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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
(X) AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number 0-25520
THRUSTMASTER, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-1040330
(State or jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7175 N.W. EVERGREEN PARKWAY #400, HILLSBORO OR
97124-5839 (Address of principal executive offices,
including zip code)
(503) 615-3200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
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 the Form 10-K. (X)
As of April 30, 1999, the aggregate market value of voting stock held
by non-affiliates of the Registrant based on the last sales price as reported by
The Nasdaq National Market was $99,917,390.
As of April 30, 1999, the Registrant had 4,874,019 shares of Common
Stock outstanding.
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PART I
ITEM 1. BUSINESS
GENERAL
ThrustMaster, Inc. (the "Company") is a developer and marketer of
realistic, high quality game controllers and software solutions for the home
personal computer ("PC") and video console markets. The Company has
established ThrustMaster-Registered Trademark- as a brand name recognized for
quality, value, durability and ease of use. ThrustMaster products enhance the
enjoyment of the PC, video game, and internet entertainment experience and
appeal to a wide variety of users, from occasional game players to avid
enthusiasts. The Company's hardware products include racing wheels,
joysticks, game pads and flight simulation controllers. The Company's
software product, Talk n' Play, is an Internet communications solution that
allows up to four people in separate locations to simultaneously talk and
play games over the Internet. ThrustMaster hardware products are available in
over 5,000 retail outlets in North America and Europe.
INDUSTRY BACKGROUND
Over the last several years, significant technological advances in home
PCs and video console platforms, such as improvements in processor speeds and
graphics capabilities, have enabled software developers to create increasingly
sophisticated entertainment programs with real-time interaction that offer
greater realism and excitement. Today's PCs generally include hardware
enhancements such as CD-ROM, 3-D graphics and high-definition sound
capabilities. As high-performance PCs have become more affordable, the installed
base of home PCs has steadily increased, and as a result, the home PC has become
a viable entertainment platform. Industry analysts expect significant growth in
sales of home PCs, video console machines and entertainment software titles. The
Company believes that sales of game controllers are directly correlated with
sales of PCs, video console machines from Sony, Nintendo and Sega, and
entertainment software titles.
PRODUCTS
The Company's hardware products include racing wheels, joysticks,
game pads and flight simulation controllers. The Company closely monitors
trends and consumer preferences in the PC and video console entertainment
markets, and offers a broad line of competitively priced products at
various price points. The Company's software product, Talk n' Play, is
an Internet communications solution that allows up to four people in separate
locations to simultaneously talk and play games over the Internet.
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RACING WHEELS.
The Company's introduction in 1994 of its Formula T1 driving control,
consisting of a racing wheel, console, and brake and accelerator pedals, helped
create the PC racing wheel market. The Company later introduced the Formula T2
and the Grand Prix 1 racing wheels.
After signing a licensing agreement with NASCAR, the foremost
sanctioning body of stock car racing in North America, the Company introduced
the NASCAR Pro Racing Wheel in mid-1997. This product continues to be
successful. In the fourth quarter of 1998, the Company started
shipping the NASCAR Sprint, NASCAR Super Sport, NASCAR Force GT and NASCAR
Race Pro (video console product) . NASCAR racing is currently one of the
fastest growing spectator sports in the United States. In Europe, versions
of the NASCAR products are marketed under the Formula, rather than the NASCAR,
name.
JOYSTICKS.
The Company offers a line of joysticks priced to appeal to different
consumers in the PC entertainment market. The Company's joysticks offer a
rich set of features that enhance the experience found in today's action and
adventure games. This portfolio includes the TOP GUN (game port), the TOP GUN
USB ("Universal Serial Bus"), the TOP GUN Platinum (includes throttle), the
Frag Master, the X-Fighter, and the Millennium 3D Inceptor.
GAMEPADS.
In November 1998, the Company began shipping the FUSION game pad to
address demand created by the popularity of action and multi-player PC software
titles. The FUSION game pad combines ergonomic design, sophisticated technology
and a variety of programmable buttons and triggers to offer users maximum
control in action, adventure and sports PC games.
FLIGHT SIMULATION CONTROLLERS.
The Company manufacturers a broad line of award-winning flight products
designed to simulate the equipment found in high-performance aircraft, including
flight sticks, throttle controls and rudder pedals. These products, the
Company's initial offerings, established the ThrustMaster name for realism and
quality and offer flight simulation enthusiasts a realistic PC interactive
flight control system.
VIDEO CONSOLE CONTROLLERS.
In November 1998, the Company introduced three controllers for the
video console market: the Shockhammer for the Sony PlayStation, the StingRay
for the Nintendo 64, and the NASCAR and Formula Race Pro Racing Wheels which
are compatible with both the Sony and Nintendo video console platforms.
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TALK N' PLAY.
The Company has integrated technology licensed from Intel and
PeopleLink with the Company's proprietary software technology to create a
software product called Talk n' Play. This product enables up to four people
from four separate locations to simultaneously talk and play Internet games.
The Company first shipped Talk n' Play into distribution channels in late
January 1999.
PRODUCT DEVELOPMENT
The Company currently employs nine full-time engineers, and
supplements its product development capabilities by contracting with a
leading industrial design firm. The Company devotes significant resources to
product enhancements and new product development. During 1996, 1997, and
1998, the Company's research and engineering expenses were $2,105,000,
$2,697,000 and $2,389,000, respectively.
In 1997, the Company began shipping products incorporating its
proprietary "DirectConnect" technology. This technology broadens communications
bandwidth and enables multi-player use without degradation of performance. In
addition, the Company's Windows 95 software interface simplifies the connection
and configuration of controllers, creating a more intuitive environment.
During 1997, PC manufacturers began shipping computers equipped with
the Universal Serial Bus ("USB") technology, a "plug-and-play" capability. USB
provides over 10 times the throughput of a standard serial port. Microsoft's
Windows 1998 operating system provides general access to the benefits of USB
technology. ThrustMaster initially began shipping USB-enabled controllers to
hardware developers in 1996 and started shipping the TOP GUN USB in April
1998.
In December 1998, the Company started shipping the NASCAR and
Formula Force GT Racing Wheels, featuring force feedback capabilities.
ThrustMaster plans to incorporate force-feedback technology in certain of its
future products. Force-feedback technology combines software and hardware
elements to create a greater sense of realism during game play. For example,
a steering wheel becomes less reactive when a player's car drives over ice,
or vibrates when crossing rough terrain.
SALES, DISTRIBUTION AND MARKETING
The Company's products are principally sold directly through
retail outlets that purchase the products directly from the Company or
through third-party distributors. ThrustMaster hardware products are
available in over 5,000 retail outlets in North America and Europe. The
Company's two European Subsidiaries are primarily responsible for the
Company's sales efforts in Europe.
In addition to retail outlets, the Company actively pursues business
through OEM arrangements. The Company currently sells its products on an OEM
basis to Gateway. Although OEM sales currently account for a relatively minor
portion of the Company's revenues, management believes that these sales will
account for an increasing percentage of its revenues in the future.
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Working with leading software publishers, such as Electronic Arts,
Inc., Activision, Inc., Sierra On-Line, Inc., and GT Interactive Software Corp.,
the Company often bundles its game controllers with popular software titles.
These bundling arrangements enable the Company to deliver increased value to
consumers and to differentiate its products from competing products. The Company
offers a variety of bundled game controller packages which allow for
differentiation among retailers that carry the Company's products. The Company
also utilizes recognized brand names, such as NASCAR, TOP GUN and NASA, to
enhance consumer appeal.
The Company anticipates that a significant portion of its revenues
will continue to be derived from a limited number of key customers. In 1998,
Comp USA, Sam's Club and Best Buy Co., Inc. accounted for an aggregate of
approximately 35% of the Company's revenue. The loss of one or more of its
key customers or any significant reduction in orders by any such customer
could have a material adverse effect on the Company's business, financial
condition and results of operations.
MANUFACTURING
ThrustMaster has moved virtually all manufacturing operations
offshore on a contract basis in an effort to obtain manufacturing cost
efficiencies. Although the Company has continued to gain experience and
confidence in offshore manufacturing, the use of offshore manufacturing is
subject to the customary risks of doing business abroad, including, among
others, fluctuations in the value of currencies, tariffs, export duties, work
stoppages and political instability. For 1998, approximately 92% of the
Company's products were manufactured and assembled through a single vendor
utilizing factories located in Taiwan and the Guangdong province of China.
Manufacturing and assembly by such vendor at one factory accounted for more
than half of the Company's production. If any of the manufacturing facilities
utilized by the Company becomes unavailable, or if the manufacturing
operations at these facilities are slowed, interrupted or terminated, the
Company's business, financial condition and results of operations could be
materially and adversely affected. The Company plans to continue to
manufacture its products offshore and plans to expand its relationships with
other manufacturers. The Company believes that the manufacturing resources
available to it are adequate to meet current and foreseeable demand for its
products.
CUSTOMER SERVICE
Management believes that its commitment to provide high-quality
customer service is a key factor in its success and has increased the brand
loyalty of its customers. The Company provides free technical support to the end
users of its products by telephone, the Internet and through bulletin boards on
many of the major computer on-line network services. The Company uses customer
feedback as a source of ideas for product improvements and enhancements.
ThrustMaster products are covered by a one-year warranty against defects.
COMPETITION
The markets in which the Company participates are highly
competitive, and the Company expects that it will face increased competition
in the future. The Company's principal competitors for its hardware products
include Microsoft Corporation, Kensington (Gravis), CH Products, Logitech
International S.A. and InterAct Accessories, many of which have substantially
greater financial, technical and marketing resources than the Company.
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The Company believes that the principal competitive factors in the
market for PC and video console game controllers include price, quality, product
features, ease of use, durability, reputation and compatibility with software
titles. Increased competition has in the past created, and may in the future
create, margin pressures. The Company believes that its future growth will
depend principally on its ability to develop and introduce competitively priced
new products with features that are attractive to PC and video console gamers.
