<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 0-21336
THE 3DO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 94-3177293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 GALVESTON DRIVE
REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices, including zip code)
(650) 261-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of January 31, 1999, the number of outstanding shares of the registrants'
common stock was 25,983,762.
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THE 3DO COMPANY
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1998 and March 31, 1998 3
Condensed Consolidated Statements of Operations for the three
and nine months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended December 31, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
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PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
THE 3DO COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1998
------------ ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,193 $ 16,209
Short-term investments 10,909 18,375
Accounts receivable, net 8,293 216
Prepaid and other current assets 2,593 838
--------- ---------
Total current assets 22,988 35,638
Property and equipment, net 3,177 3,336
Deposits and other assets 1,148 1,473
--------- ---------
Total assets $ 27,313 $ 40,447
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,690 $ 495
Accrued expenses 5,814 2,468
Deferred revenue 696 352
Current portion of capital lease obligations 46 335
Other current liabilities 2,099 3,219
--------- ---------
Total current liabilities 10,345 6,869
Stockholders' equity:
Preferred stock, $.01 par value, 5,000 shares
authorized; no shares issued -- --
Common stock, $.01 par value; 50,000 and 25,000
shares authorized; 29,372 and 25,570
shares issued and outstanding, respectively 252 256
Additional paid-in capital 160,943 159,938
Accumulated other comprehensive loss (230) (290)
Accumulated deficit (130,392) (114,673)
Treasury Stock, at cost, 4,130 and 3,448 shares (13,605) (11,653)
--------- ---------
Total stockholders' equity 16,968 33,578
--------- ---------
Total liabilities and stockholders' equity $ 27,313 $ 40,447
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
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THE 3DO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the three months For the nine months
ended December 31, ended December 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Royalties and license fees $ -- $ 6,444 $ -- $ 29,371
Software publishing 10,271 3,720 24,829 7,879
Developer products and other -- -- -- 90
-------- -------- -------- --------
Total revenues $ 10,271 $ 10,164 $ 24,829 $ 37,340
-------- -------- -------- --------
Cost of revenues:
Software publishing 3,624 1,460 8,187 3,345
Developer products and other -- -- -- 43
-------- -------- -------- --------
Total cost of revenues 3,624 1,460 8,187 3,388
-------- -------- -------- --------
Gross profit 6,647 8,704 16,642 33,952
-------- -------- -------- --------
Operating expenses:
Research and development 7,365 4,125 18,939 14,415
Sales and marketing 2,981 1,199 7,333 3,487
General and administrative 2,256 1,922 7,011 6,493
-------- -------- -------- --------
Total operating expenses 12,602 7,246 33,283 24,395
-------- -------- -------- --------
Operating income (loss) (5,955) 1,458 (16,641) 9,557
Gain on sale of the Systems assets -- -- -- 18,032
Net interest and other income 323 552 1,136 1,370
-------- -------- -------- --------
Income (loss) before income
and foreign withholding taxes (5,632) 2,010 (15,505) 28,959
Income and foreign withholding taxes 27 -- 214 83
-------- -------- -------- --------
Net income (loss) $ (5,659) $ 2,010 $(15,719) $ 28,876
======== ======== ======== ========
Basic net income (loss) per share $ (0.22) $ 0.08 $ (0.61) $ 1.08
======== ======== ======== ========
Diluted net income (loss) per share $ (0.22) $ 0.08 $ (0.61) $ 1.03
======== ======== ======== ========
Shares used to compute basic net
income (loss) per share 25,496 25,606 25,671 26,667
======== ======== ======== ========
Shares used to compute diluted
net income (loss) per share 25,496 25,777 25,671 28,002
======== ======== ======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
4
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THE 3DO COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
For the nine months
ended December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net profit (loss) $(15,719) $ 28,876
Adjustments to reconcile net profit (loss) to net cash
used in operating activities:
Net loss on disposition of equipment -- 76
Depreciation and amortization 2,257 2,894
Deferred revenue 344 (11,746)
Gain on sale of Systems assets -- (18,032)
Repurchase of 3DO shares -- (10,965)
Changes in operating assets and liabilities:
Accounts receivable, net (8,077) (1,037)
Prepaid and other assets (1,766) 906
Accounts payable 1,195 (355)
Accrued expenses 3,345 (458)
Hardware incentives (2,944)
Other liabilities (1,120) (1,409)
-------- --------
Net cash used in operating activities (19,541) (14,194)
-------- --------
Cash flows from investing activities:
Proceeds from sale of Systems assets -- 20,000
Proceeds from disposition of equipment -- 74
Short-term investments, net 7,526 (17,898)
Capital expenditures (1,761) (783)
-------- --------
Net cash provided by (used in) investing activities 5,765 1,393
-------- --------
Cash flows from financing activities:
Repurchase of 3DO shares (1,952) (722)
Proceeds from issuance of common stock, net 1,001 1,261
Payments on capital lease obligations (289) (956)
-------- --------
Net cash provided by (used in) financing activities (1,240) (417)
-------- --------
Effect of foreign currency translation -- (23)
-------- --------
Net increase (decrease) in cash and cash equivalents (15,016) (13,241)
Cash and cash equivalents at beginning of period 16,209 14,395
-------- --------
Cash and cash equivalents at end of period $ 1,193 $ 1,154
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Interest $ 9 $ 23
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
5
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THE 3DO COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The consolidated financial statements of The 3DO Company, a Delaware corporation
(the "Company"), as of December 31, 1998 and for the quarter and nine months
ended December 31, 1998 and 1997 are unaudited. In the opinion of management,
these financial statements include all adjustments (consisting of only normal
recurring items) necessary for the fair presentation of the financial position
and results of operations for the interim periods. Certain amounts for prior
periods have been reclassified to conform to the current period presentation.
These consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended March 31, 1998. The results of operations
for the quarter ended December 31, 1998 are not necessarily indicative of the
results expected for the entire year.
