbolized thereby, names, trade names, trade
secrets, goodwill, copyrights, registrations, licenses, franchises, customer
lists, security and other deposits, rights in all litigation presently or
hereafter pending for any cause or claim (whether in contract, tort or
otherwise), and all judgements now or hereafter arising therefrom, all claims
of Borrower against Coast, rights to purchase or sell real or personal
property, rights as a licensor or licensee of any kind, royalties, telephone
numbers, proprietary information, purchase orders, and all insurance policies
and claims (including without limitation life insurance, key man insurance,
credit insurance, liability insurance, property insurance and other
insurance), tax refunds and claims, computer programs, discs, tapes and tape
files, claims under guaranties, security interests or other security held by
or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"INVENTORY" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be
furnished under any contract of service or held for sale or lease (including
without limitation all raw materials, work in process, finished goods and
goods in transit, and including without limitation all farm products), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with
the manufacture, packing, shipping, advertising, selling or finishing of such
goods, merchandise or other personal property, and all warehouse receipts,
documents of title and other documents representing any of the foregoing.
"INVESTMENT PROPERTY" has the meaning set forth in Section 9115 of the
Code as in effect as of the date hereof.
"LOAN DOCUMENTS" means this Agreement, the agreements and documents
listed on Section 5 of the Schedule, and any other agreement, instrument or
document executed in connection herewith or therewith.
"LOANS" has the meaning set forth in Section 2.1 hereof.
"MATERIAL ADVERSE EFFECT" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations
of Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including,
without limitation, repayment of the Obligations as they come due) or (iii)
the validity or enforceability of this Agreement or any other agreement or
document entered into by any party in connection herewith, or the rights or
remedies of Coast hereunder or thereunder.
"MATURITY DATE" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"MAXIMUM DOLLAR AMOUNT" has the meaning set forth in Section 2 of the
Schedule.
"MINIMUM MONTHLY INTEREST" has the meaning set forth in Section 3 of the
Schedule.
"NAVARRE" means Navarre Corporation, a _________ corporation.
"OBLIGATIONS" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at
any time owing by Borrower to Coast, whether evidenced by this Agreement or
any note or other instrument or document, whether arising from an extension
of credit, opening of a letter of credit, banker's acceptance, loan,
guaranty, indemnification or otherwise, whether direct or indirect
(including, without limitation, those acquired by assignment and any
participation by Coast in Borrower's debts owing to others), absolute or
contingent, due or to become due, including, without limitation, all interest,
charges, expenses, fees, attorneys' fees (including attorneys' fees and
expenses incurred in bankruptcy), expert witness fees, audit fees, letter of
credit fees, collateral monitoring fees, closing fees, facility fees,
termination fees, minimum interest
4
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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charges and any other sums chargeable to Borrower under this Agreement or
under any other present or future instrument or agreement between Borrower and
Coast.
"PERMITTED LIENS" means the following:
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent for more than thirty (30) days, or which
are being contested in good faith, provided that the same shall have no
adverse affect on Coast's security interest or rights in the Collateral.;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above
in clauses (a) or (b) above, provided that any extension, renewal or
replacement lien is limited to the property encumbered by the existing lien
and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
(i) liens which constitute rights of set off of a customary nature
or banker's liens on amounts on deposit, whether arising by contract or by
operation of law, in connection with arrangements entered into with
depository institutions in the ordinary course of business.
Coast will have the right to require, as a condition to its consent under
clause (d) above, that the holder of the additional security interest or lien
sign an intercreditor agreement on Coats's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor
of Coast, and agree not to take any action to enforce its subordinate
security interest so long as any Obligations remain outstanding, and that
Borrower agree that any uncured default in any obligation secured by the
subordinate security interest shall also constitute an Event of Default under
this Agreement.
"PERSON" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability
company, joint venture, trust, unincorporated organization, association,
corporation, government, or any agency or political division thereof, or any
other entity.
"PRIME RATE" means the actual "Reference Rate" or the substitute
therefor of the Bank of American NT & SA whether or not that rate is the
lowest interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates
published in the Wall Street Journal on the first business day of the
applicable month, as the base rate on corporate loans at large U.S. money
center commercial banks.
"RECEIVABLES" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities
accounts, security entitlements, commodity contracts, commodity accounts,
investment property and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise
returned to or repossessed by Borrower, and all rights of stoppage in transit
and all other rights or remedies of an unpaid vendor, lienor or secured party.
"RENEWAL DATE" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"RENEWAL FEE" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"SKU REPORT" means that certain stock keeping unit or product plan
generation report compiled by Borrower and issued annually which lists
Borrower's
5
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
game inventory planned to be produced and shows among other things games that
are sequels or derivatives of other games.
"SOLVENT" means, with respect to any Person on a particular date, that
on such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it
will, incur debts beyond such Person's ability to pay as such debts mature,
and (e) such Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such Person's
properties and assets would constitute unreasonably small capital after
giving due consideration to the prevailing practices in the industry in which
such Person is engaged. In computing the amount of contingent liabilities at
any time, it is intended that such liabilities will be computed at the amount
that, in light of all the facts and circumstances existing at such time,
represents the amount that reasonably can be expected to become an actual or
matured liability.
"TANGIBLE NET WORTH" means consolidated Owner's equity, PLUS
subordinated debt otherwise permitted hereunder, LESS, goodwill, patents,
trademarks, copyrights, franchises, formulas, leasehold interests, leasehold
improvements, non-compete agreements, engineering plans, deferred tax
benefits, organization costs, prepaid items, and any other assets of Borrower
that would be treated as intangible assets on Borrower's balance sheet
prepared in accordance with GAAP.