INTELLECTUAL PROPERTY
The Company regards certain aspects of its products as proprietary
and relies on a combination of copyright and trademark laws, patents, license
agreements, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company holds utility
patents and design patents and has filed additional patent applications
covering certain aspects of the Company's proprietary technology. The issued
patents expire during the period from October 2006 to September 2015. There
can be no assurance that any patent applications will result in issued
patents, or that any patents now or hereafter issued will not be challenged,
invalidated or circumvented by others. There can be no assurance that these
patents will not be found to be invalid, or non-infringed in judicial or
administrative proceedings, should a dispute arise. Although the Company
believes that its products, processes and trademarks do not infringe on the
rights of others, third parties may assert infringement or other related
claims against the Company in the future. Any infringement claim or related
litigation against the Company, or any challenge to the validity of the
Company's own intellectual property rights, and the expense and effort of
defending the same, could materially and adversely affect the Company's
business, financial conditions and results of operations.
The Company believes that obtaining patent protection may provide some
benefits to the Company, but that rapid product development, coupled with
fleet-of-foot marketing capabilities, is of greater importance to the Company's
business than patent protection. The Company does not believe that its business
is dependent on obtaining patent protection or successfully defending any
patents that may be obtained against infringement by others.
The continuing development of the Company's technology is dependent, in
part, on the knowledge and skills of its employees. To protect its rights to its
proprietary information, the Company requires key employees, consultants and
collaborators to enter into confidentiality agreements which prohibit the
disclosure of confidential information to persons unaffiliated with the Company.
These agreements may not provide meaningful protection for the Company's
technology or other confidential information in the event of any unauthorized
use, misappropriation or disclosure.
The Company has obtained several trademark registrations, including
"ThrustMaster," "Thrustware," "X-Fighter," "FLCS," "FORMULA T1," "Talk n' Play"
and "WeCanTalk.com" Trademark applications are pending in the United States with
respect to other trade names used by the Company; however, such applications may
not result in trademark registrations.
GOVERNMENT REGULATION
The Federal Communications Commission (the "FCC") regulates the
emission of radio frequency energy by various devices, including computers and
computer peripherals, under Part 15 of its rules promulgated pursuant to the
Federal Communications Act of 1934, as amended. Certain
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of the Company's products emit radio frequency energy and are subject to
authorization and assignment of an identifier by the FCC prior to the sale of
the devices. Government agencies in certain foreign countries have also
established rules which regulate the electronic emissions of the Company's
products. The Company believes that it has complied with the requirements of the
FCC and foreign governmental regulations in countries where its products are
sold in respect of its current products and has instituted procedures to monitor
compliance with respect to future products.
EMPLOYEES
As of December 31, 1998, the Company had a total of 78 full-time
employees. At times the Company supplements its workforce with temporary
contract workers. None of the Company's employees are represented by a labor
union. The Company has not experienced any work stoppages and considers its
relations with its employees to be good.
ITEM 2. PROPERTIES
The Company maintains its headquarters and warehouse and
distribution facilities in Hillsboro, Oregon, in approximately 60,000 square
feet of leased space under two leases expiring in September 2003. The
Company's sales and distribution facility in Surrey, England, occupies
approximately 16,000 square feet of space under a lease expiring in September
2007. The Company believes that these facilities are adequate for its
immediately foreseeable needs and that suitable additional or alternative
space will be available on commercially reasonable terms if needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time the Company has been, and expects to continue to be,
subject to legal proceedings and claims in the ordinary course of its business.
Such claims, even if lacking merit, could result in the expenditure of
significant financial and managerial resources. The Company is not currently a
party to, nor is it aware of, any legal proceeding or claims that it believes
will have, individually or in the aggregate, a material adverse effect on the
Company or on its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "TMSR". The following table sets forth the high and low
closing sales prices for the Common Stock for each quarter as reported on the
Nasdaq National Market for 1997 and 1998.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997
First quarter..................................................... $8.98 $7.00
Second quarter.................................................... 12.13 7.13
Third quarter..................................................... 18.00 11.00
Fourth quarter.................................................... 17.63 11.75
1998
First quarter..................................................... $14.00 $10.50
Second quarter.................................................... 12.88 7.13
Third quarter..................................................... 7.25 3.38
Fourth quarter.................................................... 16.00 2.75
</TABLE>
As of March 22, 1999, there were 4,869,712 shares of Common Stock
outstanding held by 91 holders of record.
The Company did not declare or pay cash dividends on its Common Stock
during 1997 or 1998. On January 21, 1997, the Company declared a 3% stock
dividend on the Common Stock to holders of record as of February 14, 1997. The
Company currently intends to retain any future earnings to finance the expansion
and development of its business and does not anticipate paying cash dividends to
the holders of Common Stock. The payment of future cash dividends will be at the
sole discretion of the Company's Board of Directors and will depend on, among
other things, future earnings, capital requirements, the financial condition of
the Company and general business conditions. The Company's line of credit
facility restricts the Company's ability to pay dividends.
EQUITY LINE FINANCING
On January 28, 1999, and in connection with equity line financing
provided to the Company, the Company issued to three investors an aggregate
of 250,000 shares of the Company's Common Stock and warrants exercisable
for an aggregate of 70,754 shares of Common Stock. The purchase price for the
Common Stock issued to the investors was $16.00 per share. The exercise price
applicable to 50% of the shares issuable upon exercise of the warrants is
$20.00 per share; the exercise price for the remaining warrant shares is
$22.40 per share. Each of the investors represented that it is an "accredited
investor" within the meaning of Rule 501 under the Securities Act of 1933, as
amended (the "Securities Act"), and the securities were not offered or sold
by means of a general solicitation or general advertising. In issuing these
securities, the Company relied on an exemption from registration pursuant to
Rule 506 under Section 4(2) of the Securities Act.
The Company may elect, at its sole discretion, that two additional
tranches of investment be made under the equity line. The amount of each
additional tranche would range from $1,000,000 to $6,000,000, depending on the
price of the Common Stock at the time of the investment. Warrants to purchase
additional shares of Common Stock will be issued if the aggregate investment
under the line exceeds $12,000,000. The equity line includes a "reset"
mechanism which may result in the issuance to the investors of additional
shares of Common Stock at no additional cost. There are two reset periods for
each tranche, each covering 50% of the shares issued on the applicable closing
date. The first reset period is the 25 days after the effective date of a
registration statement to be filed in connection with that tranche. The second
reset period is the 25 days after the end of the first reset period. For each
reset period, the reset price is the average of the lowest ten trading days'
closing bid prices during the related 25-day period. The number of shares to
be issued at the end of each reset is calculated by (a) multiplying the number
of shares subject to price adjustment by (b)(i) an amount equal to 112.5% of
the applicable tranche purchase price less the reset price divided by (ii) the
reset price. The investors have agreed that, until the expiration of the
final reset period in connection with the equity line, they will not enter
into certain short sales of the Company's Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data relating
to the Company should be read in conjunction with the Company's consolidated
financial statements and the related notes thereto, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the other
financial information included herein. The selected financial data set forth
below for the Company as of December 31, 1997 and 1998 and for each of the
three years in the period ended December 31, 1998 are derived from the
audited financial statements included elsewhere herein. The selected
financial data set forth below for the Company as of December 31, 1994, 1995
and 1996 and for each of the two years in the period ended December 31, 1995
are derived from the consolidated financial statements not included elsewhere
herein. [OBJECT OMITTED]
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 13,582 $ 19,415 $ 30,821 $ 45,494 $ 25,905
Cost of goods sold............................. 8,007 11,815 19,592 28,839 24,914
-------- -------- -------- -------- --------
Gross Profit................................ 5,575 7,600 11,229 16,655 991
Operating expenses:
Research and engineering.................... 1,115 1,845 2,105 2,697 2,389
Selling, general and administrative......... 2,689 4,111 5,961 9,450 13,178
-------- -------- -------- -------- --------
Total operating expenses............... 3,804 5,956 8,066 12,147 15,567
-------- -------- -------- -------- --------
Income (loss) from operations.................. 1,771 1,644 3,163 4,508 (14,576)
Interest/other income (expense)................ -- 404 466 304 (272)
-------- -------- -------- -------- --------
Income (loss) before income taxes.............. 1,771 2,048 3,629 4,812 (14,848)
-------- -------- -------- -------- --------
Provision for (benefit from) income
taxes (1).................................... 633 687 1,370 1,615 (5,792)
-------- -------- -------- -------- --------
Net income (loss) (1).......................... $ 1,138 $ 1,361 $ 2,259 $ 3,197 $ (9,056)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income (loss) per share (1)
Basic....................................... $ 0.51 $ 0.37 $ 0.54 $ 0.75 $ (2.07)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted..................................... $ 0.42 $ 0.34 $ 0.51 $ 0.69 $ (2.07)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average shares outstanding
Basic....................................... 2,244 3,647 4,182 4,268 4,380
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Diluted..................................... 2,684 4,060 4,468 4,660 4,380
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................. $ 1,873 $ 12,276 $ 14,806 $ 17,197 $ 9,178
Total assets.................................... 4,575 15,102 21,261 26,877 27,209
Total liabilities............................... 1,885 1,791 5,363 7,597 15,656
Total shareholders' equity...................... 2,690 13,311 15,898 19,280 11,553
</TABLE>
(1) The provision for income taxes, net income and net income per share
amounts include a pro forma income tax adjustment to reflect the
Company as a C corporation, rather than an S corporation, for
federal and state income tax purposes for the year ended December
31, 1994, and to exclude the cumulative effect on deferred taxes in
1995 related to the conversion from an S corporation to a C
corporation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING INFORMATION
This report on Form 10-K, including the foregoing discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other reports hereafter filed by the Company with the
Securities and Exchange Commission may contain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
The Act provides a "safe harbor" for forward-looking statements to encourage
companies to provide prospective information about themselves so long as they
identify these statement as forward-looking and provide meaningful cautionary
statements identifying important factors that could cause actual results to
differ from the projected results. All statements other than statements of
historical fact the Company makes in this Report on Form 10-K and such other
reports filed with the Securities and Exchange Commission are
forward-looking. In particular, statements regarding industry prospectus,
future OEM sales by the Company, the adequacy of existing manufacturing
resources, the Company's continued expansion in foreign markets, Year 2000
compliance and compliance costs, and the Company's future results of
operations or financial position are forward-looking statements. Words such as
"anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and similar expressions identify forward-looking statements. But
the absence of these words does not mean the statement is not forward-looking.
The Company cannot guarantee any of the forward-looking statements, which are
subject to risks, uncertainties and assumptions that are difficult to predict.
Actual results may differ materially from those the Company forecasts in
forward-looking statements due to a variety of factors, including those set
forth below under the heading "Additional Risk Factors that Could Affect
Operating Results and Market Price of Stock" and elsewhere in this Report. The
Company does not intend to update any forward-looking statements due to new
information, future events or otherwise.