NOTE 2 - REVENUE RECOGNITION
Revenue from the sale of software titles published and distributed by the
Company and developer products is recognized at the time of shipment, provided
the Company has no related outstanding obligations. Subject to certain
limitations, the Company permits its customers to obtain exchanges of software
titles published and distributed by the Company, within certain specified
periods, and provides price protection on certain unsold merchandise. Software
publishing revenue is reflected net of allowances for returns, price protection
and discounts. Software licensing revenue is recognized at the point of 3DO's
fulfillment of its obligations (e.g., delivery of the product golden master)
under any such licensing agreement. Per-copy royalties on sales that exceed the
guarantee are recognized as earned. Revenue from the Company's on-line service
is recognized monthly on usage.
In October 1997, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 97-2 Software Revenue Recognition, which supercedes
SOP 91-1. SOP 97-2 is effective for transactions entered into after March 31,
1998. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of the elements. The fair value of an element must be based
on evidence that is specific to the vendor. If a vendor does not have evidence
of the fair value for all elements in a multiple-element arrangement, all
revenue from the arrangement is deferred until such evidence exists or until all
elements are delivered. The Company 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.
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In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions. SOP 98-9 establishes
the method of recognizing revenue for certain multiple-element software
arrangements. We will be required to implement SOP 98-9 for the year ending
March 31, 2000. SOP 98-9 also extends the deferral of the application of SOP
97-2 to certain other multiple-element software arrangements through our year
ending March 31, 1999. We expect that the adoption of SOP No. 98-9 will have no
material impact on our financial position, results of operations or cash flows.
NOTE 3 - 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 period presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,659) $ 2,010 $(15,719) $ 28,876
======== ======== ======== ========
Shares used to compute basic net income
(loss) per share - Weighted-average
number of common shares outstanding 25,496 25,606 25,671 26,667
Effect of common equivalent shares - stock
options outstanding using the treasury
stock method -- 171 -- 1,335
-------- -------- -------- --------
Shares used to compute diluted net income
(loss) per share 25,496 25,777 25,671 28,002
======== ======== ======== ========
Basic net income (loss) per share $ (0.22) $ 0.08 $ (0.61) $ 1.08
======== ======== ======== ========
Diluted net income (loss) per share $ (0.22) $ 0.08 $ (0.61) $ 1.03
======== ======== ======== ========
</TABLE>
Options to purchase 10,159,106 shares of common stock were excluded from the
Company's dilutive net income (loss) per share calculations for the quarter and
nine months ended December 31, 1998 because their effect was anti-dilutive.
These anti-dilutive shares had weighted average exercise prices of $3.09 for
both quarter and nine months ended December 31, 1998. Options to purchase
6,839,789 and 819,974 shares of common stock were excluded from the Company's
dilutive net income (loss) per share calculations for the quarter and nine
months ended December 31, 1997 because their effect was anti-dilutive. These
anti-dilutive shares had weighted average exercise prices of $3.31 and $3.74 for
the quarter and nine months ended December 31, 1997.
7
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NOTE 4 - GAIN ON SALE OF SYSTEMS GROUP
On June 23, 1997, the Company sold most of the assets of the Company's former
hardware systems group, including certain technologies and related intellectual
property rights and approximately $1.5 million in equipment, to Samsung
Electronics Company, Ltd. ("Samsung") for $20.0 million, realizing a gain of
approximately $18.0 million.
NOTE 6 - NEW ACCOUNTING STANDARDS
Effective April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This Statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. For example, other
comprehensive earnings may include foreign currency translation adjustments,
minimum pension liability adjustments and unrealized gains and losses on
marketable securities classified as available-for-sale. Annual financial
statements for prior periods will be reclassified, as required. The Company's
total comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(in thousand) DECEMBER 31, DECEMBER 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) $ (5,659) $ 2,010 $(15,719) $ 28,876
Cumulative translation adjustment -- (4) -- (23)
Unrealized gains (losses) on marketable
Securities (45) (110) 59 (84)
-------- -------- -------- --------
Total comprehensive income (loss) $ (5,704) $ 1,896 $(15,660) $ 28,769
======== ======== ======== ========
</TABLE>
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 by the first quarter of
fiscal 2001 and is not expected to have a financial impact to its financial
statements.
8
<PAGE> 9
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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
manner in which public companies report information about operating segments in
annual and interim financial statements. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. The Company does not
expect the impact of SFAS No. 131 to be material in relation to the financial
statements.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The 3DO Company ("3DO" or the "Company") develops, publishes and distributes
interactive entertainment software products for multiple platforms including
IBM-compatible personal computers (the "PC"), the 32-bit PlayStation platform
(the "Sony PlayStation") developed by Sony Computer Entertainment, Inc., the
64-bit Nintendo 64 platform (the "N64") developed by Nintendo Company, Ltd., and
Internet platforms. During the first quarter of fiscal year 1998, the Company
also designed, developed and licensed hardware technologies for the 64-bit
consumer and PC markets.
In December 1995, the Company licensed its next generation 64-bit technology
(the "M2 Technology") to Matsushita Electric Industrial Co., Ltd. ("MEI" or
"Matsushita") for an upfront license fee of $100.0 million plus certain ongoing
royalties (the "M2 Agreement"). On April 24, 1996, the Company agreed to make
certain modifications to the M2 system design, pursuant to the terms of an
addendum (the "Addendum") to the M2 Agreement. As consideration for providing
engineering and certain support services, the Company received an additional
aggregate fee of approximately $4.5 million received in installments in fiscal
years 1997 and 1998. On July 23, 1997, the Company and MEI signed a second
addendum (the "Second Addendum") to the M2 Agreement. Under the Second Addendum,
the Company relinquished its rights to develop and distribute software and
peripherals that are compatible with hardware products developed by MEI or its
sublicensees that incorporate the M2 Technology, and gave up its right to
develop and distribute M2-compatible authoring systems. The Company recognized
all remaining revenue in connection with the M2 Agreement in fiscal year 1998.
In addition, the Company relinquished its right to receive royalties with
respect to MEI's potential use of the M2 Technology, as well as certain other
rights. In exchange, MEI returned to the Company all of the approximately 3.2
million shares of the Company's common stock that it previously owned. The
Company recognized approximately $11.0 million of revenue in connection with
this transaction.