"YEAR 2000 PROBLEM" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"OTHER TERMS." All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in
accordance with GAAP. All other terms contained in this Agreement, unless
otherwise indicated, shall have the meanings provided by the Code, to the
extent such terms are defined therein.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
and in percentages to be determined by Coast in its good faith discretion, up
to the Credit Limit, provided no Default or Event of Default has occurred and
is continuing. In addition, Coast may create reserves against or reduce its
advance rates based upon Eligible Receivables without declaring a Default or
an Event of Default if it determines that there has occurred a Material
Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth
to the contrary in this Agreement. Interest shall be payable monthly, on the
last day of the month. Interest may, in Coast's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the
same rate as the other Loans. Regardless of the amount of Obligations that
may be outstanding from time to time, Borrower shall pay Coast Minimum
Monthly Interest during the term of this Agreement with respect to the Loans
in the amount set forth on the Schedule.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Coast and are
deemed fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when
due, Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and
wherever located: All Receivables, Inventory, Equipment, Investment Property,
and General Intangibles, including, without limitation, all of Borrower's
Deposit Accounts, and all money, and all property now or at any time in the
future in Coast's possession (including claims and credit balances), and all
proceeds of any of the foregoing (including proceeds of any insurance
policies, proceeds of proceeds, and
6
<PAGE>
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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claims against third parties), all products of any of the foregoing, and all
books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral"). Notwithstanding the foregoing provisions
of this Section 4, such grant of a security interest shall not extend to, and
the term "Collateral" shall not include the following: any rights in any
General Intangibles representing rights under agreements between the Borrower
and any other party which are now or hereafter held by the Borrower to the
extent that (i) such General Intangibles are not assignable or capable of
being encumbered as a matter of law or under the terms of the agreement
applicable thereto (but solely to the extent that any such restriction shall
be enforceable under applicable law), without the consent of the other party
thereto and (ii) such consent has not been obtained.
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the
satisfaction, in the sole discretion of Coast, at or prior to the first
advance of funds hereunder, of each, every and all of the following
conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No accounts payable shall be due and
unpaid one hundred twenty (120) days past its invoice date except for such
accounts payable being contested in good faith in appropriate proceedings and
for which adequate reserves have been provided.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability
immediately following the initial funding in the amount set forth on the
Schedule.
5.3 LANDLORD WAIVER. Coast shall have received duly executed landlord
waivers and access agreements in form and substance satisfactory to Coast, in
Coast's sole and absolute discretion, and, when deemed appropriate by Coast,
in form for recording in the appropriate recording office, with respect to
all leased locations where Borrower maintains any inventory or equipment.
5.4 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.5 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its
sole and absolute discretion.
5.6 PRIORITY OF COAST'S LIENS. Coast shall have received the results of
"of record" searches satisfactory to Coast in its sole and absolute
discretion, reflecting its Uniform Commercial Code and intellectual property
filings against Borrower indicating that Coast has a perfected, first
priority lien in and upon all of the Collateral, subject only to Permitted
Liens.
5.7 INSURANCE. Coast shall have received copies of the insurance
binders or certificates evidencing Borrower's compliance with Section 8.2
hereof, including lender's loss payee endorsements.
5.8 BORROWER'S EXISTENCE. Coast shall have received copies of
Borrower's certificate of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the
Closing Date, and Coast shall have received Certificates of Foreign
Qualification for Borrower from the Secretary of State of each state wherein
the failure to be so qualified could reasonably be expected to have a
Material Adverse Effect.
5.9 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing
the execution and delivery of this Agreement and the other documents
contemplated hereby, and authorizing the transactions contemplated hereunder
and thereunder, and authorizing specific officers of Borrower to execute the
same on behalf of Borrower, in each case certified by the Secretary or other
acceptable officer of Borrower as of the Closing Date.
5.10 TAXES. Coast shall have received evidence from Borrower that
Borrower has complied with all tax withholding and Internal Revenue Service
regulations, in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.11 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have
received a certificate from the relevant officer of Borrower to the effect
that, as the result of a comprehensive assessment
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made to Borrower's material suppliers,
vendors and customers, Borrower knows of no facts that would cause Borrower
to reasonably believe that the Year 2000 Problem will cause a Material
Adverse Effect.
5.12 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.13 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such
other agreements, instruments and documents as Coast may require in
connection with the transactions contemplated hereby, all in form and
substance satisfactory to Coast in Coast's sole and absolute discretion, and
in form for filing in the appropriate filing office, including, but not
limited to, those documents listed in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that
Borrower will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be
qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a Material Adverse Effect. The execution,
delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (a) have been duly and validly authorized, (b)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (c) do not violate Borrower's certificate of
incorporation or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (d) do not
constitute grounds for acceleration of any material indebtedness or
obligation under any material agreement or instrument which is binding upon
Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before
changing its name or doing business under any other name. Borrower has
complied, and will in the future comply, with all laws relating to the
conduct of business under a fictitious business name.
6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In
addition, Borrower has places of business and Collateral is located only at
the locations set forth on the Schedule. Borrower will give Coast at least
thirty (30) days' prior written notice before opening any additional place of
business, changing its chief executive office, or moving any of the
Collateral to a location other than Borrower's Address or one of the
locations set forth on the Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and
will remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has,
and will continue to have, a first-priority perfected and enforceable
security interest in all of the Collateral, subject only to the Permitted
Liens, and Borrower will at all times defend Coast and the Collateral against
all claims of others. None of the Collateral now is or will be affixed to
any real property in such a manner, or with such intent, as to become a
fixture. Borrower is not and will not become a lessee under any real property
lease pursuant to which the lessor may obtain any rights in any of the
Collateral and no such lease now prohibits, restrains, impairs or will
prohibit, restrain or impair Borrower's right to remove any Collateral from
the leased premises. Whenever any Collateral is located upon premises in
which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall,
whenever requested by Coast, use its best efforts to cause such third party
to execute and deliver to Coast, in form acceptable to Coast, such waivers and
subordinations as Coast shall
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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specify, so as to ensure that Coast's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any
lease of real property where any of the Collateral now or in the future may
be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial
statements now or in the future delivered to Coast have been, and will be,
prepared in conformity with GAAP (except, in the case of unaudited financial
statements, for the absence of footnotes and subject to normal year-end
adjustments) and now and in the future will fairly reflect the financial
condition of Borrower, at the times and for the periods therein stated.