OVERVIEW
The Company is a developer and marketer of realistic, high quality
game controllers and software solutions for the home PC and video console
markets. The Company has established ThrustMaster-Registered Trademark- as a
brand name recognized for quality, value, durability and ease of use.
ThrustMaster products enhance the enjoyment of the PC, video game, and
internet entertainment experience and appeal to a wide variety of users, from
occasional game players to avid enthusiasts. The Company's hardware products
include racing wheels, joysticks, game pads and flight simulation
controllers. The Company's software product, Talk n' Play, which was released
in January of 1999, is an Internet communications solution that allows up to
four people in separate locations to simultaneously talk and play games over
the Internet. ThrustMaster hardware products are available in over 5,000
retail outlets in North America and Europe.
From its inception in 1990 through the third quarter of 1994, the
Company derived a majority of its revenues from sales of flight simulation
controllers to serious PC game enthusiasts. In the fourth quarter of 1994,
the Company expanded its product line to include racing wheels. While the
Company continues to offer a wide variety of game controllers, racing wheels
now account for a majority of the Company's revenues. The Company believes
that it is the leading producer of racing wheels for the PC and video console
entertainment markets.
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In mid-1996, the Company increased its foreign presence by
contracting with a distributor in the United Kingdom and with an independent
sales representative to market its products to major retailers in Germany. In
1997, the Company opened its own distribution facility in the United Kingdom
and hired sales and administrative staff to support its future growth in
Europe. On April 1, 1998 the UK operation was legally incorporated as
ThrustMaster UK Ltd. Sales outside North America accounted for approximately
30% of the Company's revenues in 1997 and approximately 36% of revenues in
1998. The Company intends to continue to expand its presence in foreign
markets, primarily in Europe, by entering into relationships with additional
distributors and sales representatives.
Over the past four years, ThrustMaster has moved virtually all
manufacturing operations offshore on a contract basis in an effort to obtain
manufacturing cost efficiencies. During 1998, approximately 92% of the
Company's products were manufactured and assembled through a single vendor
utilizing factories in Taiwan and the Guangdong province of China.
Manufacturing and assembly by such vendor at one factory accounted for more
than half of the Company's production.
The Company has combined technology licensed from Intel and
PeopleLink with the Company's proprietary software technology to create the
Company's first software product, Talk n' Play. This product enables up to
four people from four separate locations to simultaneously talk and play
Internet games. The Company first shipped Talk n' Play into distribution
channels in late January 1999.
The Company typically ships its products within 30 days of receipt of
customer orders. Substantially all of the Company's revenues in any quarter
result from orders received in that quarter. Accordingly, the Company generally
does not have significant backlog and believes that its backlog at any given
time is not a reliable indicator of future revenues or earnings.
The Company's business is seasonal, reflecting traditional retail
seasonality patterns. Sales in the retail PC and video console entertainment
industry are significantly higher in the fourth calendar quarter of each year
than in the preceding three quarters. In 1998, approximately 44% of the
Company's revenues were earned in the fourth quarter.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage of revenues represented by certain items included in the Company's
consolidated statements of operations included elsewhere herein.
<TABLE>
<CAPTION>
Years ended December 31,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues.................................... 100.0 % 100.0 % 100.0 %
Cost of goods sold.......................... 63.6 63.4 96.2
--------- --------- ---------
Gross profit................................ 36.4 36.6 3.8
Operating expenses:
Research and engineering................. 6.8 5.9 9.2
Selling, general and administrative...... 19.3 20.8 50.9
--------- --------- ---------
Total operating expenses.................... 26.1 26.7 60.1
--------- --------- ---------
Income (loss) from operations............... 10.3 9.9 (56.3)
Interest/other income (expense)............. 1.5 0.7 (1.0)
--------- --------- ---------
Income (loss) before income taxes........... 11.8 10.6 (57.3)
Provision for (benefit from) income taxes... 4.5 3.6 (22.3)
--------- --------- ---------
Net income (loss)........................... 7.3% 7.0% (35.0)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Revenues for 1998 were $25,905,000, a decrease of
$19,589,000, or 43.1%, compared to $45,494,000 for 1997. Revenues declined
primarily as a result of an extreme seasonal slowdown resulting in retail
distribution channel customers selling existing inventory that was acquired
in earlier periods and not replenishing such inventory. In addition, sale
returns and allowances were significantly higher in 1998 compared to 1997;
such amounts were $6,687,000 and $3,335,000 respectively. Further, the
decline was impacted by significant delays in new product introductions and
strong competitive pricing pressures resulting in declining average selling
prices.
GROSS PROFIT. Gross profit for 1998 was $991,000, a decrease of
$15,664,000, or 94.1%, compared to $16,655,000 for 1997. As a percentage of
revenues, the gross profit percentage was 3.8% for 1998 and 36.6% for 1997. The
decrease in gross profit was primarily due to: a continuation of higher than
normal returns as a result of retail customers returning excess inventory and
general end-user product installation challenges in a Windows environment; price
protection credits granted to customers as a result of sales price decreases;
inventory write-down charges to record inventory at lower-of-cost or market
value; and competitive pricing pressures. Further, the gross profit was
adversely affected by significantly lower shipment volume levels during the
twelve months ended December 31, 1998 over which indirect manufacturing costs
could be absorbed.
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RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses
were $2,389,000 for 1998, a decrease of $308,000, or 11.4%, compared to
$2,697,000 in 1997. This decrease was a result of a reduction in personnel in
the second quarter of 1998. As a percentage of revenues, research and
engineering expenses were 9.2% for 1998 compared to 5.9% for 1997. The increase
in research and engineering expenses as a percentage of revenues resulted
primarily from the large decline in revenues. The Company further reduced its
research and engineering personnel near the end of the fourth quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $13,178,000 for 1998, an increase of $3,728,000,
or 39.4%, compared to $9,450,000 for 1997. As a percentage of revenues,
selling, general and administrative expenses increased to 50.9% for 1998,
compared to 20.8% in 1997. The expense increase, as a percentage of revenues,
resulted primarily from the significant decline in revenues in 1998. The
increase in costs of $3,051,000 resulted from an increase in sales and
marketing costs associated primarily with greater sales incentive program
costs, increased marketing development costs, and increased advertising
expenditures.
INTEREST/OTHER INCOME (EXPENSE). Interest income for 1998 was
$64,000, interest expense was $183,000 and foreign currency translation loss
was $153,000. This compares with interest income of $304,000 for 1997.
INCOME TAXES. The benefit for income taxes for the twelve-month
period ended December 31, 1998 reflects an effective tax rate of 39.0%. This
compares to an effective tax rate of 33.5% for the twelve-month period ended
December 31, 1997. The increase in the effective tax rate was due primarily
to a higher effective state tax rate due to no state tax credit in 1998
compared to 1997, and a lower research and experimentation tax credit in 1998
compared to 1997.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
REVENUES. Revenues for 1997 were $45,494,000, an increase of
$14,673,000, or 47.6%, compared to $30,821,000 for 1996. Revenues increased
primarily due to significantly increased sales of the Company's existing
products in the United States and Europe, and higher sales due to the
introduction of new products.
GROSS PROFIT. Gross profit for 1997 was $16,655,000, an increase of
$5,426,000, or 48.3%, compared to $11,229,000 for 1996. As a percentage of
revenues, the gross profit percentage was 36.6% for 1997, compared to 36.4% for
1996.
RESEARCH AND ENGINEERING EXPENSES. Research and engineering expenses
were $2,697,000 for 1997, an increase of $592,000, or 28.1%, compared to
$2,105,000 in 1996. The increase resulted primarily from additional expenses
incurred in development of the Company's new products. As a percentage of
revenues, research and engineering expenses decreased to 5.9% in 1997, compared
to 6.8% in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $9,450,000 for 1997, an increase of $3,489,000, or
58.5%, compared to $5,961,000 for 1996. The increase resulted primarily from
higher sales and marketing expenses associated with greater revenues, and
increases in other merchandising and marketing expenses. Also included in
selling, general and administrative expenses were $297,000 of charges associated
with the cancellation of the Company's proposed public offering in the fourth
quarter of 1997. As a
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percentage of revenues, selling, general and administrative expenses
increased to 20.8% of revenues in 1997, compared to 19.3% in 1996.
INTEREST/OTHER INCOME (EXPENSE). Interest income of $304,000 for
1997 and $466,000 for 1996 was derived from the investment of the cash
balances of the Company.
INCOME TAXES. The provision for income taxes for 1997 reflects an
effective tax rate of 33.5%. This compares to an effective tax rate of 37.8% for
1996. The decrease in the effective tax rate was due primarily to a lower
effective state tax rate due to a state tax credit, and a higher research and
experimentation tax credit in 1997. See Notes 2 and 10 of Notes to Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities to date with a combination of
cash flow from operations, borrowed funds, and proceeds from the sale of equity
securities.
The Company has a revolving line of credit pursuant to which it may
borrow up to the lesser of $16,000,000 or 50% of eligible receivables and 50% of
eligible inventory (subject to an inventory sub-limit of $2,500,000).
Borrowings are payable on demand and bear interest at a fluctuating rate equal
to the prime rate plus 2%. The line of credit is scheduled for review in October
1999 and is collateralized by substantially all of the Company's assets. The
line of credit is a "demand discretionary" credit facility and does not require
the Company to maintain working capital and debt-to-equity ratios. At December
31, 1998, $5,821,000 was outstanding under the facility and the Company was in
compliance with all loan covenants. On December 31, 1998, the Company had
$826,000 available to borrow on the operating line of credit.
Net cash used in operating activities was $3,782,000 in 1998,
resulting primarily from a net loss of $9,056,000, and an increase in
deferred income taxes and taxes receivable of $6,410,000, offset by
depreciation of $1,366,000, a decrease in accounts receivable of $6,023,000,
and an increase in payables and accrued liabilities of $4,094,000. Cash used
in operations was $5,482,000 in 1997. Increases in accounts receivable of
$6,784,000 and inventories of $3,414,000, offset by net income of $3,197,000,
depreciation of $615,000, and increase in payables and acccrued liabilities
of $1,212,000 were the primary components of changes in working capital for
1997. Cash used in operations was $941,000 in 1996. Increase in accounts
receivable of $6,923,000, inventories of $1,034,000, payables and accruals of
$3,857,000, and a decrease in prepaids and other assets of $286,000 were the
primary components of changes in working capital for 1996.