On June 23, 1997, the Company sold and/or licensed most of the assets of the
Company's former hardware systems group, including certain technologies and
related intellectual property rights and approximately $1.5 million in
equipment, to Samsung Electronics Co. Ltd. ("Samsung") for $20.0 million. As
part of the agreement between 3DO and Samsung, 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
then-remaining deliverables due to MEI under the M2 Agreement.
3DO's contractual obligations pursuant to the M2 Agreement, as amended, to
provide MEI with engineering support regarding the M2 Technology expired on June
30, 1998. At this time, 3DO believes that its efforts to effectively transfer to
MEI a technical understanding of the M2 Technology was successfully accomplished
and that MEI does not require any further engineering services or technical
support from 3DO. Pursuant to the M2 Agreement, as amended, MEI is entitled to
request additional engineering support
10
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services from 3DO, which services would be provided by 3DO at MEI's expense in
an amount to be mutually agreed upon by the parties. There can be no assurance
that any sum(s) agreed upon for such services will fully compensate 3DO for the
costs and expenses of providing such services, including, but not limited to,
diverting funds and personnel from the Company's software publishing business.
If MEI requests additional engineering support from the Company, the Company
does not expect that it will have a material adverse impact on its financial
position or results of operations.
In February 1996, the Company licensed the 3-D graphics portion of the M2
Technology to Cirrus Logic, Inc. ("Cirrus") for the potential development of
high-end 3-D graphics chips for the PC market. Under the terms of the Joint
Development and License Agreement (the "Cirrus Agreement") the Company agreed to
develop certain modifications to its semiconductor technology familiarly known
to the parties as the "3DEngine." As partial consideration under such agreement,
the Company received the non-refundable sum of $2.5 million. This payment has
been recognized as revenue under the percentage-of-completion method.
On October 3, 1996, Cirrus filed a complaint to rescind the Cirrus Agreement on
the grounds of frustration of purpose, mistake, failure of consideration,
concealment, and non-disclosure, and seeking to obtain a repayment of $2.5
million in nonrefundable payments made to the Company. The Company responded to
Cirrus' complaint and filed a cross-complaint regarding Cirrus' breach of the
Cirrus Agreement and seeking to enforce its rights under said agreement,
including procurement of Cirrus' payment of $4.5 million in nonrefundable
license fees, prepaid royalties and termination fees, plus damages, interest,
and attorneys' fees and costs.
On October 15, 1997, 3DO and Cirrus resolved and settled the parties' respective
claims with respect to the above-referenced litigation, including, inter alia,
the dismissal with prejudice of the subject litigation, the general release of
both parties from any and all claims relating to the 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 year 1998.
On July 19, 1997, the Board of Directors of the Company approved a stock
repurchase plan pursuant to which the Company was authorized to purchase up to
$5.0 million worth of the Company's stock on the open market or in block trades,
from time to time as management deems appropriate, if the market price of the
Company's stock remains below certain levels. As of January 31, 1999, the
Company has reacquired over one million shares. The repurchase plan will remain
in effect until rescinded by the Board.
Revenue from the sale of software titles published and distributed by the
Company is recognized at the time of shipment, provided the Company has no
related outstanding obligations. Subject to certain limitations, the Company
permits its customers to obtain exchanges of software titles published and
distributed by the Company, within certain specified periods, and provides price
protection on certain unsold merchandise. Software publishing revenue is
reflected net of allowances for returns, price protection and
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discounts. Software licensing revenue is recognized at the point of 3DO's
fulfillment of its obligations (e.g., delivery of the product golden master)
under any such agreement. Per-copy royalties on sales that exceed the guarantee
are recognized as earned. Revenue from the Company's on-line service is
recognized monthly on usage.
The Company will continue to incur substantial expenditures to develop its
business throughout the remainder of fiscal year 1999. The Company expects that
its operating results will fluctuate as a result of a wide variety of factors,
including the timing of software product introductions by the Company and its
competitors, the Company's expenditures on research and development, marketing
and promotional programs, and the general state of the national and global
economies. In addition, the Company's revenues will be affected by the seasonal
nature of the market for consumer electronics products and variations as a
result of the demand for a particular software title.
Except for the historical information contained herein, this discussion and
analysis includes certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are subject to the
"safe harbor" created by that section. These forward-looking statements include,
but are not limited to, all statements concerning future revenues, expenses,
cash flows and capital resources; all statements regarding the Company, with or
without the assistance of any subcontractors fulfilling any engineering or
support obligations associated with the M2 Agreement, as amended; the extent to
which the Company will receive and/or recognize revenue from the sale of
software titles it publishes and distributes and/or from its on-line service;
the extent to which the Company will receive and/or recognize revenue with
respect to the sale of software titles it licenses to third-party publishers;
the length of time for which the Company's existing cash resources, working
capital financing and other sources of funds will fund the Company's activities;
the Company's ability to develop software products for new platforms, and the
timeliness, cost, and market demand for such products; the ability of the
Company to adequately distribute its software products through various
distribution channels; the Company's ability to adequately address its own or
third parties' Year 2000 issues; and the effect of competitive factors in the
marketplace, including the market acceptance of certain formats and the timing
and release of competitors' products. The Company's actual future results could
differ materially from those projected in the forward-looking statements
contained herein. Some factors which could cause future actual results to differ
materially from the Company's recent results or those projected in the
forward-looking statements are described in "Factors Affecting Future
Performance," below. The Company assumes no obligation to update any or all of
the forward-looking statements or such factors.
RESULTS OF OPERATIONS
For the quarter and nine months ended December 31, 1998, the Company had net
losses of $5.7 million and $15.7 million, respectively, compared to net profits
of $2.0 million and $28.9 million for the same periods in fiscal year 1998.
Included in the net profit for the nine months ended December 31, 1997 was $29.4
million in revenue recognized from the M2 Agreement and a one-time $18.0 million
gain from the sale of certain of the hardware related assets to Samsung.