Between the last date covered by any such statement provided to Coast and the
date hereof, there has been no Material Adverse Effect. Borrower is now and
will continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has
timely filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and Borrower has timely paid, and will
timely pay, all foreign, federal, state and local taxes, assessments,
deposits and contributions now or in the future owed by Borrower. Borrower
may, however, defer payment of any contested taxes, provided that Borrower
(i) in good faith contests Borrower's obligation to pay the taxes by
appropriate proceedings promptly and diligently instituted and conducted,
(ii) notifies Coast in writing of the commencement of, and any material
development in, the proceedings, and (iii) posts bonds or takes any other
steps required to keep the contested taxes from becoming a lien upon any of
the Collateral. As of the date hereof, Borrower is unaware of any claims or
adjustments proposed for any of Borrower's prior tax years which could result
in additional taxes becoming due and payable by Borrower. Borrower has
paid, and shall continue to pay all amounts necessary to fund all present
and future pension, profit sharing and deferred compensation plans in
accordance with their terms, and Borrower has not and will not withdraw from
participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could
result in any liability of Borrower, including any liability to the Pension
Benefit Guaranty Corporation or its successors or any other governmental
agency. Borrower shall, at all times, utilize the services of an outside
payroll service providing for the automatic deposit of all payroll taxes
payable by Borrower.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal,
state and local laws and regulations relating to Borrower, including, but not
limited to, the Fair Labor Standards Act, and those relating to Borrower's
ownership of real or personal property, the conduct and licensing of
Borrower's business, and environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in a
Material Adverse Effect. Borrower will promptly inform Coast in writing of
any claim, proceeding, litigation or investigation in the future threatened
or instituted by or against Borrower involving an amount set forth on the
Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to
purchase or carry any "margin stock" or to extend credit to others for the
purpose of purchasing or carrying any "margin stock."
6.12 YEAR 2000 COMPLIANCE. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software
and applications and after due inquiry made of Borrower's material suppliers,
vendors and customers
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Borrower represents and warrants that the Year 2000 problem will not result
in a Material Adverse Effect.
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be.
All sales and other transactions underlying or giving rise to each Receivable
shall fully comply with all applicable laws and governmental rules and
regulations. All signatures and indorsements on all documents, instruments,
and agreements relating to all Receivables are and shall be genuine, and all
such documents, instruments and agreements are and shall be legally
enforceable in accordance with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms; PROVIDED, HOWEVER, that Borrower's failure to execute
and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's Receivables, nor shall Coast's failure to
advance or lend against a specific Receivable affect or limit Coast's
security interest and other rights therein. Loan requests received after
10:30 A.M. Los Angeles, California time, will not be considered by Coast
until the next Business Day. Together with each such schedule, or later if
requested by Coast, Borrower shall furnish Coast with copies (or, at Coast's
request, originals) of all contracts, orders, invoices, and other similar
documents, and all original shipping instructions, delivery receipts, bills
of lading, and other evidence of delivery, for any goods the sale or
disposition of which gave rise to such Receivables, and Borrower warrants the
genuineness of all of the foregoing. Borrower shall also furnish to Coast an
aged accounts receivable trial balance in such form and at such intervals as
Coast shall request. In addition, Borrower shall deliver to Coast the
originals of all instruments, chattel paper, security agreements, guarantees
and other documents and property evidencing or securing any Receivables, upon
receipt thereof and in the same form as received, with all necessary
indorsements, all of which shall be with recourse. Borrower shall also
provide Coast with copies of all credit memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast,
and Borrower shall delivery all such payments and proceeds to Coast within
one (1) Business Day after receipt by Borrower, in their original form, duly
endorsed to Coast, to be applied to the Obligations in such order as Coast
shall determine. Coast may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Coast may specify, pursuant to a blocked account
agreement in such form as Coast may specify. Coast or its designee may, at
any time, notify Account Debtors that Coast has been granted a security
interest in the Receivables.
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of
Borrower's other funds or property, but will hold such proceeds separate and
apart from such other funds and property and in an express trust for Coast.
Nothing in this Section limits the restrictions on disposition of Collateral
set forth elsewhere in this Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in
full, or agree to do any of the
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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foregoing, except that Borrower may do so, provided that: (a) Borrower does
so in good faith, in a commercially reasonable manner, in the ordinary course
of business, and in arm's length transactions, which are reported to Coast on
the regular reports provided to Coast; (b) no Default or Event of Default has
occurred and is continuing; and (c) taking into account all such discounts
settlements and forgiveness, the total outstanding Loans will not exceed the
Credit Limit. Coast may, at any time after the occurrence of an Event of
Default, settle or adjust disputes or claims directly with Account Debtors
for amounts and upon terms which Coast considers advisable in its reasonable
credit judgment and, in all cases, Coast shall credit Borrower's Loan account
with only the net amounts received by Coast in payment of any Receivables.