On January 28, 1999, and in connection with equity line financing
provided to the Company, the Company issued to three investors an aggregate
of 250,000 shares of the Company's Common Stock and warrants exercisable for
an aggregate of 70,754 shares of Common Stock. The purchase price for the
Common Stock issued to the investors was $16.00 per share. The exercise price
applicable to 50% of the shares issuable upon exercise of the warrants is
$20.00 per share; the exercise price for the remaining warrant shares is
$22.40 per share. The Company may elect, at its sole discretion, that two
additional tranches of investment be made under the equity line. The amount
of each additional tranche would range from $1,000,000 to $6,000,000,
depending on the price of the Common Stock at the time of the investment.
Warrants to purchase additional shares of Common Stock will be issued if the
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aggregate investment under the line exceeds $12,000,000. The equity line
includes a "reset" mechanism which may result in the issuance to the
investors of additional shares of Common Stock at no additional investment.
There are two reset periods for each tranche, each covering 50% of the shares
issued on the applicable closing date. The first reset period is the 25 days
after the effective date of a registration statement to be filed in
connection with that tranche. The second reset period is the 25 days after
the end of the first reset period. For each reset period, the reset price is
the average of the lowest ten trading days' closing bid prices during the
related 25-day period. The number of shares to be issued at the end of each
reset is calculated by (a) multiplying the number of shares subject to price
adjustment by (b)(i) an amount equal to 112.5% of the applicable tranche
purchase price less the reset price divided by (ii) the reset price. The
investors have agreed that, until the expiration of the final reset period in
connection with the equity line, they will not enter into certain short sales
of the Company's Common Stock.
At December 31, 1998, the Company had cash and cash equivalents of
$460,000 and working capital of $9,178,000.
Capital expenditures for 1998, 1997, and 1996 were $1,597,000,
$1,653,000, and $789,000, respectively. Capital expenditures for December 31,
1998 were primarily for new product tooling and manufacturing equipment and
computer equipment.
The Company does not intend to pay cash dividends to the holders of
Common Stock and intends to retain future earnings to finance the expansion and
development of its business.
The Company believes that available funds together with borrowings
from its new credit facility will be adequate to meet the Company's
anticipated cash needs through the end of December, 1999. There can be no
assurance that additional capital beyond the amounts currently forecasted by
the Company will not be required nor that any such required additional capital
will be available on reasonable terms, if at all, at such time or times as
required by the Company.
YEAR 2000 COMPLIANCE
The Year 2000 issue results from computer programs written using
two, rather than four, digits to define the applicable year. These computer
programs may recognize a date using "00" as the year 1900 instead of 2000 and
cause system failures or miscalculations or material disruptions of business
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business operations.
If the Company or its significant customers, suppliers, service providers and
other related third parties fail to take the necessary steps to correct or
replace these problematic computer programs, the Year 2000 issue could have a
material adverse effect on the Company. The Company cannot, however,
quantify the impact at this time.
The Company has begun upgrading or replacing the software packages
underlying its financial, production, communication, desktop and other
systems, as appropriate, to address the Year 2000 issue. It has also
performed an in-depth analysis of its products and began to modify those that
are not Year 2000 compliant. Moreover, the Company has begun to contact all
major external third parties that provide products and services to
the Company to assess their readiness for the Year 2000.
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Management believes it has completed the review and assessment phase
of affected systems within the Company and those which are external to
the Company. This assessment indicated that most of the Company's
significant internal information systems could be affected by the Year 2000
issue, and that the Company may be negatively impacted by non-compliance of
related third parties.
The Company has begun the remediation phase of the Company's
internal information technology systems and has set September 1999 as the
target for Year 2000 compliance of all of the Company's internal information
technology systems. The Company's internal information technology systems
include its finance systems and those systems used in the research and
development of the Company's products.
The Company is currently in the process of creating contingency
plans for its internal information technology systems. These contingency
plans are expected to be in place by September 30, 1999. In the event
the Company's information technology systems are not Year 2000 compliant by
September 30, 1999, the Company will decide at that time whether to
implement the necessary contingency plan(s).
The Company has queried its important suppliers and service
providers and has obtained assurances from those selected third parties that
they are or will be Year 2000 compliant. The inability of those parties to
complete their Year 2000 resolution process could materially impact
the Company. The effects of non-compliance by third parties where no system
interface exists is not determinable.
Concurrent to performing the above steps, the Company will make
certain investments in systems and applications to address Year 2000 issues.
The Company has not tracked internal resources dedicated to the resolution of
the Year 2000 issue and, therefore, is unable to quantify internal costs
incurred to date that are associated with the Year 2000 issue. Identifiable
expenditures for these investments were approximately $10,000 through
December 31, 1998. Management estimates that additional expenditures in 1999
will total approximately $130,000. Investments to address the Year 2000 issue
have been, and are expected to be, funded through cash generated from
operations.
The Company's plans to complete the Year 2000 modifications are
based upon management's best estimates, which were derived utilizing numerous
assumptions of future events, including continued availability of certain
resources, and other factors. However, there can be no assurance that these
estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
included the availability and cost of personnel trained in this area and the
ability to locate and correct all relevant computer codes.
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ADDITIONAL RISK FACTORS THAT COULD AFFECT OPERATING RESULTS AND MARKET
PRICE OF STOCK
As discussed earlier in this Report, the following factors are among
those that may cause actual results to vary from those the Company forecasts
in forward-looking statements included in this Report and other reports it
files with the Securities and Exchange Commission.
SEASONAL AND OTHER FLUCTUATIONS IN THE COMPANY'S OPERATING RESULTS
MAY MAKE IT DIFFICULT TO PREDICT THE COMPANY'S FUTURE
PERFORMANCE AND MAY RESULT IN VOLATILITY IN THE MARKET PRICE
OF THE COMPANY'S COMMON STOCK
The Company generally experiences seasonality in its operating
results. The Company's revenues typically are substantially higher in the
fourth quarter of the year, reflecting traditional retail seasonality
patterns. In addition to seasonal fluctuations, the Company may experience
significant fluctuations in its operating results from other causes.
The volume and timing of orders received during a quarter are
difficult to forecast. Customers generally order on an as-needed basis and,
accordingly, the Company has historically operated with a relatively small
backlog. This reduces the Company's ability to accurately forecast revenue.
The Company's revenue in a given period depends on the volume and timing of
orders received during the period, the timing of new product introductions by
the Company and its competitors, product line maturation, the impact of price
competition on the Company's average selling prices, the availability of
components for the Company's products, changes in product or distribution
channel mix, the level of inventory carried by the Company's distribution and
retail channel customers, and product returns and price protection charges
from customers. These factors all tend to make the timing of revenue
unpredictable and may lead to significant period-to-period fluctuations in
revenue.
The Company's gross margins are affected by short product life
cycles, the mix of products sold, the mix of distribution channels used,
competitive price pressures, the availability and cost of components from the
Company's suppliers, component price inflation or deflation, end-of-life
inventory write downs and general economic conditions. Individual product
lines generally provide higher margins at the beginning of the typical
12-to-18-month product life cycle, and lower margins as the product line
matures. If a product's life is shorter than expected, unexpected
distribution channel inventory returns and end-of-life and obsolete inventory
and tooling charges could result, which would depress the Company's revenue
and gross margin in the affected period.
A disproportionate percentage of the Company's revenue in any
quarter may be generated in the last month or weeks of a quarter. As a
result, a shortfall in sales in any quarter as compared to expectations may
not be identifiable until at or near the end of the quarter.
Notwithstanding the difficulty in forecasting future sales and the
relatively small level of backlog at any given time, the Company generally
must plan production, order components and undertake its development, sales
and marketing activities and other commitments months in advance.
Accordingly, impacts of shortfalls in revenue may be magnified due to the
Company's inability to adjust expenses or inventory levels during the quarter
to match the level of revenue for the quarter. Conversely, in the Company's
efforts to adjust inventory levels to a slower order rate, the Company may
overcorrect its component purchases and inventory levels, resulting in
periodic shortages of inventory and delivery delays and negatively affecting
its revenue, market share and customer satisfaction levels in the current
quarter or in future quarters.
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For these reasons, the Company believes that its quarterly revenue and
results from operations are likely to vary significantly in the future and
that quarter-to-quarter comparisons of the Company's operating results may
not be meaningful. Investors should therefore not rely on the results of one
quarter as an indication of future performance.
THE INTENSE COMPETITION IN THE COMPANY'S MARKETS MAY LEAD TO REDUCED
SALES OF THE COMPANY'S PRODUCTS AND REDUCED PROFITS
The markets for the Company's products are intensely competitive and are
likely to become even more competitive. Increased competition often results
in pricing pressures, reduced sales, reduced margins, or the failure of
products to achieve or maintain market acceptance, any of which could have a
material adverse effect on the Company's business, results of operations, and
financial condition. Each of the Company's hardware products faces intense
competition from multiple competing vendors. Competitors such as Microsoft
have greater name recognition, access to larger customer bases, and
substantially greater financial, technical, marketing, distribution, service,
support, and other resources than the Company has, and may be able to respond
more quickly than the Company can to new or changing opportunities,
technologies, standards, or customer requirements.
THE COMPANY MAY NOT BE ABLE TO DEVELOP ACCEPTABLE NEW PRODUCTS OR
ENHANCEMENTS TO THE COMPANY'S EXISTING PRODUCTS AT THE RATE
REQUIRED BY THE COMPANY'S RAPIDLY CHANGING MARKETS
The Company's future success depends upon its ability to address the
rapidly changing needs of its customers by developing and introducing high
quality products, product enhancements, and services on a timely basis and by
keeping pace with technological developments and emerging industry standards.
The markets for the Company's products are rapidly evolving. Failure to
develop and release enhanced or new products, or delays or quality problems
in doing so, could have a material adverse effect on the Company's business,
results of operations, and financial condition. As is common in rapidly
evolving markets, demand and market acceptance for recently introduced
products are subject to high levels of uncertainty and risk. New products
can also quickly render obsolete products that were only recently in high
demand. The markets for the Company's existing products may not be
sustainable at their current levels. The markets for recently introduced and
planned products may not expand or develop.
THE COMPANY'S PRODUCTS HAVE SHORT LIFE CYCLES
The markets for the Company's products are characterized by frequent new
product introductions and product obsolescence. These factors typically
result in short product life cycles, frequently ranging from 12 to 18 months.