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Revenue for the quarter and nine months ended December 31, 1998 totaled $10.3
million and $24.8 million compared to $10.2 million and $37.3 million for the
same periods last fiscal year. Royalties and license fees for the quarter and
nine months ended December 31, 1997 were $6.4 million and $29.4 million,
respectively. No revenue associated with the royalties and license fees was
recognized for the current fiscal year due to the sale of the Company's hardware
assets to Samsung in the first quarter of last fiscal year.
Software publishing revenue totaled $10.3 million and $24.8 million for the
three and nine months ended December 31, 1998, compared to $3.7 million and $7.9
million for the comparable periods ended December 31, 1997. The increase in
software publishing revenue was primarily due to the release of Army Men and
Might and Magic VI for the PC, TOCA Championship Racing for the Sony PlayStation
(PSX), and BattleTanx for the Nintendo (N64) in the current fiscal year. In
addition, the increase was also attributable to the current quarter licensing
revenue associated with a one-time $0.9 million royalty payment from third party
developers, of which approximately $0.4 million was recognized in the current
quarter, and the balance will be recognized in the fourth quarter of this fiscal
year. Software publishing revenue was recorded net of allowances for returns,
price protection and discounts.
Cost of revenues totaled $3.6 million and $8.2 million for the quarter and nine
months ended December 31, 1998, respectively, compared to $1.5 million and $3.4
million for the same periods last fiscal year. Cost of publishing revenue as a
percentage of publishing revenue were 35% and 33% for the quarter and nine
months ended December 31, 1998, compared to 39% and 43% for the prior comparable
periods. The improvement compared to prior year was attributable to lower cost
to net revenue ratios for both Army Men, Might and Magic VI and BattleTanx, and
higher software licensing revenue in fiscal year 1999, which had no associated
cost. Cost of revenues consists of direct costs associated with software titles
sold and royalties paid to third-party software developers. Internal development
costs on software title development for the Company's published titles are
recognized as incurred and included in research and development expenses.
Research and development expenses for the quarter and nine months ended December
31, 1998, totaled $7.4 million and $18.9 million, respectively, compared to $4.1
million and $14.4 million for the comparable periods in the prior fiscal year.
The increase was primarily due to higher on-going development expenses
associated with all 3DO studios as the Company continues to expand its product
development efforts, offset by a savings of approximately $2.7 million in
operating expenses due to the sale of the hardware group to Samsung in June
1997.
Sales and marketing expenses for the three months ended December 31, 1998 and
1997 were $3.0 million and $1.2 million, respectively. Sales and marketing
expenses for the nine months ended December 31, 1998 was $7.3 million compared
to $3.5 million for the nine months ended December 31, 1997. The increase was
attributable to the sales and marketing expenses related to the release of Army
Men, Might and Magic VI, High Heat Baseball, TOCA Championship Racing and the
television ad campaign for BattleTanx. In addition, in May 1998, the Company
participated in the Electronic Entertainment Expo ("E3") tradeshow, where the
Company showcased its latest line-up of new video games
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for the PC, PlayStation and N64 platforms for the first time since it made the
transition from a hardware company to a software publishing company.
General and administrative expenses increased from $1.9 million and $6.5 million
for the quarter and nine months ended December 31, 1997 to $2.3 million and $7.0
million for same periods in the current fiscal year. The increase was
attributable to the increase in administrative and overhead expenses as the
Company continues to build its infrastructure to support the release of its new
video games for the PC, PlayStation and N64 platforms. The Company expects that
its general and administrative expenses will continue to increase in the near
future.
Net interest and other income decreased from $0.6 million and $19.4 million for
the quarter and nine months ended December 31, 1997 to $0.3 million and $1.1
million for the same periods this fiscal year, primarily due to the $18.0
million gain on the sale of certain assets of the Company's hardware systems
division to Samsung in June 1997 and lower average cash balance in the current
year compared to last year.
Income and foreign withholding taxes for the nine months ended December 31, 1998
and 1997 were $0.2 million and $0.1 million, respectively. Income and foreign
withholding taxes for the quarters ended September 30, 1998 and 1997 were
nominal. Income and foreign withholding taxes primarily consisted of foreign
licensing withholding taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity are its cash and cash equivalent
balances and short-term investment balances, which totaled approximately $12.1
million at December 31, 1998. At March 31, 1998, cash and short-term investments
totaled $34.6 million. This decrease was primarily due to net cash used in
operations of $19.5 million, capital expenditures of $1.8 million and inventory
purchase of $6.3 million..
The Company will incur negative cash flow for the remainder of fiscal year 1999
from the continued investment in the internal development of entertainment
software titles scheduled to be released in this fiscal year and beyond. The
Company entered into letters of intent for credit lines of $20.0 million and
$20.0 million with Coast Business Credit and Merrill Lynch & Co., respectively,
and is in the process of negotiating final agreements regarding such credit
lines. The Company anticipates that its existing cash resources, future lease
and working capital financing and all other sources of funds should be
sufficient to fund the Company's activities through the end of fiscal year 1999.
There can be no assurance that additional capital will not be required in fiscal
year 2000 since cash flows will be affected by the rate at which the Company
releases its products 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 the Company's products. The level of
financing required beyond fiscal year 1999 will depend on these and other
factors. If the Company needs to raise additional funds through public or
private financing, no assurance can be given that additional financing will be
available or that, if available, it will be available on terms acceptable to the
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Company or its stockholders. Additional financing may result in substantial and
immediate dilution to existing stockholders. If adequate funds are not available
to satisfy either short or long term capital requirements, the Company may be
required to curtail its operations significantly or to seek funds through
arrangements with strategic partners or others that may require the Company to
relinquish material rights to certain of its technologies, products and/or
potential markets.