7.7 RETURNS. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any inventory to Borrower in the
ordinary course of its business, Borrower shall promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor
in the appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (a) hold the returned
Inventory in trust for Coast, (b) segregate all returned Inventory from all
of Borrower's other property, (c) conspicuously label the returned Inventory
as subject to Coast's security interest, and (d) immediately notify Coast of
the return of any Inventory, specifying the reason for such return, the
location and condition of the returned Inventory, and on Coast's request
deliver such returned Inventory to Coast.
7.8 VERIFICATION. Coast may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters
relating to the Receivables, by means of mail, telephone or otherwise, either
in the name of Borrower or Coast or such other name as Coast may choose.
7.9 NO LIABILITY. Coast shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss
or destruction of, any goods, the sale or other disposition of which gives
rise to a Receivable, or for any error, act, omission or delay of any kind
occurring in the settlement, failure to settle, collection or failure to
collect any Receivable, or for settling any Receivable in good faith for less
than the full amount thereof, nor shall Coast be deemed to be responsible for
any of Borrower's obligations under any contract or agreement giving rise to
a Receivable. Nothing herein shall, however, relieve Coast from liability for
its own gross negligence or willful misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast
may reasonably require, and Borrower shall provide evidence of such insurance
to Coast, so that Coast is satisfied that such insurance is, at all times, in
full force and effect. All liability insurance policies of Borrower shall
name Coast as an additional insured, and all property casualty and related
insurance policies of Borrower shall name Coast as a loss payee thereon and
Borrower shall cause a lender's loss payee endorsement in form reasonably
acceptable to Coast. Upon receipt of the proceeds of any such insurance,
Coast shall apply such proceeds in reduction of the Obligations as Coast
shall determine in its sole discretion, except that, provided no Default or
Event of Default has occurred and is continuing, Coast shall release to
Borrower insurance proceeds with respect to Equipment totaling less than the
amount set forth in Section 8 of the Schedule, which shall be utilized by
Borrower for the replacement of the Equipment with respect to which the
insurance proceeds were paid. Coast may require reasonable assurance that the
insurance proceeds so released will be so used. If Borrower fails to provide
or pay for any insurance, Coast may, but is not obligated to, obtain the same
at Borrower's expense. Borrower shall promptly deliver to Coast copies of all
reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other
written reports with respect to Borrower (including budgets, sales
projections, operating plans and other financial documentation), as Coast
shall from time to time reasonably specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but
not less frequently than
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quarterly and on one (1) Business Day's notice, Coast, or its agents, shall
have the right to perform Audits. Coast shall take reasonable steps to keep
confidential all confidential information obtained in any Audit, but Coast
shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other
legal process. The Audits shall be at Borrower's expense and the charge for
the Audits shall be Seven Hundred Fifty Dollars ($750) per person per day (or
such higher amount as shall represent Coast's then current standard charge
for the same), plus reasonable out-of-pocket expenses. Borrower will not
enter into any agreement with any accounting firm, service bureau or third
party to store Borrower's books or records at any location other than
Borrower's Address, without first notifying Coast of the same and obtaining
the written agreement from such accounting firm, service bureau or other third
party to give Coast the same rights with respect to access to books and
records and related rights as Coast has under this Loan Agreement. Borrower
shall also take all necessary steps to assure that its material accounting
and software, systems and applications, and those of its accounting firm,
service bureau or any other third party vendor or supplier, will, on a timely
basis, adequately and completely address the Year 2000 Problem in all
material respects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior
written consent, do any of the following:
(a) merge or consolidate with another entity, except in a
transaction in which (i) the owners of the Borrower hold at least fifty
percent (50%) of the ownership interest in the surviving entity immediately
after such merger or consolidation, and (ii) the Borrower is the surviving
entity;
(b) acquire any assets, except (i) in the ordinary course of
business, or (ii) in a transaction or a series of transactions not involving
the payment of an aggregate amount in excess of the amount set forth in
Section 8 of the Schedule;
(c) enter into any other transaction outside the ordinary course
of business;
(d) sell or transfer any Collateral, except for the sale of
finished inventory in the ordinary course of Borrower's business, and except
for the sale of obsolete or unneeded Equipment in the ordinary course of
business;
(e) store any Inventory or other Collateral with any warehouseman
or other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i)
advances to customers or suppliers in the ordinary course of business, (ii)
travel advances, employee relocation loans and other employee loans and
advances in the ordinary course of business, and (iii) loans to employees,
officers and directors for the purpose of purchasing equity securities of the
Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would
have a Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section
are only permitted if no Default or Event of Default is continuing or would
occur as a result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against Coast with respect to any Collateral or relating
to Borrower, Borrower shall, without expense to Coast, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Coast may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
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8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully
consummate the transactions contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be
extended, and this Agreement shall automatically and continuously renew, for
successive additional terms of one year each, unless one party gives written
notice to the other, not less than one hundred twenty (120) days prior to the
Maturity Date or the next Renewal Date, that such party elects to terminate
this Agreement effective on the Maturity Date or such next Renewal Date. If
this Agreement is renewed under this Section 9.1, Borrower shall pay to Coast
a Renewal Fee in the amount shown in Section 3 of the Schedule. The Renewal
Fee shall be due and payable on the Renewal Date and thereafter shall bear
interest at a rate equal to the rate applicable to the Loans.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under
this Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the
amount shown in Section 3 of the Schedule. The Early Termination Fee shall be
due and payable on the effective date of termination and thereafter shall bear
interest at a rate equal to the rate applicable to the Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether
or not all or any part of such Obligations are otherwise then due and
payable. Notwithstanding any termination of this Agreement, all of Coast's
security interests in all of the Collateral and all of the terms and
provisions of this Agreement shall continue in full force and effect until
all Obligations have been paid and performed in full; provided that, without
limiting the fact that Loans are subject to the discretion of Coast, Coast
may in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and
performed in full. Upon payment and performance in full of all the
Obligations and termination of this Agreement, Coast shall promptly deliver
to Borrower termination statements, requests for reconveyances and such other
documents as may be required to fully terminate Coast's security interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower
shall give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers,
employees or agents, now or in the future, shall be untrue or misleading and
results in a Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to
Coast as provided in Section 7.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 8.4 above, or
shall breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within five (5) Business Days after