The Company must develop and introduce new products in a timely manner that
compete effectively on the basis of price and performance and that address
customer needs. To do this, the Company must continually monitor industry
trends and make difficult choices regarding the selection of new technologies
and features to incorporate into its new products, as well as the timing of
when to introduce new products, all of which may impair the orders for or the
prices of the Company's existing products.
Each new product cycle presents new opportunities for current or
prospective competitors of the Company to gain a product advantage or
increase their market share. If the Company does not successfully introduce
new products within a given product cycle, its sales will be adversely
affected for that cycle and possibly for subsequent cycles. Any such failure
could also impair the Company's brand name and ability to command retail
shelf space in future periods.
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PRICES FOR PRODUCTS IN THE COMPANY'S MARKETS ARE DECLINING
The Company's markets are characterized by intense ongoing competition
coupled with declining average selling prices. Accordingly, the Company's
average selling prices, measured over a given period of time, may decline
from the levels experienced to date. Such a decline could cause the
Company's revenue and gross margins to decline relative to prior periods.
THE COMPANY MAY NEED TO ACCESS ADDITIONAL FUNDS TO FINANCE ONGOING
OPERATIONS
As of March 31, 1999, the Company believes that available funds together
with borrowings from its credit facility will be adequate to meet its
anticipated cash needs for the next 12 months. However, there can be no
assurance that additional capital beyond the amounts currently forecast by
the Company will not be required nor that any such required additional
capital will be available on reasonable terms, if at all, at such time or
times as required by the Company. Additional financing may involve public or
private offerings of debt or equity securities, and may include bank debt.
Debt financing may increase the Company's leveraged position, require the
Company to devote significant cash to service debt and limit funds available
for working capital, capital expenditures, and general corporate purposes,
all of which could increase the Company's vulnerability to adverse economic
and industry conditions and competitive pressures. Equity financing may
cause additional dilution to purchasers of the Company's common stock.
OFFSHORE MANUFACTURING AND DEPENDENCE ON MANUFACTURING
CONTRACTORS IMPOSE ADDITIONAL RISKS
Virtually all the Company's products are manufactured and assembled in
China and Taiwan by independent contractors. The Company's use of offshore
manufacturing is subject to the customary risks of doing business abroad,
including fluctuations in the value of currencies, tariffs, export duties,
quotas, restrictions on the transfer of funds, work stoppages and political
instability.
For the year ended December 31, 1998, approximately 92% of the Company's
products were manufactured and assembled through a single vendor utilizing
factories located in Taiwan and the Guangdong province of China.
Manufacturing and assembly at one factory accounted for more than half of the
Company's production. If any of the manufacturing facilities utilized by the
Company become unavailable, or if the manufacturing operations at these
facilities are slowed, interrupted or terminated, the Company's business,
financial condition and results of operation could be materially and
adversely affected. The Company may not be able to enter into satisfactory
alternative third-party manufacturing arrangements. In addition, although
the Company seeks to control the quality of its products manufactured
offshore, quality problems have occasionally arisen, and may in the future
arise, that are beyond the Company's direct control. The use of independent
manufacturing contractors to manufacture and assemble products offshore also
has required the Company to increase production lead times and has reduced
the Company's ability to adjust production in response to short-term market
conditions. As a result, the Company's failure to adequately forecast demand
of products manufactured offshore could materially and adversely affect the
Company's sales and results of operations.
THE COMPANY DEPENDS ON A LIMITED NUMBER OF KEY CUSTOMERS
The Company anticipates that a significant portion of its revenues and
accounts receivable will continue to be derived from a limited number of key
customers. For the year ended December 31, 1998, three customers accounted
for an aggregate of approximately 35% of the Company's revenues. The loss of
one or more key customers or any significant reduction in orders by such
customers could have a material adverse effect on the Company's business,
results of operations or financial condition.
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THE LOSS OF KEY PERSONNEL OR THE COMPANY'S FAILURE TO ATTRACT
ADDITIONAL PERSONNEL COULD ADVERSELY AFFECT THE COMPANY'S
BUSINESS AND DECREASE THE VALUE OF YOUR INVESTMENT
The Company's success depends largely upon the continued services of its
executive officers and other key management and development personnel. The
loss of the services of one or more of the Company's executive officers,
engineering personnel, or other key employees could have a material adverse
effect on the Company's business, results of operations, and financial
condition. The Company's employees do not have employment agreements and
could terminate their employment with the Company at any time without
penalty. The Company does not maintain key person life insurance policies on
any of its employees.
The Company's future success also depends on its ability to attract and
retain highly qualified personnel. The Company may not be successful in
attracting or retaining qualified personnel, which could have a material
adverse effect on the Company's business, results of operations, and
financial condition. The competition for qualified personnel in the computer
software and game markets is intense, and the Company may be unable to
attract, assimilate, or retain additional highly qualified personnel in the
future. The Company attempts to hire engineers with high levels of
experience in designing and developing software and personal computer-related
products in time-pressured environments. There is a limited number of
qualified engineers in the Company's geographic location, resulting in
intense competition for its services.
THE STRAIN THAT CHANGES IN THE COMPANY'S GROWTH RATE PLACES UPON ITS
SYSTEMS AND MANAGEMENT RESOURCES MAY ADVERSELY AFFECT THE
COMPANY'S BUSINESS
Any failure to properly manage the Company's growth could have a
material adverse effect on the Company's business, results of operations, and
financial condition. The growth and contractions that the Company has
experienced place significant challenges on its management, administrative,
and operational resources. To properly manage the Company's business, the
Company must, among other things, implement and improve additional and
existing administrative, financial, and operational systems, procedures, and
controls on a timely basis. The Company may not be able to complete the
necessary improvements to its systems, procedures, and controls necessary to
support its future operations in a timely manner. Management may not be able
to hire, train, retain, motivate, and manage required personnel and may not
be able to successfully identify, manage, and exploit existing and potential
market opportunities.
THE COMPANY'S INTERNATIONAL SALES ARE SIGNIFICANT AND COULD DECREASE
FOR REASONS ADDITIONAL TO THOSE AFFECTING DOMESTIC SALES
Approximately 30% and 36% of the Company's total revenue for the years
ended December 31, 1997 and 1998, respectively, were attributable to sales
made outside the United States. Any reduction in international sales, or the
Company's failure to further develop its international distribution channels,
could have a material adverse effect on the Company's business, results of
operations, and financial condition. The Company's international operations
are subject to the risks inherent in international business activities,
including, in particular:
- Management of an organization operating in various countries;
- Compliance with a variety of foreign laws and regulations;
- Overlap of different tax structures;
- Foreign currency exchange rate fluctuations, which may affect
demand for the Company's products in international markets or the
Company's consolidated multinational financial results;
- Trade restrictions, changes in tariffs, and freight rates; and
- Regional economic and political conditions.
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These factors could have a material adverse effect on the Company's future
international sales and, consequently, the Company's business, results of
operations, and financial condition.
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY;
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST THE COMPANY
The Company regards substantial elements of its products as proprietary
and attempts to protect them by relying on patent, trademark, service mark,
trade dress, copyright, and trade secret laws and restrictions, as well as
confidentiality procedures and contractual provisions. Any steps the Company
takes to protect its intellectual property may be inadequate, time consuming,
and expensive. In addition, despite the Company's efforts, it may be unable
to prevent third-parties from infringing upon or misappropriating its
intellectual property. Any such infringement or misappropriation could have
a material adverse effect on the Company's business, results of operations,
and financial condition. Currently issued patents or any new patent
applications may not provide the Company with any competitive advantages, or
may be challenged by third parties. Effective trademark, copyright, and
trade secret protection may not be available in every country in which the
Company's products are distributed. In addition, the Company's competitors
may independently develop similar technology that substantially limits the
value of the Company's intellectual property.
The Company also has acquired or licensed technologies from other
companies. The Company's internally developed technology or the technology
it acquires or licenses may infringe on a third party's intellectual property
rights and such third parties may bring claims against the Company alleging
infringement of their intellectual property rights. Any such infringement or
claim of infringement could have a material adverse affect on the Company's
business, result of operations, and financial condition.
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. The Company
is not currently involved in any intellectual property litigation. The
Company may, however, be a party to litigation in the future to protect its
intellectual property or as a result of an alleged infringement of others'
intellectual property. Such claims and any resulting litigation could
subject the Company to significant liability for damages and invalidation of
its proprietary rights. Such litigation, regardless of its success, likely
would be time-consuming and expensive to defend and would divert management
time and attention. Any potential intellectual property litigation could
also force the Company to do one or more of the following:
- Cease selling, incorporating, or using products or services that
incorporate the challenged intellectual property;
- Obtain from the holder of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; and
- Redesign those products or services that incorporate such technology.
Any of these results could have a material adverse effect on the Company's
business, results of operations, and financial condition.
PRODUCT DEFECTS COULD LEAD TO LOSSES OF CUSTOMERS
Product components may contain undetected errors or "bugs" when first
supplied to the Company that, despite its internal testing, are discovered
only after certain of the Company's products have been installed and used by
customers. The Company continues to upgrade the firmware and software
utilities that are incorporated into or included with its products. The
Company's products are complex as a result of factors including advanced
functionality, the diverse operating environments in which the products may
be deployed, the need for interoperability, and the multiple versions of such
products that must be supported for diverse operating platforms and
standards. Despite the Company's testing, these products may contain
undetected errors or failures when first introduced or as new versions or
enhancements are released. Problems encountered by customers or product
recalls could materially adversely affect the Company's business, financial
condition and results of operations.
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THE COMPANY DEPENDS ON A SMALL GROUP OF SUPPLIERS FOR CRITICAL COMPONENTS
Certain key components used in the Company's products are obtained from
one or a limited group of suppliers. Any reduction, interruption of or delay
in supply could materially and adversely affect the Company's business,
results of operations or financial condition. The Company has had and may in
the future have, shortages of supplies and delays in deliveries of necessary
components. Substantially all components used in the Company's products are
purchased from sources located outside the United States. Trading policies
adopted by the United States or foreign governments could restrict the
availability of components or increase the cost of obtaining them. Any
significant increase in component prices or decrease in component
availability could materially and adversely affect the Company's business,
results of operations and financial condition.
