More from Trip Hawkins about how Army Men will save the universe...Company Updates Guidance for Fiscal Years 2003 and 2004
REDWOOD CITY, Calif., Oct. 7 /PRNewswire-FirstCall/ -- The 3DO Company (Nasdaq: THDO) announced today that founder and chief executive officer Trip Hawkins has made a $3 million loan that will meet the short-term capital needs of the Company, which expects to return to profitability in the quarter ending March 31, 2003. In addition, the Company has obtained a conditional waiver from its revolving credit facility lender regarding existing defaults through October 2002. The Company also announced today updated financial guidance for the Fiscal Years ending March 31, 2003 and March 31, 2004. The Company outperformed consensus analyst guidance in the First Quarter of Fiscal 2003, but will fall short in the Second and Third Quarters, with combined quarterly revenue of approximately $11-$12 million versus consensus analyst estimates of $19 million. The Fourth Quarter will be close to consensus analyst estimates, with revenue growing to $22-$25 million. Finally, the Company hopes to beat analyst estimates in FY2004 with revenues exceeding $100 million and net income of $5-$10 million, buoyed by a strong lineup of new game releases into a video game software market made stronger by hardware sales during the 2002 and 2003 holiday seasons. "The big picture remains the same," said Hawkins. "Calendar 2002 is all about cash management and product development for calendar 2003. We have now made it 75% of the way through this transition calendar year towards a strong recovery that begins next quarter. The new loan enables the Company to meet its short-term cash needs. And now that Nasdaq has given us a clean bill of health, I believe that our long-term access to capital is greatly improved. Meanwhile, indications are for a very strong hardware market this holiday season that will significantly improve software opportunities in calendar 2003 and beyond."
Financial Status During September, the Company completed a 1-for-8 reverse split of its common stock and was reviewed by the Nasdaq Listing Qualifications Panel. The Panel informed the Company that, " ... the Company satisfied the minimum bid price requirement by evidencing a closing bid price of at least $1.00 per share for the 10-day trading period ended September 6, 2002. The Panel was further of the opinion that the Company evidenced an ability to sustain compliance with the $1.00 bid price requirement over the long term, particularly given the margin of compliance as well as the general upward trend of the stock price since the implementation of the reverse stock split. The Panel also expressed confidence in the Company's ability to sustain compliance with all other requirements for continued listing on the NASDAQ National Market over the long term. Accordingly, the Panel determined to continue the listing of the Company's securities on the NASDAQ National Market. The hearing file has been closed." "Given that our stock first fell below $1.00 back in February of 2002, it took 7 months to resolve the matter," said Hawkins. "Given the timeframes that these things take, I believe that we would be well into 2003 before the need could arise for us to assess how to respond to any future potential problem with Nasdaq's minimum bid price requirement. And, within that timeframe, we expect to demonstrate that we are delivering on our recovery, which would mean that we can truly put this episode behind us." In June 2002, the Company committed to its revolving credit facility lender that it would raise an additional $4.6 million in capital by October 1, 2002. However, the Company's spending and cash flow since that time have been better than projected. As a result of the $3 million loan, the Company has no present need to borrow against the credit line and the credit line loan balance is zero. Subject to the conditional waiver, the Company may not borrow more than $2 million against its revolving credit line until the parties renegotiate the covenants and other provisions of the credit line for the remainder of the first year of the agreement.