the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted
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Lien) is made on all or any part of the Collateral which is not cured,
discharged, stayed or bonded against, within ten (10) Business Days after
the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which
has or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any other Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law
or statute of any jurisdiction, now or in the future in effect, which is (i)
not timely controverted, or (ii) not cured by the dismissal thereof within
thirty (30) days after the date commenced; or
(l) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of
the foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all
of the Obligations, or any attempt to do any of the foregoing, or
commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his subordination
agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer
or experience any Change of Control without Coast's prior written consent,
which consent shall be in the discretion of Coast in the exercise of its
reasonable business judgment; or
(p) Borrower shall generally not pay its debts as they become due,
or Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any bankruptcy,
fraudulent conveyance or similar law; or
(q) there shall be Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any
of the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any
kind (all of which are hereby expressly waived by Borrower), may do any one
or more of the following:
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred
or installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without
judicial process to enter onto any of Borrower's premises without interference
to search for, take possession of, keep, store or remove any of the
Collateral, and remain on the premises or cause a
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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custodian to remain on the premises in exclusive control thereof, without
charge for so long as Coast deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement: PROVIDED, HOWEVER, that should Coast seek to take possession of
any of the Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and
make it available to Coast at places designated by Coast which are
reasonably convenient to Coast and Borrower, and to remove the
Collateral to such locations as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge. Coast is hereby granted a license or other right to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling
any Collateral and Borrower's rights under all licenses and all franchise
agreements shall inure to Coast's benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in
its condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private
sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other
than oral announcement at the time scheduled for sale. Coast shall have the
right to conduct such disposition on Borrower's premises without charge, for
such time or times as Coast deems reasonable, or on Coast's premises, or
elsewhere and the Collateral need not be located at the place of disposition.
Coast may directly or through any affiliated company purchase or lease any
Collateral at any such public disposition, and if permissible under
applicable law, at any private disposition. Any sale or other disposition of
Collateral shall not relieve Borrower of any liablility Borrower may have if
any Collateral is defective as to title or physical condition or otherwise at
the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's
sole discretion, to grant extensions of time to pay, compromise claims and
settle Receivables and the like for less than face value;and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the
preparation thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations
incurred by Coast (including attorneys' fees and expenses incurred in
connection with bankruptcy) with respect to the foregoing shall be due from
the Borrower to Coast on demand. Coast may charge the same to Borrower's loan
account, and the same shall thereafter bear interest at the same rate as is
applicable to the Loans. Without limiting any of Coast's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional three
percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower
and Coast agree that a sale or other disposition (collectively, "sale") of
any Collateral which complies with the following standards will conclusively
be deemed to be commercially reasonable:
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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(a) Notice of the sale is given to Borrower at least seven (7)
days prior to the sale, and, in the case of a public sale, notice of the sale
is published at least seven (7) days before the sale in a newspaper of
general circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.
Los Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling
the Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power
of attorney coupled with an interest, authorizing and permitting Coast
(acting through any of its employees, attorneys or agents) at any time, at
its option, but without obligation, with or without notice to Borrower, and
at Borrower's expense, to do any or all of the following, in Borrower's name
or otherwise, but Coast agrees to exercise the following powers in a
commercially reasonable manner:
(a) Execute on behalf of Borrower any documents that Coast may, in
its sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of
Borrower or Coast, or in order to fully consummate all the transactions
contemplated under this Agreement, and all other present and future
agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose
of or to lease (as lessor or lessee) any real or personal property which is
part of Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any
Account Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim
of mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come
into Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment
based thereon, or otherwise take any action to terminate or discharge the
same;
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure
the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any
books or records belonging to, or relating to, Borrower to give Coast the
same rights of access and other rights with respect thereto as Coast has
under this Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant
to this Agreement and any other present or future agreements.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees
and expenses incurred pursuant to bankruptcy) with respect to the foregoing
shall be added to and become part of the Obligations, and shall be payable on
demand. Coast may charge the foregoing to Borrower's loan account and the
foregoing shall thereafter bear interest at the same rate applicable to the
Loans. In no event shall Coast's rights under the foregoing power of
attorney or any of Coast's other rights under this Agreement be deemed to
indicate that Coast is in control of the business, management or properties
of Borrower. Borrower shall pay, indemnify, defend, and hold Coast and each
of its officers, directors, employees, counsel, agents, and attorneys-in-fact
(each, an "Indemnified Person") harmless (to the fullest extent permitted by
law) from and against any and all claims, demands, suits, actions,
investigations, proceedings, and damages, and all attorneys fees and
disbursements and other costs and expenses actually incurred in connection
therewith (as and when they are incurred and irrespective of whether suit is
brought), at any time asserted against, imposed upon, or incurred by any of
them in connection with or as a result of or related to the execution,
delivery, enforcement, performance, and administration of this Agreement and
any other Loan Documents or the transactions contemplated herein, and with
respect to any investigation, litigation, or proceeding related to this
Agreement, any other Loan Document, or the use of the proceeds of the credit
provided hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person hereunder with
respect to any Indemnified Liability that a court of competent jurisdiction
finally determines to have resulted from the gross negligence or willful
misconduct of Coast or such Indemnified Person. This provision shall survive
the termination of this Agreement and the repayment of the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of
any sale of the Collateral shall be applied by Coast first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in
the exercise of its rights under this Agreement, second to the interest due
upon any of the Obligations, and third to the principal of the Obligations,
in such order as Coast shall determine in its sole discretion. Any surplus
shall be paid to Borrower or other persons legally entitled thereto;
Borrower shall remain liable to Coast for any deficiency. If, Coast, in its