CHANGES IN THE COMPANY'S DISTRIBUTION NETWORK MAY ADVERSELY AFFECT THE
COMPANY'S BUSINESS
The Company sells its products through a network of domestic and
international distributors, and directly to major retailers/mass merchants.
The Company's future success is dependent on the continued viability and
financial stability of its customer base. Personal computer distribution and
retail channels historically have been characterized by rapid change,
including periods of widespread financial difficulties and consolidation and
the emergence of alternative sales channels, such as direct mail order,
telephone sales by PC manufacturers and electronic commerce on the Internet.
Changes in distribution channel patterns, such as increased commerce on the
Internet, increased use of mail-order catalogs, increased use of
consumer-electronics channels for personal computer sales, or increased use
of channel assembly to configure PC systems to fit customers' requirements
could affect the Company in unforeseen ways. Moreover, additions to or
changes in the types of products the Company sells, such as the introduction
of non-gaming products or the migration toward more communications-centric
products, may require specialized channel partnerships, relationships which
the Company has only begun to establish.
Inventory levels of the distribution channels used by the Company
generally are maintained in a range of one to three months of customer
demand. These channel inventory levels tend toward the low end of the
months-of-supply range when demand is stronger, sales are higher and products
are in short supply. Conversely, when demand is slower, sales are lower and
products are abundant, these channel inventory levels tend toward the high
end of the months-of-supply range. Frequently, in such situations, the
Company attempts to ensure that distributors and retailers devote their
working capital, sales and logistics resources to the Company's products to a
greater degree than to those of competitors. Similarly, the Company's
competitors attempt to ensure that their own products are receiving a
disproportionately higher share of the distributors' working capital and
logistics resources. The Company believes that it is currently operating in a
period of slower demand, lower sales and abundant products, leading to
existing distribution channel inventory levels of older product that are
higher than desirable. Further, in such an environment of slower demand and
abundant supply of products, price declines are more likely to occur and,
should they occur, are more likely to be severe. In such an event, high
distribution channel inventory levels may result in substantial price
protection charges. Such price protection charges have the effect of reducing
net revenue and gross profit.
SOME OF THE COMPANY'S PRODUCTS MAY NOT BE YEAR 2000 COMPLIANT,
WHICH COULD RESULT IN CUSTOMER DISSATISFACTION OR CLAIMS
AGAINST THE COMPANY
The Company is currently reviewing its products, internal systems and
infrastructure in order to identify and modify those products and systems
that are not Year 2000 compliant. The Company expects any required
modification to be made on a timely basis and does not believe that the cost
of any such modification will have a material adverse effect on the Company's
operating results. However, increased costs associated with implementation
of any such modifications and the inability to implement such modifications
could have an adverse effect on the Company's business, financial condition
and results of operations. In addition, if the Company's suppliers, vendors,
major distributors, and partners fail to correct their Year 2000 problems,
such failure could result in an interruption in, or a failure of, the
Company's normal business activities or operations. Such failures could have
a material adverse effect on the Company's business, results of operations,
and financial condition.
22
<PAGE>
The Company is currently reviewing its internal systems and
infrastructure in order to identify and modify those systems that are not
Year 2000 compliant. The Company expects any required modification to be
made on a timely basis and does not believe that the cost of any such
modification will have a material adverse effect on the Company's operating
results. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, implementation of any such
modifications and inability to implement such modifications could have an
adverse effect on the Company's future operating results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Substantially all of the Company's liquid investments as of December
31, 1998 were at fixed interest rates, and therefore the fair value of these
investments was affected by changes in market interest rates. However,
all of such liquid investments had original maturities of 90 days or less. As
a result, the Company believes that the market risk arising from its holdings
of financial instruments was minimal. The Company, as of December 31, 1998,
held no financial instruments.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants .......................................................... 25
Consolidated Balance Sheets--As of December 31, 1997 and 1998 .............................. 26
Consolidated Statements of Operations--For each of the three years in the period
ended December 31, 1998 ............................................................... 27
Consolidated Statements of Cash Flows--For each of the three years in the
period ended December 31, 1998 ........................................................ 28
Consolidated Statements of Changes in Shareholders' Equity--For each of the
three years in the period ended December 31, 1998 ..................................... 29
Notes to Consolidated Financial Statements ................................................. 30
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts--For each of the three
years in the period ended December 31, 1998 ...................................... 42
</TABLE>
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of ThrustMaster, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under Item 8 on page 24 present fairly, in all material
respects, the financial position of ThrustMaster, Inc. and its subsidiary (the
"Company") at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Portland, Oregon
January 25, 1999, except as to Note 13, which is as of January 28, 1999
25
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
----- -----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 449 $ 460
Accounts receivable, less allowance for
doubtful accounts of $51 and $270................... 16,604 10,581
Inventories................................................. 6,974 6,786
Prepaid expenses and other.................................. 294 252
Income taxes receivable..................................... -- 2,078
Deferred income taxes....................................... 409 4,677
---------- ---------
Total current assets..................................... 24,730 24,834
Plant and equipment, net.................................... 2,119 2,350
Other....................................................... 28 25
---------- ---------
Total assets........................................... $ 26,877 $ 27,209
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating line of credit.................................. $ 1,110 $ 5,821
Accounts payable.......................................... 2,919 7,202
Accrued liabilities....................................... 3,504 2,633
---------- ---------
Total current liabilities................................... 7,533 15,656
Deferred income taxes....................................... 64 --
---------- ---------
Total liabilities...................................... 7,597 15,656
---------- ---------
Commitments (Note 8)
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized; none issued or outstanding................ -- --
Common stock, no par value, 25,000,000 shares
authorized; 4,293,588 and 4,597,333
shares issued and outstanding......................... 13,486 14,846
Retained earnings (accumulated deficit).................. 5,794 (3,262)
Cumulative translation adjustment........................ -- (31)
---------- ---------
Total shareholders' equity............................. 19,280 11,553
---------- ---------
Total liabilities and shareholders' equity............. $ 26,877 $ 27,209
---------- ---------
---------- ---------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
26
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years ended December 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues................................. $ 30,821 $ 45,494 $ 25,905
Cost of goods sold....................... 19,592 28,839 24,914
-------- -------- --------
Gross profit........................ 11,229 16,655 991
-------- -------- --------
Operating expenses:
Research and engineering............ 2,105 2,697 2,389
Selling, general and administrative 5,961 9,450 13,178
-------- -------- --------
Total operating expenses......... 8,066 12,147 15,567
-------- -------- --------
Income (loss) from operations............ 3,163 4,508 (14,576)
Interest/other income (expense).......... 466 304 (272)
-------- -------- --------
Income (loss) before income taxes........ 3,629 4,812 (14,848)
Provision for (benefit from) income
taxes.................................. 1,370 1,615 (5,792)
-------- -------- --------
Net income (loss)................... $ 2,259 $ 3,197 $(9,056)
-------- -------- --------
-------- -------- --------
Net income (loss) per share
Basic................................. $ 0.54 $ 0.75 $ (2.07)
-------- -------- --------
-------- -------- --------
Diluted............................... $ 0.51 $ 0.69 $ (2.07)
-------- -------- --------
-------- -------- --------
Weighted average shares outstanding
Basic................................. 4,182 4,268 4,380
-------- -------- --------
-------- -------- --------
Diluted............................... 4,468 4,660 4,380
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
27
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operations:
Net income (loss)........................................ $ 2,259 $ 3,197 $ (9,056)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation......................................... 766 615 1,366
Deferred income taxes and taxes receivable (152) (127) (6,410)
Change in operating assets and liabilities:
Accounts receivable................................ (6,923) (6,784) 6,023
Inventories........................................ (1,034) (3,414) 188
Prepaid expenses and other assets.................. 286 (181) 13
Payables and accrued liabilities................... 3,857 1,212 4,094
-------- -------- --------
Net cash used in operating activities............ (941) (5,482) (3,782)
-------- -------- --------
Cash flows from investing activities:
Purchases of plant and equipment......................... (789) (1,653) (1,597)
-------- -------- --------
Cash flows from financing activities:
Proceeds from operating line of credit................... -- 1,110 4,711
Payments on long-term debt............................... (11) (10) --
Proceeds from issuance of common stock................... 71 64 679
-------- -------- --------
Net cash provided by financing activities 60 1,164 5,390
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents............................ (1,670) (5,971) 11
Cash and cash equivalents, beginning of year............... 8,090 6,420 449
-------- -------- --------
Cash and cash equivalents, end of year.................... $ 6,420 $ 449 $ 460
-------- -------- --------
-------- -------- --------
Cash paid during the year for:
Interest................................................... $ 1 $ 19 $ 183
Income taxes............................................... 47 1,531 1,025
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
28
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Retained Accumulated
Common Stock Earnings Other
--------------------- (accumulated Comprehensive Comprehensive
Shares Amount deficit) Income Income
-------- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996...................... 3,953 $ 11,877 $ 1,434 $ -- $ --
Proceeds from issuance of common stock.. 164 71 --
Tax benefits from stock options exercised.. -- 257 --
Stock dividend declared (Note 2)............ 123 1,096 (1,096)
Translation adjustment......................... -- -- -- -- --
Net income..................................... -- -- 2,259 -- 2,259
-------- -------- ---------- ----------- -----------
Balance, December 31, 1996.................. 4,240 13,301 2,597 --
Comprehensive Income 1996 2,259
-----------
-----------
Proceeds from issuance of common stock.. 54 64 --
Tax benefits from stock options exercised.. -- 121 --
Translation adjustment......................... -- -- -- -- --
Net income..................................... -- -- 3,197 -- 3,197
-------- -------- ---------- ----------- -----------
Balance, December 31, 1997.................. 4,294 13,486 5,794 --
Comprehensive Income 1997 3,197
-----------
-----------
Proceeds from issuance of common stock.. 303 679 --
Tax benefits from stock options exercised.. -- 681 --
Translation Adjustment........................ -- -- -- (31) (31)
Net loss........................................ -- -- (9,056) -- (9,056)
-------- -------- ---------- ----------- -----------
Balance, December 31, 1998................... 4,597 $ 14,846 $ (3,262) $(31)
-------- -------- -----------
-------- -------- -----------
Comprehensive Income 1998 $(9,087)
-----------
-----------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
29
<PAGE>
THRUSTMASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- THE COMPANY
The consolidated financial statements include the accounts of
ThrustMaster, Inc., (the "Company"), an Oregon corporation, and its wholly-owned
subsidiaries, ThrustMaster (Europe) Limited, and its wholly owned subsidiary
ThrustMaster (Deutschland) GmbH. The Company was incorporated on July 31, 1990.