FACTORS AFFECTING FUTURE PERFORMANCE
CHANGING PRODUCT PLATFORMS AND FORMATS
The Company has entered new, rapidly changing markets with its software
products, specifically the enhanced graphics card portion of the PC market, the
Sony PlayStation, the Nintendo 64, and the Internet markets. The markets for
entertainment software and entertainment software platforms are undergoing rapid
technological change. As a result, the Company must continually anticipate and
adapt its products to emerging platforms and evolving consumer preferences. The
introduction of new platforms and technologies can render existing products
obsolete and unmarketable. Development of entertainment software products for
new hardware platforms requires substantial investments in research and
development for technologies such as motion capture, digitized speech and sound
effects, music and full motion video, and requires the Company to anticipate and
attempt to develop products for those platforms that will ultimately be
successful. Generally, software development efforts must occur well in advance
of the release of new platforms in order to introduce new products on a timely
basis following the release of such platforms. Although the Company intends to
develop and market entertainment software for certain advanced and emerging
platforms, the development and marketing efforts in connection therewith may
require greater technical and financial resources than currently possessed by
the Company. In addition, there can be no assurance that the platforms for which
the Company develops products will achieve market acceptance and, as a result,
there can be no assurance that the Company's development efforts with respect to
such new platforms will lead to marketable products or products that generate
sufficient revenues to offset research and development costs incurred in
connection with the creation of such products. There can be no assurance that
the Company will be successful in developing and marketing products for new
platforms. Failure to develop products for new platforms that achieve
significant market acceptance would have a material adverse effect on the
Company's business, operating results and financial condition. Furthermore, the
Company does not have a license to develop products for certain of the most
popular platforms, including the proprietary platform of Sega. Finally, the
Company's products must maintain compatibility with certain hardware and
software accessories. Any changes in any of such third-party product designs
that result in incompatibility of the Company's products could result in
significant product returns and obsolescence.
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DEPENDENCE ON THE PC MARKET
The Company's future success is in part dependent on the PC market, which is
extremely dynamic and has historically been characterized by wide fluctuations
in product supply and demand. From time to time, the PC industry has also
experienced significant downturns, often in connection with, or in anticipation
of, declines in general economic conditions. Furthermore, rapid technological
changes in PC hardware may render the current installed base of PCs and the
Company's technology and products obsolete. There can be no assurance that unit
sales of PCs or the number of entertainment software users in the PC market will
continue at their present levels or increase in the future. The Company's
revenues from its entertainment software products will be dependent on marketing
and distribution of titles to an installed base of PC users. Any decrease in
demand for PCs or the number of entertainment software users in the PC market
would have a material adverse effect on the Company's operating results.
DEPENDENCE ON THE PROPRIETARY PLATFORM MARKETS
The market for software products for the various proprietary platforms for which
the Company develops software products, including the Sony PlayStation and
Nintendo 64, are currently experiencing rapid growth. The Company's future
success is partly dependent on its ability to successfully take advantage of
these markets and on the continued growth of these markets. There can be no
assurance that the Company will be able to develop products for these markets in
a timely manner to take advantage of these growing markets, that the Company's
software products for these markets will achieve market acceptance, or that
these markets will continue to grow. In the event that the Company fails to
develop products while these markets are expanding or fails to deliver products
that are commercially successful, or if these markets do not continue to grow,
the Company's operating results would be adversely affected.
DEPENDENCE ON THE INTERNET MARKET
The Company's future success is in part dependent upon continued growth in the
use of the Internet. Rapid growth in the use of and interest in the Internet is
a recent phenomenon. The Internet may not prove to be a viable commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary infrastructure or timely development of performance
improvements, including high speed modems. In addition, to the extent that the
Internet continues to experience significant growth in the number of users and
level of use, there can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed upon it by any such growth. In
addition, the Internet could lose its viability due to delays in the development
or adoption of new standards and protocols required to handle increased levels
of Internet activity, or due to increased government regulations. Changes in or
insufficient availability of telecommunications services to support the Internet
also could result in slower response times and adversely affect usage of
entertainment software developed for the Internet. If the use of the Internet
does not grow, or if the Internet infrastructure does not effectively support
the growth that may occur, the Company's business, results of operations and
financial conditions would be materially adversely affected.
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INTERACTIVE MULTIPLE PLAYER GAMES IN THE INTERNET
The availability of multiple player games on the Internet is a relatively recent
phenomenon. The limited history of multiple player games on the Internet has
been characterized by numerous companies entering the market in a short span of
time and competing for a limited number of players of multiple player games by
providing incentives to attract players' interest and by entering into
agreements with the few companies providing Internet game sites that have
developed some player following. However, there has been little evidence of
success in this area and a profitable business model to capitalize on the
Internet multiple player game market has not yet been established. In addition,
multiple player games on the Internet require the implementation of newly
developed software to accept and process payments from players which may contain
errors in the program which have not yet been discovered or corrected. The
Company provides free play time and other incentives such as discounts and
contests to interest the limited number of players in the market into trying the
Company's Internet game, Meridian 59, and has entered into agreements to have
such game distributed through Internet game sites. There can be no assurance
that any of the incentives provided by the Company or the availability of the
Company's games on Internet game sites will result in increased player interest
in the Company's games, that the costs of providing such incentives or entering
into agreements with Internet game site providers will be compensated for by
increased payments from use of the Company's games, that the Company will be
able to continue to offer the incentives it does in accordance with the
applicable laws of the jurisdictions in which the Company's games are
distributed, or that the Company will be able to continue to offer its games
through various Internet game sites. In addition, the Company has experienced
problems with certain of the Internet hardware and software it has put into
operation and there can be no assurance that such problems or other problems
will not reoccur in the future.
SHORT PRODUCT LIFESPANS
Interactive entertainment software products typically have life spans of only 3
to 12 months. Accordingly, the Company will need to constantly develop and bring
to market new products that achieve market acceptance quickly. The Company's
future success will depend in large part on its ability to develop and introduce
new products on a timely basis. New products must keep pace with competitive
offerings, adapt to new hardware platforms and emerging industry standards, and
provide additional functionality. If the Company is unable, due to resource
constraints or technological or other reasons, to develop and introduce such
products in a timely manner, this inability would have a material adverse effect
on its operating results and financial condition. There can be no assurance that
the Company will be able to complete the timely development and commercial
release of new software products that achieve market acceptance.
COMPETITION
The Company has entered new markets with certain of its software products and in
particular, those products currently in development for the Sony PlayStation,
Nintendo 64
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and Internet markets. This has, to some degree, required distribution through
distributors and retailers who had not previously carried the Company's
products. There is intense competition in procuring adequate distribution of the
Company's software products. There can be no assurance that the Company will
succeed in obtaining sufficient distribution to enable its products to achieve
market success.