sole discretion, directly or indirectly enters into a deferred payment or
other credit transaction with any purchaser at any sale of Collateral, Coast
shall have the option, exercisable at any time, in its sole discretion, of
either reducing the Obligations by the principal amount of purchase price or
deferring the reduction of the Obligations until the actual receipt by Coast
of the cash therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise
by Coast of one or more of its rights or remedies shall not be deemed an
election, nor bar Coast from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Coast to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been indefeasibly paid and performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations,
all checks, wire transfers and other items of payment received by Coast
(including proceeds of Receivables and payment of the Obligations in full)
shall be deemed applied by Coast on account of the Obligations three (3)
Business Days after receipt by Coast of immediately available funds, and, for
purposes of the foregoing, any such funds received after 10:30 AM Los
Angeles, California time, on any day shall be deemed received on the next
Business Day. Coast shall be entitled to charge Borrower's account for such
three (3) Business Days of "clearance" or "float" at the rate(s) set forth
in Section 3 of the Schedule on all checks, wire transfers and other items
received by Coast, regardless of whether such three (3) Business Days of
"clearance" or "float" actually occur, and shall be deemed to be the
equivalent of charging three (3) Business Days of interest on such
collections. This across-the-board three (3) Business Day clearance or float
charge on all collections is acknowledged by the parties to constitute
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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an integral aspect of the pricing of Coast's financing of Borrower. Coast
shall not, however, be required to credit Borrower's account for the amount
of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of
any item of payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 7.5 hereof, all
payments with respect to the Obligations may be applied, and in Coast's sole
discretion reversed and re-applied, to the Obligations, in such order and
manner as Coast shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to
Borrower's Loan account, in which event they will bear interest from the date
due to the date paid at the same rate applicable to the Loans.
11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in
the heading to this Agreement, or at any other address designated in writing
by one party to the other party. Notices to Coast shall be directed to the
Commerical Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, faxed (at time of
confirmation of transmission), or at the expiration of one (1) Business Day
following delivery to the private delivery service, or two (2) Business Days
following the deposit thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by
any court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in
full force and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. THERE
ARE NO ORAL UNDERSTANDINGS, REPRESENTATIONS OR AGREEMENTS BETWEEN THE PARTIES
WHICH ARE NOT SET FORTH IN THIS AGREEMENT OR IN OTHER WRITTEN AGREEMENTS
SIGNED BY THE PARTIES IN CONNECTION HEREWITH.
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or
any other present or future agreement between Borrower and Coast shall not
waive or diminish any right of Coast later to demand and receive strict
compliance therewith. Any waiver of any Default shall not waive or affect
any other Default, whether prior or subsequent, and whether or not similar.
None of the provisions of this Agreement or any other agreement now or in the
future executed by Borrower and delivered to Coast shall be deemed to have
been waived by any act or knowledge of Coast or its agents or employees, but
only by a specific written waiver signed by an authorized officer of Coast
and delivered to Borrower. Borrower waives demand, protest, notice of
protest and notice of default or dishonor, notice of payment and nonpayment,
release, compromise, settlement, extension, or renewal of any commerical
paper, instrument, account, General Intangible, document or guaranty at any
time held by Coast on which Borrower is or may in any way be liable, and
notice of any action taken by Coast, unless expressly required by this
Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims,
demands, losses or damages, of any kind whatsoever, made, claimed, incurred
or suffered by Borrower or any other party through the ordinary negligence of
Coast, or any of its directors, officers, employees, agents, attorneys or
any other Person affiliated with or representing Coast, but nothing herein
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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shall relieve Coast from liability for its own gross negligence or willful
misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse
Coast for all attorneys' fees (including attorneys' fees and expenses
incurred pursuant to bankruptcy) and all filing, recording, search, title
insurance, appraisal, audit, and other costs incurred by Coast, pursuant to,
or in connection with, or relating to this Agreement (whether or not a
lawsuit is filed), including, but not limited to, any attorneys' fees and
costs (including attorneys' fees and expenses incurred pursuant to
bankruptcy) Coast incurs in order to do the following: prepare and negotiate
this Agreement and the documents relating to this Agreement; obtain legal
advice in connection with this Agreement or Borrower; enforce, or seek to
enforce, any of its rights; prosecute actions against, or defend actions by,
Account Debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy;
file or prosecute any probate claim, bankruptcy claim, third-party claim, or
other claim; examine, audit, copy, and inspect any of the Collateral or any
of Borrower's books and records; protect, obtain possession of, lease,
dispose of, or otherwise enforce Coast's security interest in, the
Collateral; and otherwise represent Coast in any litigation relating to
Borrower. If either Coast or Borrower files any lawsuit against the other
predicated on a breach of this Agreement, the prevailing party in such action
shall be entitled to recover its costs and attorneys' fees (including
attorneys' fees and expenses incurred pursuant to bankruptcy), including (but
not limited to) attorneys' fees and costs incurred in the enforcement of,
execution upon or defense of any order, decree, award or judgment. Borrower
shall also pay Coast's standard charges for returned checks and for wire
transfers, in effect from time to time. All attorneys' fees, costs and
charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under
this Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights
and delegate its duties hereunder without the consent of Borrower. Coast
reserves the right to syndicate all or a portion of the transaction created
herein or sell, assign, transfer, negotiate, or grant participations in all
or any part of, or any interest in Coast's rights and benefits hereunder. In
connection with any such syndication, assignment or participation, Coast may
disclose all documents and information which Coast now or hereafter may have
relating to Borrower or Borrower's business. To the extent that Coast assigns
its rights and obligations hereunder to a third Person, Coast thereafter
shall be released from such assigned obligations to Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published
announcing the consummation of this transaction and the aggregate amount
thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only
used in this Agreement for convenience. Borrower and Coast acknowledge that
the headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe,
limit, define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between
the parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any
rule of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of Coast and
Borrower shall be governed by the internal laws of the State of California,
without regard to its conflicts of law
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principles. As a material part of the consideration to Coast to enter into
this Agreement, Borrower (a) agrees that all actions and proceedings relating
directly or indirectly to this Agreement shall, at Coast's option, be
litigated in courts located within California, and that the exclusive venue
therefor shall be Los Angeles County; (b) consents to the jurisdiction and
venue of any such court and consents to service of process in any such action
or proceeding by personal delivery or any other method permitted by law; and
(c) waives any and all rights Borrower may have to object to the jurisdiction
of any such court, or to transfer or change the venue of any such action or
proceeding.