The Company is a developer and marketer of realistic, high quality game
controllers and software solutions designed to enhance the personal computer
and video console entertainment experience.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS. Cash equivalents consist of highly liquid debt
instruments purchased with an original maturity of three months or less.
INVENTORIES. Inventories are stated at the lower of cost or market on a
first-in, first-out basis. Finished goods are costed using standard costs, which
approximates the first-in, first-out method of accounting.
PLANT AND EQUIPMENT. Plant and equipment are stated at cost and are depreciated
using the straight-line method over the estimated useful lives (three to seven
years). Replacements and improvements which extend the useful life are
capitalized. Maintenance and repairs and routine replacements are expensed as
incurred. Upon disposal, costs and related accumulated depreciation of the
assets are removed from the accounts and resulting gains and losses are
reflected in operations.
INCOME TAXES. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
reporting and tax bases of assets and liabilities and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period of change. Valuation allowances are
established when necessary, to reduce deferred tax assets to the amounts
expected to be realized.
REVENUE RECOGNITION. Revenue is recognized at the time of product shipment.
All products have a warranty for one year from date of sale covering product
defects. Certain sales agreements provide the right to return unsold
merchandise. The Company provides for estimated costs of warranty and returns
when products are shipped. The Company offers price protection to certain
customers on its products. At the time of a price reduction, the Company
records this price protection as a reduction of revenues.
RESEARCH AND ENGINEERING EXPENSE. Research and engineering costs are charged to
operations as incurred.
ADVERTISING. Advertising costs which include cooperative advertising and
marketing development funds, are expensed as incurred.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS. The Company maintains a sales
and distribution office and warehouse in Surrey, England, through which all
of its European
30
<PAGE>
sales are made. The financial statements of the Company's operations in the
United Kingdom have been translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation." Certain of the Company's sales to foreign distributors
are denominated in foreign currencies. Gains and losses associated with the
foreign currency transaction are recorded in the Company's consolidated
financial statements at the settlement date. Gains and losses associated with
foreign currency receivables are recorded based upon the exchange rate at the
end of the period.
EARNINGS PER SHARE DATA. Basic earnings per common share is computed using
the weighted average number of shares of common stock outstanding for the
period. Diluted earnings per common share is computed using the weighted
average number of shares of common stock and dilutive common equivalent
shares outstanding during the year. Common equivalent shares from stock
options are excluded from the computation when their effect is antidilutive.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 3 -- CONCENTRATION OF CREDIT RISK, FOREIGN OPERATIONS, AND MAJOR CUSTOMER
INFORMATION
The financial instrument which potentially subjects the Company to
concentration of credit risk is accounts receivable. The Company's accounts
receivable are primarily from a small number of computer wholesale
distributors and software specialty stores located in the United States,
Canada, and western Europe. Management believes that any risk of loss is
significantly reduced by its ongoing credit evaluations of its customers'
financial condition.
In 1996, no customer individually accounted for more than 10% of
revenues. In 1997, two customers accounted for 11.8% and 10.4% of revenues,
respectively. In 1998, two customers accounted for 12.8% and 12.4% of revenues.
Certain of the Company's game controllers designed to enhance the
personal computer, video game, and internet entertainment experience are
manufactured and assembled in Taiwan and China by independent contractors.
Products manufactured and assembled by one of these vendors approximated 74.3%,
89.9%, and 91.8% of total products in 1996, 1997, and 1998 respectively.
31
<PAGE>
Net revenue by geographic region and as a percentage of total revenue
for each region outside the United States that constituted more than 10% of the
Company's total revenue is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net revenue by geographic region:
Europe........................................ $ 10,225 $ 13,473 $ 9,256
Net revenue as a % of total revenue:
Europe........................................ 33.2% 29.6% 35.7%
</TABLE>
The Company's U.K. operations accounted for substantially all of the
Company's European sales. Identifiable assets of the Company's U.K. operations
were $2,937 at December 31, 1998.
NOTE 4 -- INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
----- -----
<S> <C>
Raw materials ....... $1,062 $1,072
Work-in-progress .... 49 34
Finished goods ...... 5,863 5,680
------- -------
$6,974 $6,786
------- -------
------- -------
</TABLE>
NOTE 5 -- PLANT AND EQUIPMENT
Plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
------- ---------
<S> <C> <C>
Computers and other equipment....... $1,652 $ 1,961
Tooling............................. 2,172 3,410
Furniture and fixtures.............. 343 393
------- ---------
4,167 5,764
Accumulated depreciation............ (2,048) (3,414)
------- ---------
$2,119 $ 2,350
------- ---------
------- ---------
</TABLE>
32
<PAGE>
NOTE 6 -- OPERATING LINE OF CREDIT
At December 31, 1998, the Company has a revolving line credit pursuant
to which it may borrow up to the lesser of $16,000 or 50% of eligible
receivables and 50% of eligible inventory (subject to an inventory sub-limit
of $2,500). Borrowings are payable on demand and bear interest at a
fluctuating rate equal to the prime rate plus 2% which was 9.75% as of
December 31, 1998. The line of credit is scheduled for review in October 1999
and is collateralized by substantially all the Company's assets. The line of
credit is a "demand discretionary" credit facility and does not require the
Company to maintain working capital and debt-to-equity ratios. At December 31,
1998, $5,821 was outstanding under the facility and the Company was in
compliance with all loan covenants. At December 31, 1998, the Company had $826
available to borrow on the operating line of credit.
NOTE 7 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
----- -----
<S> <C> <C>
Accrued payroll and payroll liabilities.... $ 208 $ 265
Accrued bonuses............................ 601 35
Warranty reserve........................... 785 1,255
Federal and state income taxes............. 1,056 --
Accrued commissions........................ 771 354
Other liabilities.......................... 83 724
------- --------
$ 3,504 $ 2,633
------- --------
------- --------
</TABLE>
A portion of the compensation paid by the Company to certain officers
is determined based upon the Company's revenues and net income for the year. The
Company recorded expense of $251 in 1996, $289 in 1997, and $25 in 1998 related
to such amounts.
NOTE 8 -- COMMITMENTS
The Company leases facilities and equipment under non-cancelable
operating leases. Certain of the facility leases contain escalation clauses.
The following is a schedule by years, through expiration of the facilities
leases of future minimum lease payments required under these leases as of
December 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
1999................................. $705
2000................................. 701
2001................................. 705
2002................................. 725
2003................................. 580
2004................................. 188
2005................................. 188
2006................................. 188
2007................................. 126
</TABLE>
Under the agreements for the lease of its office, production, and
distribution facilities, the Company is obligated to the lessors for its share
of certain expenses related to the use, operation, maintenance and insurance of
the property. These expenses, payable monthly in addition to the base rent, are
33
<PAGE>
not included in the amounts shown above. Rental expense totaled $236, $438 and
$767 for the years ended December 31, 1996, 1997, and 1998, respectively.
NOTE 9 -- STOCK OPTION PLANS AND WARRANTS
The Company has adopted a stock option plan for employees and
directors (the "1998 Stock Option Plan"). The Company has reserved 1,000,000
shares for issuance under the 1998 Stock Option Plan. The plan provides for
incentive stock options and nonqualified options to be granted. The Company
previously made grants under the 1994 Stock Option Plan, the 1994 Directors'
Stock Option Plan, and a nonqualified plan adopted in 1990 in which 1,200,000
shares had been reserved. In May 1998, any ungranted options and any future
forfeitures under the 1994 and 1990 option plans were transferred to the 1998
Stock Option Plan.
The stock option plans generally require the price of options to be
at the estimated fair market value of the stock at the date of grant. Options
have a maximum duration of ten years (five years under certain circumstances)
and may be exercised in varying amounts over the vesting periods. During
1998, the Board of Directors approved a stock option repricing for all
executives and employees of the Company. The repricing was effective as of
October 1, 1998.
The following table summarizes stock option transactions:
<TABLE>
<CAPTION>
Number of Shares
--------------------------------
Available
Under Option for Grant
-------------- ------------
<S> <C> <C>
Balance, January 1, 1996........................... 700,606 629,869
Granted ($4.125 to $7.625 per share)............... 340,930 (340,930)
Exercised ($0.25 to $0.75 per share)............... (169,023) --
Cancelled ($0.485 to $5.34 per share).............. (138,535) 138,535
----------- ----------
Balance, December 31, 1996......................... 733,978 427,474
Granted ($8.675 to $15.75 per share)............... 243,470 (243,470)
Exercised ($0.243 to $8.495 per share)............. (41,394) --
Cancelled ($4.733 to $8.75 per share).............. (40,233) 40,233
----------- ----------
Balance, December 31, 1997......................... 895,821 224,237
Authorization of additional shares -- 1,000,000
Granted ($2.75 to $12.375 per share)............... 811,190 (811,190)
Exercised ($0.243 to $8.617 per share)............. (303,745) --
Cancelled ($0.243 to $15.75 per share)............. (357,349) 357,349
----------- ----------
Balance, December 31, 1998......................... 1,045,917 770,396
----------- ----------
----------- ----------
</TABLE>
The exercise price of the outstanding options at December 31, 1998
ranged between $0.24 and $15.75 per share. The weighted average exercise price
of outstanding options was $4.12 at December 31, 1998.
34
<PAGE>
NOTE 9 -- STOCK OPTION PLANS AND WARRANTS (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF DECEMBER 31, CONTRACTUAL AVERAGE AT AVERAGE
EXERCISE 1998 REMAINING EXERCISE DECEMBER 31, EXERCISE
PRICES LIFE PRICE 1998 PRICE
--------------- --------------- ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
$0.24--$0.73 128,488 4.1 $ 0.36 128,488 $ 0.36
$2.43--$3.00 292,400 8.2 2.77 82,400 2.52
$3.50--$5.34 475,728 8.6 4.04 74,372 4.94
$8.62--$8.75 89,801 8.2 8.68 20,712 8.68
$11.50--$12.38 49,500 9.2 12.07 -- --
$15.75 10,000 8.8 15.75 2,500 15.75
--------- -------
1,045,917 308,472
</TABLE>
During 1995, warrants to purchase 139,050 shares were granted at a
price of $7.57 per share. There were 117,151 warrants outstanding at December
31, 1998.