The markets in which 3DO's software products compete are expected to undergo
significant changes, due in part to the introduction, or planned introduction,
of new hardware platforms and electronic delivery systems, and the entry and
participation of new industries and companies. Severe competition exists for
retail shelf space in the consumer software industry. A number of factors,
including the Company's historic performance, discounts to retailers, inventory
and return policies, customer service, product support, brand recognition,
perceived quality and entertainment value of specific titles, and marketing
activities all affect access to distributors and retailers. In addition, sales
of interactive entertainment products are becoming increasingly dependent upon
name recognition of product families. Fewer products in this market are
successful and publishers of these games, including the Company, must incur
substantial marketing and sales expenses to promote retailers' efforts to sell
such products given the products' short lifespans.
A variety of companies offer products that compete directly with one or more of
the Company's software products. These direct competitors vary in size from very
small companies with limited resources to companies with financial, managerial
and technical resources substantially greater than those of the Company. The
Company's competitors include large independent multi-platform software
developers such as Electronic Arts Inc., Eidos plc, THQ, Inc., Acclaim
Entertainment, Inc., Lucas Arts Entertainment Co., and GT Interactive Software,
as well as publishers of personal computer software such as Microsoft
Corporation and The Learning Company, Inc.
VARIABILITY OF OPERATING RESULTS
The Company expects that its operating results will experience significant
fluctuations as a result of the timing of new video game hardware and software
product introductions by the Company's competitors, the timeliness with which
the Company is able to release its products to the market, fluctuations in the
PC market, the financial impact of acquisitions of other companies and/or
products by the Company, the Company's investments in research and development,
and expenditures on marketing and promotional programs.
The market for entertainment software is highly seasonal. The Company's revenues
are expected to be affected by the seasonal nature of the market, which is
characterized by increased sales in the fourth calendar quarter coinciding with
the holiday selling season and typically a seasonal low in revenues in the
quarter ending in June. Seasonal trends may also be affected by general economic
or industry factors. The Company's revenues may also reflect substantial
variations as a result of the timing of the introduction of and demand for a
particular software title it has published and/or distributed. Such demand may
increase or decrease as a result of a number of factors, such as consumer
preferences, product announcements by competitors and the popularity of
particular hardware
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platforms, that cannot be predicted. The software industry is characterized by
frequent product delays, which can materially and adversely affect the sales of
a product if the product is not released in time for the holiday season.
The Company has stock-balancing programs for its software products that, under
certain circumstances and up to a specified amount, allow for the return and
exchange of software products by resellers. The Company also typically provides
for price protection for its software products that, under certain conditions,
allows the reseller a price reduction from the Company for unsold products. The
Company maintains a policy of exchanging products or giving credits, but does
not typically give cash refunds. The risk of price protection requirements is
increasing as a result of the maturing and the increasingly "hit" based nature
of the video game market. Moreover, the risk of product returns may increase as
new hardware platforms become more popular or market factors force the Company
to make changes in its distribution system. Overstocking in the distribution
channel can result in high returns or the requirement for substantial price
protection in subsequent periods. The Company establishes reserves for returns
and price protection based on estimated future returns of products, taking into
account promotional activities, the timing of new product introductions,
distributor and retailer inventories of the Company's products and other
factors. However, there can be no assurance that actual returns or price
protection requirements will not exceed the Company's reserves.
DEPENDENCE ON DISTRIBUTORS
The distribution channels through which consumer software products are sold have
been characterized by change, including consolidations and financial
difficulties of certain distributors and retailers, and the emergence of new
retailers such as general mass merchandisers. The bankruptcy or other business
difficulties of a distributor or retailer could render the Company's accounts
receivable from such entity uncollectible, which could have an adverse effect on
the operating results and financial condition of the Company. In addition, an
increasing number of companies are competing for access to these channels.
Distributors and retailers often carry numerous products that compete with those
of the Company. Retailers of the Company's products typically have a limited
amount of shelf space and promotional resources for which there is intense
competition. There can be no assurance that distributors and retailers will
purchase the Company's products or provide the Company's products with prominent
display or even with adequate levels of shelf space.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service of
its key technical, marketing, sales and management personnel. Given the
Company's early stage of development, the Company is dependent on its ability to
recruit, retain and motivate high-quality personnel, especially highly-skilled
engineers, programmers and artists involved in the ongoing development required
to define future interactive technologies, refine existing interactive
technologies, introduce enhancements for future applications, and develop novel
software titles. The Company is particularly dependent on the skills and
contributions of several key individuals, any one of whom may voluntarily
terminate
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employment with the Company at any time and whose departure would have a
material adverse effect on the Company's business. The Company is particularly
dependent upon its Chief Executive Officer, Trip Hawkins. The Company does not
have "key person" life insurance policies on any of its employees. The game
software industry is characterized by a high level of employee mobility and
aggressive recruiting of skilled personnel. The Company competes with computer
hardware, software and entertainment companies for the recruitment of skilled
personnel. There can be no assurance that the Company's current employees will
continue to work for the Company or that the Company will be able to obtain the
services of additional personnel necessary for the Company's growth.
PROPRIETARY RIGHTS AND LICENSES
The Company's success will depend in part on its ability to obtain and enforce
intellectual property protection for its products and related technology in both
the United States and other countries. The Company has filed a number of patent
applications with the United States Patent and Trademark Office ("U.S. Patent
Office") and international counterparts of certain of these applications with
the United States Receiving Office pursuant to the Patent Cooperation Treaty.
The Company intends to file additional applications as it deems appropriate for
patents covering its technology. The process of obtaining patent protection is
expensive and absorbs significant management and engineering time. No assurance
can be given that any patents will issue from these applications or that, if any
patent does issue, the claims allowed will be sufficiently broad to protect the
key aspects of the Company's technologies, or that the patent laws will provide
effective legal or injunctive remedies to stop any apparent infringement of the
Company's patents. In addition, no assurance can be given that any patent issued
to the Company will not be challenged, invalidated or circumvented, that the
rights granted under patents will provide competitive advantages to the Company,
or that the Company's competitors will not independently develop or patent
technologies that are substantially equivalent or superior to the Company's
technologies.