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY
CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
COAST OR BORROWER, IN ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
BORROWER:
THE 3DO COMPANY,
a California corporation
By /s/ [illegible] CFO/VP 3/18/99
----------------------------------------------
President or Vice President
By
----------------------------------------------
Secretary or Ass't Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By
----------------------------------------------
Title:
------------------------------------------
20
<PAGE>
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COAST
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: THE 3DO COMPANY,
A CALIFORNIA CORPORATION
ADDRESS: 600 GALVESTON DRIVE
REDWOOD CITY, CALIFORNIA
DATE: MARCH 18, 1999
This Schedule forms an integral part of the Loan and Security Agreement
between Coast Business Credit, a division of Southern Pacific Bank, and the
above-borrower of even date.
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SECTION 2 -- CREDIT FACILITIES
SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time
outstanding not to exceed the lesser of a
total Twenty Million Dollars
($20,000,000) (the "Maximum Dollar
Amount") or up to 50% of the amount of
Borrower's Eligible Receivables if
Dilution, measured on a three (3) month
rolling average, is equal or less than
thirty percent (30%) or 65% of the amount
of Borrower's Eligible Receivables if
Dilution, measured on a three (3) month
rolling average, is equal or less than
twenty (20%) (as defined in Section 1 of
the Agreement) at any one time outstanding.
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SECTION 3 -- INTEREST AND FEES
SECTION 3.1 - INTEREST RATE: A rate equal to the Prime Rate plus 2%
per annum calculated on the basis of a
360-day year for the actual number of days
elapsed. The interest rate applicable to
all Loans shall be adjusted monthly as of
the first day of each month, and the
interest to be charged for each month
shall be based on the highest Prime Rate
in effect during the prior month, but in
no event shall the rate of interest
charged on any Loans in any month be less
than 8% per annum.
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SECTION 3.1 - MINIMUM MONTHLY
INTEREST: Interest based upon assumption that amount
outstanding is equal to Forty percent
(40%) of the Maximum Dollar Amount.
SECTION 3.2 - LOAN FEE: Three Hundred Ninety Thousand Dollars
($390,000), such amount being fully earned
on the Closing Date, and payable to Coast
One Hundred Fifty Thousand Dollars
($150,000) on the Closing Date, One
Hundred Twenty Thousand Dollars
($120,000) to Coast on the first
anniversary of the Closing Date and One
Hundred Twenty Thousand Dollars ($120,000)
to Cost on the second anniversary of the
Closing Date; PROVIDED, HOWEVER, if prior
to the second anniversary date Borrower is
denied an increase of the Maximum Dollar
Amount to Twenty Million Dollars
($20,000,000), and Borrower, prior to the
second anniversary date, notifies Coast of
its intention to terminate this Agreement,
pursuant to Sections 9.1 and 9.2 hereof,
then Coast will waive the One Hundred
Twenty Thousand Dollars ($120,000) payment
due on the second anniversary date.
SECTION 3.2 - FACILITY FEE: $5,000, per quarter, payable on the Closing
Date (prorated for any partial quarter at
the beginning of the term of this
Agreement) and on the first day of every
quarter thereafter during the term hereof.
SECTION 9.1 - RENEWAL FEE: 1/2% of the Maximum Dollar Amount per year.
SECTION 9.2 - EARLY TERMINATION
FEE: An amount equal to three percent (3%) of
the Maximum Dollar Amount (as defined in
the Schedule), if termination occurs on or
before the first anniversary of the
effective date of this Agreement; two
percent (2%) of the Maximum Dollar Amount,
if termination occurs after the first
anniversary and on or before the second
anniversary of the effective date of this
Agreement; and one percent (1%) of the
Maximum Dollar Amount, if termination
occurs after the second anniversary and
before the Maturity Date; PROVIDED,
HOWEVER, if prior to the second
anniversary date Borrower is (i) denied an
increase of the Maximum Dollar Amount to
Twenty Million Dollars ($20,000,000), and
(ii) notifies Coast of its intention to
terminate this Agreement, pursuant to
Sections 9.1 and 9.2 hereof, then the Early
Termination Fee shall be reduced from 2%
to 1% for year two and reduced from 1% to
0% for year three.
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SECTION 5 - CONDITIONS PRECEDENT
SECTION 5.2 - MINIMUM
AVAILABILITY: $250,000 immediately following the initial
funding under this Agreement.