Company Progress Report In early 2002, the Company determined that the challenging market climate of 2000-2001 would continue in 2002 and that it was strategically essential for the Company to lengthen its product development schedules in order to deliver competitive product quality, efficiently leverage its technology and development resources, and to properly prepare the market for its upcoming games. This required the Company to shift focus towards new releases in calendar 2003 that could be delivered using this strategy. As a result, the Company is undergoing a slow revenue period from April through December 2002 during which it has no major new products being released. In the March 2002 quarter, the Company did have two major product releases that met the criteria above, and as a result achieved revenues in excess of $15 million. The subsequent quarters in calendar 2002 are smaller revenue quarters because there are no major new releases. Beginning in the March 2003 quarter, the Company has prepared a pipeline that is expected to regularly deliver four to six major products per quarter. In addition, consumer spending on game software is expected to increase significantly in 2003 as a result of a significant increase in the next- generation console game system hardware base during the 2002 holiday selling season. The Company believes a key upcoming event will be the release of High Heat(TM) Major League Baseball(R) 2004, which will be available on many game formats in the March 2003 quarter. The game is already the universally top- rated baseball game for the PlayStation(R)2 computer entertainment system and the PC, but will be available on more formats for the first time, in a significantly larger market following holiday hardware sales. "As a result of having a larger and regular supply of major new game releases, and selling them into a larger marketplace, the Company expects significant revenue growth in calendar 2003 and Fiscal Year 2004 compared to the prior years," Hawkins said. In addition, the Company has made significant reductions in overhead spending and has increased its development focus and efficiency. As a result, despite lower revenues, the Company's losses in Fiscal 2003 are expected to be considerably smaller than the prior year. With increased revenues beginning in the March 2003 quarter the Company expects a return to profitability for that quarter. In August 2002 the Company completed a major research project during which its entire product line plans through Fiscal Year 2004 were reviewed by the game console hardware licensors, the leading retailers, the game magazines, and by consumer market segments in focus group research. The Company eliminated from its plans any projects that did not have strong support from all of these market constituencies. The research findings included strong support for the Company's established brands (High Heat Major League Baseball, the Army Men(R) series, and Heroes(R) of Might and Magic(R)), as well as excitement for the three new brands from the Company, led by the Four Horsemen of the Apocalypse(TM). Proven brands make up the majority of the Company's revenue plans. "We've adapted to a more demanding business climate," said Hawkins. "We have weeded our garden and have become very focused on what we can do successfully and at lower levels of risk. With poor market conditions, a software glut, and a limited hardware base of next-generation systems, the last few years have been a struggle. But we believe we can become a highly leveraged producer of original game brands. We have learned how to develop brands and use state-of-the-art technology with much more leverage. Plus, the hardware customer base will hit the takeoff point this Christmas which will give us additional leverage from increased demands for gaming software." Hawkins continued, "To use a film-making analogy, we're not the Warner Brothers of the game industry, nor do we expect to be. But we can aspire to be the Pixar or the Lucas among game publishers, using development mastery to leverage technology into our own brand upside. We believe we can have lower overhead and succeed with lower breakeven levels than the larger publishers. And with our new planning methodology and longer schedules, I believe we have as good a shot at making the big, breakout hits as anyone."
Updated Guidance
Fiscal Year 2003 For the Fiscal Year ending March 2003, the First Quarter was better than consensus analyst estimates. The Second and Third Quarters will be worse than consensus analyst estimates. The Fourth Quarter will be significantly better than the prior quarters and will be similar to consensus analyst estimates. For the full year, the Company expects to achieve revenues of $42 to $45 million, somewhat below consensus analyst estimates of $52.8 million. The primary reason for the shortfall is the lack of major new releases in the first three quarters. Roughly half of revenue in Fiscal Year 2003 is estimated to occur in the Fourth Quarter since that is the first recovery quarter during which the Company will begin to deliver major new games based on its updated strategy. The full year net income is expected to be a loss between $6 and $9 million, which compares favorably with a $48 million loss in the prior year. The consensus analyst estimate for the year is a loss of approximately $6 million. However, the Company expects to exit Fiscal Year 2003 with a profit in the Fourth Quarter of $1 to $2 million.
Second (September) Quarter, Fiscal Year 2003 Revenues are expected to be in the range of $6.8 to $7.4 million, approximately $2 million below current analyst estimates. A leading factor for the reduction is the delay of the start of the second season of broadcasting for the Cubix(TM): Robots for Everyone television show, which has delayed its debut from September 2002 to February 2003. The Company has completed new Cubix games but elected to postpone their release until the show is back on the air. Net income in the quarter is expected to be a loss of $7 to $8 million, versus the consensus analyst estimates of $4 million. The primary reasons for the reduction were writeoffs of $4.5 million of capitalized software development for the aforementioned Cubix games and a discontinued development project that failed to pass muster in the market research project noted previously. From an EPS standpoint, the Company expects a loss of $0.92 to $1.04, taking the reverse stock split into account. Pre-split, the expected loss would be 11 to 13 cents compared to the consensus analyst estimates of a loss of 6 cents.
Third (December) Quarter, Fiscal Year 2003 Revenues are expected to be in the range of $4 to $5 million, more than $4 million below consensus analyst estimates. The reason for the shortfall is that in order to ensure proper quality, the Company chose to delay the release of the one major product that had been scheduled for release in the quarter. Instead, Army Men Air Combat(TM): The Elite Missions will be released for the Nintendo GameCube(TM) system in the March 2003 quarter. Net income for the quarter is expected to be a loss of $6 to $7 million versus consensus analyst estimates of approximately $2 million. From an EPS standpoint, the Company expects a loss of $0.80 to $0.90, taking the reverse stock split into account. Pre-split, the expected loss would be 10 to 11 cents compared to the consensus analyst estimates of a loss of 3 cents.