The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, by confidentiality agreements with its employees,
consultants, developers, vendors, and current and prospective licensees. The
Company's license agreements typically prohibit unauthorized disclosure and
unauthorized reverse-engineering of the Company's licensed technology. However,
the Company expects that third parties may attempt to reverse-engineer its
technology without authorization and there can be no assurance that the
Company's confidentiality and license agreements will not be breached or that
the Company will have adequate remedies for any breach. As a result, the Company
may not have an adequate remedy if a competitor disassembles or
reverse-engineers products that incorporate the Company's proprietary
technology, even if such technology is protected by trade secret or copyright
law. There can be no assurance that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
The Company relies in part on copyright laws to prevent unauthorized duplication
or distribution of its software, written materials and audiovisual works.
Existing copyright laws afford only limited protection, particularly in certain
jurisdictions outside the United
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States where the Company has licensed and may seek to license its products and
related technology. There can be no assurance that the copyright laws will
adequately protect the Company's technologies.
The Company licenses its trade names, trademarks and logos for use in connection
with authorized products. The Company has experienced difficulty in registering
some of its marks in various jurisdictions, including Japan. There can be no
assurance that the Company will obtain sufficient trademark protection for these
marks, that these marks will not be duplicated without authorization, or that
the Company will have adequate remedies for trademark infringement in any
country.
From time to time, the Company receives communications from third parties
asserting that features or content of certain of the Company's or its licensees'
products or advertising materials infringe upon intellectual property rights
held by such third parties. As the number of patents and products in the
Company's industry increases and as the functionality of such products further
overlaps, the Company believes that its products may increasingly become the
subject of infringement claims. The Company could incur substantial costs in
defending itself or its licensees in litigation brought by others, or in
prosecuting infringement claims against third parties. The Company could also
incur substantial costs in interference proceedings before the U.S. Patent
Office in connection with one or more of the Company's or a third party's
patents or patent applications. Those proceedings could result in an adverse
decision as to the priority of the Company's inventions. A third party claiming
infringement may be able to obtain an injunction or other equitable relief,
which could effectively block the ability of the Company or its licensees to
import into various jurisdictions, including the United States, or to distribute
and sell products within particular jurisdictions. Such a result would
materially and adversely affect the Company. Such a third party could also
assert claims for substantial damages against the Company, its licensees or
distributors of such products, which could inhibit the manufacture or sale of
licensed products. In the event of a claim of infringement, the Company or its
licensees may be required to obtain one or more licenses from third parties.
There can be no assurance that the Company or its licensees will be able to
obtain from third parties any required license regarding such technology at a
reasonable cost or at all. Failure by the Company or its licensees to obtain any
such license would have a material adverse impact on the Company's business,
results of operations and financial condition.
VOLATILITY OF STOCK PRICE
Market prices of securities of companies engaged in the entertainment software
industry have been highly volatile. Factors such as announcements of the
introduction of new products by the Company or its competitors, announcements of
joint development efforts or corporate partnerships in the entertainment
software field, market conditions in the technology, entertainment, cable,
telecommunications and other emerging growth company sectors, and rumors
relating to the Company or its competitors, have had and may in the future have
a significant impact on the market price of the Company's common stock. Further,
the stock market has experienced volatility that has particularly affected the
market prices of equity securities of many high technology companies, such
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as those in the entertainment software industry, that has often been unrelated
to the operating performance of such companies. These market fluctuations may
adversely affect the price of the Company's common stock.
HARDWARE SYSTEMS GROUP SALE
On June 23, 1997, the Company sold certain assets of its former hardware systems
group to Samsung pursuant to an Asset Purchase Agreement (the "Samsung
Agreement"). As part of the Samsung Agreement, CagEnt, a subsidiary of Samsung,
agreed to assist the Company, as a subcontractor, in its efforts to complete the
remaining deliverables associated with the M2 Agreement. 3DO's contractual
obligations pursuant to the M2 Agreement, as amended, to provide MEI with
engineering support regarding the M2 Technology expired on June 30, 1998. At
this time, 3DO believes that its efforts to effectively transfer to MEI a
technical understanding of the M2 Technology was successfully accomplished and
that MEI does not require any further engineering services or technical support
from 3DO. Pursuant to the M2 Agreement, as amended, MEI is entitled to request
additional engineering support services from 3DO, which services would be
provided by 3DO at MEI's expense in an amount to be mutually agreed upon by the
parties. There can be no assurance that any sum(s) agreed upon for such services
will fully compensate 3DO for the costs and expenses of providing such services,
including, but not limited to, diverting funds and personnel from the Company's
software publishing business.
YEAR 2000 ISSUE
Many existing computer systems and related software applications, and other
control devices, use only two digits to identify a year in the date field,
without considering the impact of the upcoming change in the century. Such
systems, applications and/or devices could fail or create erroneous results
unless corrected so that they can process data related to the Year 2000. The
Company relies on such computer systems, applications and devices in operating
and monitoring all major aspects of its business, including, but not limited to,
its financial systems (such as general ledger, billing, accounts payable and
payroll modules), customer services, internal networks and telecommunications
equipment, and end products. The Company also relies, directly and indirectly,
on the external systems of various independent business enterprises, such as its
customers, suppliers, creditors, financial organizations, and of governments,
both domestically and internationally, for the accurate exchange of data and
related information.
The Company has formed a Year 2000 Working Group to organize, manage, and report
on its Year 2000 remediation efforts. The Year 2000 Working Group consists of
approximately 20 individuals from all levels of management and covering all
areas of the Company's operations. The Company has retained an experienced Year
2000 Project Manager to lead this working group and also retained KPMG, LLP to
provide feedback and assistance toward developing a comprehensive plan.
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
provide a
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method to inventory, identify, and address all systems, software, and control
device issues. This approach is also expected to identify critical business
relationships in all areas of operations which could reasonably be expected to
have adverse effects on the Company should they fail to adequately address their
own Year 2000 issues.
Phase 1 (Inventory) creates a comprehensive inventory of systems, software, and
business relationships. 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. Phase 4
(Remediation) implements those plans, correcting or replacing systems, software,
or business partners as required.