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<PAGE>
SECTION 5.13 - OTHER DOCUMENTS
AND AGREEMENTS: 1. UCC-1 financing statements, fixture
filings and termination statements:
2. Security Agreements (including those
covering copyrights, patents and
trademarks);
3. Subordination agreements of other debt;
4. Blocked Account and/or Lockbox
Agreements; and
5. Review of all agreements with
Distributors by Coast and its Counsel.
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SECTION 6 -- REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF
BORROWER: To be provided by Borrower.
SECTION 6.2 - PRIOR TRADE NAMES
OF BORROWER: To be provided by Borrower.
SECTION 6.2 - EXISTING TRADE NAMES
OF BORROWER: To be provided by Borrower.
SECTION 6.3 - OTHER LOCATIONS AND
ADDRESSES: 9430 Research Blvd.
Suite 300
Austin, TX
29800 Agoura Rd., #2
Agoura Hills, CA
SECTION 6.10 - MATERIAL ADVERSE
LITIGATION: To be provided by Borrower.
SECTION 6.10 - FUTURE CLAIMS
AND LITIGATION: Borrower will promptly inform Coast in
writing of any claim, proceeding,
litigation or investigation in the
future threatened or instituted by or
against Borrower involving any single
claim of Fifty Thousand Dollars ($50,000)
or more, or involving One Hundred Thousand
Dollars ($100,000) or more in the
aggregate.
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SECTION 8 -- ADDITIONAL DUTIES OF BORROWER
SECTION 8.1 - OTHER PROVISIONS: 1. Borrower must for each quarter during
the term hereof achieve 80% of forecast
quarterly projected Tangible Net Worth
based upon projections acceptable to
Coast.
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<PAGE>
2. Borrower must maintain $2,000,000 on
deposit at all times in restricted
accounts which shall be assigned to
and accessible only by Coast.
SECTION 8.2 - INSURANCE: Subject to the limitations set forth in
Section 8.2 of the Agreement, Coast shall
release to Borrower insurance proceeds
with respect to Equipment totaling less
than Fifty Thousand ($50,000).
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the
following:
1. Monthly Receivable agings, aged by
invoice date, within ten (10) days
after the end of each month.
2. Monthly accounts payable agings, aged
by invoice date, and outstanding or
held check registers within ten (10)
days after the end of each month.
3. Monthly internally prepared financial
statements, as soon as available, and
in any event within thirty (30) days
after the end of each month.
4. Form 10Q concurrent with filing with
Securities and Exchange Commission, and
in any event within forty-five (45)
days after the end of each fiscal
quarter of Borrower.
5. Quarterly customer lists, including
customer name, address, and phone
number.
6. Annual financial statements and its
10-K concurrent with filing with the
Securities and Exchange Commission, and
in any event within ninety (90) days
following the end of Borrower's fiscal
year, containing the unqualified
opinion of, and certified by, an
independent certified public accountant
acceptable to Coast.
7. Copies of all mailings to shareholders
of Borrower.
8. Upon request by Coast, channel
inventory reports of Distributors and
vendor sell through reports from
retailers.
9. Annual SKU Report delivered to Coast
on or before March 15 of each calendar
year.
SECTION 8.5 - NEGATIVE COVENANTS
(ACQUIRED ASSETS): Fifty Thousand Dollars ($50,000).
24
<PAGE>
- ------------------------------------------------------------------------------
SECTION 9 -- TERM
SECTION 9.1 - MATURITY DATE: March 31, 2002, subject to automatic
renewal as provided in Section 9.1 of the
Agreement, and early termination as
provided in Section 9.2 of the Agreement.
25
<PAGE>
Exhibit 21.01
THE 3DO COMPANY
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<S> <C>
Subsidiary Jurisdiction of Incorporation
The 3DO Company California
Studio 3DO K.K. Japan
3DO Europe, Ltd. United Kingdom
</TABLE>
1
<PAGE>
EXHIBIT 23.01
THE 3DO COMPANY
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
The 3DO Company:
We consent to incorporation by reference in the registration statements (Nos.
33-71620, 33-80872, 33-84250, 33-84248, 33-96560, 33-96562, 333-20877,
333-42739, 333-42737, 333-66799 and 333-66801) on Form S-8 and the
registration statement (No. 333-80309) on Form S-3 of The 3DO Company of our
report dated May 4, 1999 relating to the 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, which
report appears in the March 31, 1999 annual report on Form 10-K of The 3DO
Company.
Mountain View, California
June 11, 1999
<PAGE>
Exhibit 24.01
THE 3DO COMPANY
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James Alan Cook and John Adams, and
each of them acting individually, as such person's lawful attorneys-in-fact
for him, each with full power of substitution, for such person, in any and
all capacities, to sign any and all amendments to The 3DO Company's Report on
Form 10-K for the fiscal year ending March 31, 1999, and to file the same,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorneys-in-fact or their substitute or substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ WILLIAM M. HAWKINS, III Chairman of the Board of Directors and June 17, 1999
- ----------------------------------- Chief Executive Officer
William M. Hawkins, III (Principal Executive Officer)
/S/ JOHN ADAMS Chief Financial Officer June 17, 1999
- ----------------------------------- (Principal Financial Officer and
John Adams Principal Accounting Officer)
/S/ WILLIAM A. HALL Director June 17, 1999
- -----------------------------------
William A. Hall
/S/ HUGH C. MARTIN Director June 17, 1999
- -----------------------------------
Hugh C. Martin
/S/ H. WILLIAM JESSE, JR. Director June 17, 1999
- -----------------------------------
H. William Jesse, Jr.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE 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>