Fourth (March) Quarter, Fiscal Year 2003 Revenues are expected to be in the $22 to $26 million range, consistent with consensus analyst estimates of $25 million. The Company hopes to release nine new products including five major games such as High Heat Major League Baseball 2004, for various platforms, Army Men Air Combat: The Elite Missions for the Nintendo GameCube(TM) system, and Army Men: Sarge's War(TM) for the Nintendo GameCube(TM) system. Revenues are expected to be greater than the first three fiscal quarters combined, as the Company takes advantage of having several major game releases shipping into a larger hardware customer base. Net income is expected to be $1 to $2 million versus consensus analyst estimates of $4 million.
Fiscal Year 2004 Guidance The Company expects in Fiscal 2004 to continue the favorable trend set by the Fourth Quarter of Fiscal 2003. Revenues are expected to exceed $100 million, with the goal of releasing an average of four to six major new game SKUs per quarter and more than 20 for the full year. Net income for Fiscal 2004 is expected to be $5 to $10 million versus consensus analyst estimates of $6 million. Hawkins concluded, "With new game releases spread evenly throughout the year, the Company expects the quarterly revenue pattern to follow traditional seasonality as well as growth in the hardware customer base as the year progresses. The majority of revenue is expected to come from proven brands such as Army Men: Platoon Commander(TM), Heroes of Might and Magic V, High Heat Major League Baseball 2005, and Army Men: Air Combat 3. Market research and development progress is also very promising on the Company's three new brands, the Four Horsemen of the Apocalypse, Street Racing Syndicate(TM), and Jacked(TM)."
About The 3DO Company The 3DO Company, headquartered in Redwood City, Calif., develops, publishes and distributes interactive entertainment software for personal computers, the Internet and advanced entertainment systems such as the PlayStation(R)2 computer entertainment system, and the Nintendo GameCube(TM) and Game Boy(R) Advance systems. 3DO has also been licensed to develop and publish interactive entertainment products compatible with the Xbox(TM) video game system from Microsoft Corp. More information about The 3DO Company and 3DO products may be found on the Internet at http://www.3do.com.
The statements contained in this release that are not historical facts are "forward-looking statements" that are subject to risks and uncertainties. Factors that could cause the Company's results to differ materially include, without limitation, the timely development and release of the Company's products and recognition of revenues, the popularity of the Company's brands, the discontinuance of development projects, unanticipated expenses, unexpected conversion of preferred stock or exercise of warrants and options, the consequences of competitive factors in the marketplace, and potential default of the financial or other covenants contained in the Loan and Security Agreement that the Company signed with its credit facility lender (the "Loan Agreement"). In the event of a default under the Loan Agreement, if such default is not timely cured or waived, the credit facility lender could pursue its contractual remedies against the Company. These could include: (1) decreasing advance rates, (2) restricting advances, (3) penalty rates of interest, (4) restricting the seasonal line limits necessary to achieve the Company's plan, (5) penalty fees associated with the line of credit, (6) acceleration of the Company's financial obligations to the credit facility lender, and/or (7) the foreclosure on any assets securing the Company's indebtedness to the credit facility lender. In accordance with the Loan Agreement, the Company is obliged to meet certain specified levels for current ratio, debt to equity ratio, net sales, net income, and net worth, and not to exceed specified spending levels. The Company is also required under the Loan Agreement to raise additional equity during fiscal 2003. We cannot provide assurances that we will be able to remain in compliance in the future with the financial covenants and other contractual obligations set forth in the Loan Agreement, nor can we provide assurances that we will be able to successfully renegotiate the financial covenants or other contractual obligations contained in the Loan Agreement. The Company may not have sufficient capital for other reasons, including, but not limited to, the possibility that the Company could have variances from plan that adversely affect its cash needs. The Company has no binding agreement with any third party to enter into any financing arrangement with the Company, and the Company cannot provide assurance that any required financing will be completed or completed on time, nor that the Company will be able to obtain additional financing on terms that the Company would find acceptable. Any potential financing may require shareholder approval, and the Company cannot provide assurance that it will be able to obtain shareholder approval for any proposed financing. Further information on potential factors which could affect such forward-looking statements and the Company's financial results are described in the Company's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002, and the Company's Quarterly Reports on Form 10-Q for the fiscal quarters ended December 31, 2001 and June 30, 2002. The Company disclaims any obligation to update any forward-looking statement to reflect events or circumstances occurring after the date hereof.
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