As of December 31, 1998, the Company's overall progress by phase was as follows:
<TABLE>
<CAPTION>
PERCENTAGE COMPLETED EXPECTED
PHASE AS OF DECEMBER 31, 1998 COMPLETION DATE
- -----------------------------------------------------------------------------
<S> <C> <C>
Phase 1 - Inventory 98%(1) February 1999
Phase 2 - Risk Assessment 75% August 1999
Phase 3 - Remediation Planning 20%(2) August 1999
Phase 4 - Remediation 10%(3) October 1999
</TABLE>
(1) The Company has substantially completed inventorying and analyzing its
remaining centralized computer and embedded systems to identify any
potential Year 2000 issues and will take corrective action based on the
results of analysis.
(2) The Company has a number of projects underway to replace or upgrade
hardware and software that are known to be Year 2000 non-compliant.
(3) The Company has upgraded its Oracle Financials system to the most recent
version. The Oracle database and financials applications are believed to
be Year 2000 compliant. These systems are used to automate Order Entry,
Accounts Receivable, Accounts Payable, Purchasing, Fixed Asset and
General Ledger functions. The Company has also recently upgraded its
Email systems to be Year 2000 compliant.
The Company is continuing the process of surveying its critical suppliers,
manufacturers, distributors, and other vendors to determine if their operations
and the products and services that they provide to the Company are Year 2000
compliant. The Company will attempt to mitigate its 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
have a materially adverse impact on the Company's results of operations or
financial condition. This survey is expected to be complete by February 1999.
In several cases, the Company's business with its customers and suppliers is
conducted through the use of Electronic Data Interchange (EDI) systems. In each
case where EDI is used, the Company is in the process of conducting electronic
testing with these businesses. This electronic testing is expected to be
complete by August 1999.
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The Company develops and sells products for the Nintendo 64, Sony PlayStation,
PC, and Internet platforms. Due to the nature of the Company's products, many of
them contain no date-related processing. Because of this, many of them are not
affected by the Year 2000 date change. However, the Company's Year 2000 Working
Group is in the process of developing tests for all of the Company's significant
products to determine the effects of the Year 2000 change. These tests are
expected to be developed by March 1999. The Company expects to be substantially
complete with testing of all of its current products by July 1999. While the
Company expects to find few date-related issues with its own products, the
Company has not fully identified such impact and may or may not incur expenses
related to the remediation of Year 2000 problems in its existing products.
Cost
The Company expects to incur costs during the next four quarters related to the
planning and remediation described above. Management's 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 the
results of operations or financial position of the Company in any given quarter.
However, the Company is not certain that it has fully identified such impact or
whether the Company can resolve it without disruption of its business or
incurring significant expense. The Company has incurred approximately $0.3
million in expenditures to date related to the Year 2000 issue.
Risks and Uncertainties
If the Company fails to find and correct a significant Year 2000 issue, it could
result in the interruption, delay, or failure of normal business operations. The
Company currently expects to substantially complete remediation and validation
of its internal systems, as well as to develop contingency plans for certain
internal systems, by mid-1999. However, if implementation of replacement
upgraded systems or software is delayed, if significant new non-compliance
issues are identified, or if contingency plans fail, the Company's results of
operations or financial condition could be adversely affected. Management
believes that the Year 2000 Working Group and the Year 2000 plan discussed in
these paragraphs will significantly reduce the Company's risk associated with
the changeover to the Year 2000. The Company's risks include, but are not
limited to the following:
Software Development Schedules: The 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. The Company relies on external
contractors to develop components of some of the Company's 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 products.
Facilities Operations: The Company relies on systems and software to run its
security and telecommunications systems. Although both of these components at
all of the
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Company's 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 the
Company's locations.
Financial Software: The Company has upgraded its Oracle Financials system to the
most recent version. The Oracle database and financials applications are
believed to be 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 the
Company's ability to process customer orders, billing, payroll, accounts payable
and financial statements.
Contingency Plans
The Company expects to develop contingency plans for key internal systems and
business critical business partners by mid-1999. This contingency planning
includes, but is not limited to, identifying additional vendors who could
provide similar goods and services on short notice. Management expects these
plans to substantially 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 the
Company's results of operations or financial condition.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company engages in certain legal actions arising in the ordinary
course of business. The Company believes it has adequate legal
defenses and believes that the ultimate outcome of these actions will
not have a material effect on the Company's financial position or
results of operations, although there can be no assurance as to the
outcome of such litigation.
ITEM 5. OTHER INFORMATION
Proposals of stockholders of the Company that are intended to be
presented by such stockholders at the Company's 1999 Annual Meeting
of Stockholders must have been received by the Company no later than
April 1, 1999, in order that they may be considered for inclusion in
the proxy statement and form of proxy relating to that meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits have been filed with this report:
27.01 Financial Data Schedule
(b) No Current Reports on Form 8-K were filed during the quarter ended
December 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE 3DO COMPANY
Dated: February xx, 1999 /s/ JOHN ADAMS
-----------------------------------
John Adams
Chief Financial Officer
(Principal Financial Officer
and Principal Accounting Officer)
(Duly authorized officer)
27
<PAGE> 28
EXHIBIT INDEX
Exhibit
No. Document
---- --------
27.01 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998, CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE NINE MONTH PERIOD ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,193
<SECURITIES> 10,909
<RECEIVABLES> 11,075
<ALLOWANCES> 2,782
<INVENTORY> 2,102
<CURRENT-ASSETS> 22,998
<PP&E> 13,469
<DEPRECIATION> 10,292
<TOTAL-ASSETS> 27,313
<CURRENT-LIABILITIES> 10,345
<BONDS> 0
0
0
<COMMON> 252
<OTHER-SE> (232)
<TOTAL-LIABILITY-AND-EQUITY> 27,313
<SALES> 24,829
<TOTAL-REVENUES> 24,829
<CGS> 8,186
<TOTAL-COSTS> 33,283
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> (15,504)
<INCOME-TAX> 215
<INCOME-CONTINUING> (15,719)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,719)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