The Company applies APB opinion No. 25 and related interpretations
in accounting for its plans. However, in accordance with SFAS 123, pro forma
disclosures as if the Company adopted the cost recognition requirements under
SFAS 123 for all awards subsequent to January 1, 1995, are presented below.
The fair value of each option granted during the years ended 1996,
1997 and 1998 is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions: (i) average dividend
yield of 0%, (ii) expected volatility of 28.8% for 1996, 26.7% for 1997, and
33.9% for 1998, (iii) expected average life of 3.3 years. The risk-free
interest rate (equivalent to the zero coupon treasury rate) at the date of
grant ranged from 4.8% to 6.3% for 1996, from 5.9% to 6.8% for 1997, and from
4.1% to 5.6% for 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Net income (loss)- as reported............... $2,259 $3,197 ($9,056)
Net income (loss)- pro forma................. 2,173 2,987 (9,321)
Net income (loss) per share-as reported
Basic................................... 0.54 0.75 (2.07)
Diluted................................. 0.51 0.69 (2.07)
Net income (loss) per share--pro forma
Basic................................... 0.52 0.70 (2.13)
Diluted................................. 0.49 0.64 (2.13)
</TABLE>
The effect of applying SFAS 123 in this pro forma disclosure is not
indicative of future amounts.
NOTE 10 -- INCOME TAXES
The provision for income taxes is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................... $1,256 $ 1,535 $ (2,224)
State............................. 266 207 --
-------- -------- --------
Total current..................... 1,522 1,742 (2,224)
-------- -------- --------
Deferred:
Federal........................... (126) (105) (2,591)
State............................. (26) (22) (977)
-------- -------- --------
Total deferred.................... (152) (127) (3,568)
-------- -------- --------
Total.......................... $1,370 $ 1,615 $ (5,792)
-------- -------- --------
-------- -------- --------
</TABLE>
35
<PAGE>
The provision for income taxes differs from the amount of income
taxes determined by applying the statutory federal income tax rate to income
(loss) from continuing operations due to the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Federal statutory rate................................. 34.0 % 34.0 % (34.0)%
State income taxes, net of federal income tax benefit.. 4.4 2.2 (4.4)
Effect of research and experimentation tax credit and
other.............................................. (0.6) (2.7) (0.6)
---- ---- ----
Effective income tax rate.............................. 37.8 % 33.5 % (39.0)%
---- ---- ----
---- ---- ----
</TABLE>
Deferred tax assets (liabilities) are comprised of the following
components:
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1998
-------- -------
<S> <C> <C>
Deferred tax asset:
Expenses and allowances not currently
deductible............................... $ 409 $ 1,158
Net operating loss carryforwards........... 2,938
Credit carryforwards....................... 581
Deferred tax liability:
Excess tax over book depreciation
and amortization......................... (64) --
------ -------
Net deferred tax asset....................... $ 345 $ 4,677
------ -------
------ -------
</TABLE>
The Company has federal and state net operating loss carryforwards of $6,000
and $13,900 respectively, that expire in 2019. The Company has accumulated
unused research and experimination credits of approximately $417 that expire
from 2012-2019. The Company also has Alternative Minimum Tax (AMT) credits in
the amount of $164 which may be carried forward indefinitely.
36
<PAGE>
NOTE 11--EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted computations of earnings per share:
<TABLE>
<CAPTION>
INCOME PER SHARE
(LOSS) SHARES AMOUNT
----------- --------- ----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Basic earnings (loss) per share:
Loss available to common shareholders............ $(9,056) 4,380 $(2.07)
-------
-------
Effect of dilutive securities
Stock options issuable........................... -- --
Diluted earnings (loss) per share:
-------- ------
Loss available to common shareholders............ $(9,056) 4,380 $(2.07)
-------- ------ -------
-------- ------ -------
YEAR ENDED DECEMBER 31, 1997
Basic earnings per share:
Income available to common shareholders.......... $3,197 4,268 $ 0.75
-------
-------
Effect of dilutive securities
Stock options issuable........................... -- 392
Diluted earnings per share:
-------- ------
Income available to common shareholders.......... $3,197 4,660 $ 0.69
-------- ------ -------
-------- ------ -------
YEAR ENDED DECEMBER 31, 1996
Basic earnings per share:
Income available to common shareholders.......... $2,259 4,182 $ 0.54
-------
-------
Effect of dilutive securities
Stock options issuable........................... -- 286
Diluted earnings per share:
-------- ------
Income available to common shareholders.......... $2,259 4,468 $ 0.51
-------- ------ -------
-------- ------ -------
</TABLE>
NOTE 12--401 (k) PLAN
The Company has a 401(k) Plan (the "Plan") covering substantially all
employees meeting minimum service requirements. The Plan allows the Company to
make discretionary matching contributions. The Company provided discretionary
contributions of $35, $45, and $46 for the years ended December 31, 1996, 1997,
and 1998, respectively.
NOTE 13--SUBSEQUENT EVENT
On January 28, 1999, and in connection with equity line financing
provided to the Company, the Company issued to three investors an aggregate
of 250,000 shares of the Company's Common Stock and warrants exercisable for
an aggregate of 70,754 shares of Common Stock. The purchase price for the
Common Stock issued to the investors was $16.00 per share. The exercise price
applicable to 50% of the shares issuable upon exercise of the warrants is
$20.00 per share. The exercise price for the remaining warrant shares is
$22.40 per share.
37
<PAGE>
NOTE 13--SUBSEQUENT EVENT (CONTINUED)
The Company may elect, at its sole discretion, that two additional tranches of
investment be made under the equity line. The amount of each additional
tranche would range from $1,000 to $6,000, depending on the price of the
Common Stock at the time of investment. Warrants to purchase additional shares
of Common Stock will be issued if the aggregate investment under the line
exceeds $12,000. The equity line includes a "reset" mechanism which may result
in the issuance to investors of additional shares of Common Stock at no
additional cost. There are two reset periods for each tranche, each covering
50% of the shares issued on the applicable closing date. The first reset
period is the 25 days after the effective date of a registration statement to
be filed in connection with that tranche. The second reset period is the 25
days after the end of the first reset period. For each reset period, the reset
price is the average of the lowest ten trading days' closing bid prices during
the related 25-day period. The number of shares to be issued at the end of
each reset is calculated by (a) multiplying the number of shares subject to
price adjustment by (b)(i) an amount equal to 112.5% of the applicable tranche
purchase price less the reset price divided by (ii) the reset price. The
investors have agreed that, until the expiration of the final reset period in
connection with the equity line, they will not enter into certain short sales
of the Company's Common Stock.
NOTE 14 -- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected unaudited actual and pro forma financial information for
each of the quarters in the two year period ended December 31, 1998 is as
follows. Pro forma net income per share and net income per share data has
been adjusted to reflect the stock dividend discussed in Note 2.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1997
Revenues........................ $ 6,272 $ 7,149 $ 10,509 $ 21,564
Cost of goods sold.............. 3,786 4,480 6,548 14,025
Operating expenses.............. 2,108 2,244 2,804 4,991
Net income...................... 289 329 836 1,743
Diluted net income per share $ 0.06 $ 0.07 $ 0.18 $ 0.37
1998
Revenues........................ $ 6,282 $ 4,136 $ 4,167 $ 11,320
Cost of goods sold.............. 4,792 4,055 5,369 10,698
Operating expenses.............. 3,430 4,460 3,847 3,830
Net loss........................ (1,241) (2,829) (3,282) (1,704)
Diluted net loss per share $ (0.29) $ (0.65) $ (0.75) $ (0.38)
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Certain information with respect to the directors and executive
officers of the Company is set forth below. The Board of Directors is composed
of eight members who are divided into three classes, designated Class A, Class B
and Class C. Each class consists, as nearly as possible, of one-third of the
total number of directors constituting the entire Board of Directors. Each class
of directors is elected for a three-year term or until their successors are duly
elected. All executive officers are elected by the Board of Directors and serve
until their successors are duly elected by the Board of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
<S> <C> <C>
C. Norman Winningstad 73 Chairman of the Board (Class B director with term expiring
in 1999)
Frank G. Hausmann 41 President, Chief Executive Officer and Director (Class A
director with term expiring in 2001)
Robert L. Carter 56 Director (Class A director with term expiring in 2001)
Graham E. Dorland 57 Director (Class C director with term expiring in 2000)
General Merrill A. McPeak 63 Director (Class B director with term expiring in 1999)
G. Gerald Pratt 71 Director (Class A director with term expiring in 2001)
Milton R. Smith 63 Director (Class A director with term expiring in 2001)
Frederick M. Stevens 62 Vice Chairman of the Board (Class C director with term
expiring in 2000)
David K. Bergeson 40 Vice President, Sales
Frank M. Bouton 54 Vice President, New Technologies
G. Edward Brightman 41 Vice President, Operations
Ronald J. Resnick 50 Vice President, Marketing
</TABLE>
C. NORMAN WINNINGSTAD has served as Chairman of the Board since
February 1994. He has served as a director of the Company since its inception.
From 1970 to October 1991, Mr. Winningstad held at various times the positions
of Chairman of the Board, Vice-Chairman, President and Chief Executive Officer
of Floating Point Systems, Inc., a manufacturer of scientific computers. Mr.
Winningstad has a B.S. degree in Electrical Engineering from the University of
California at Berkeley, an M.B.A. degree from Portland State University, and an
Honorary Doctorate of Law degree from Pacific University.
FRANK G. HAUSMANN became a member of the Board of Directors in October
1998. He has been employed by the Company since July 1998, serving as President
and Chief Executive Officer since October 1998 and Vice President, Finance and
Administration and Chief Financial Officer prior to that time. From August 1997
to May 1998, Mr. Hausmann was Vice President, Finance and Chief Financial
Officer of Atlan Telecom, Inc., a developer of enhanced facsimile and voice-mail
solutions. From September 1995 to July 1997, he served as Vice President,
Corporate Development and General
39
<PAGE>
Counsel of Diamond Multimedia Systems, Inc., a designer and marketer of
computer peripherals such as modems and graphics and sound cards. From June
1993 to September 1995, Mr. Hausmann was Executive Vice President and Chief
Financial Officer for Supra Corporation, a designer and marketer of modems
that was acquired by Diamond Multimedia Systems, Inc. in September 1995. Mr.
Hausmann received B.S. degrees in economics and political science from
Willamette University and a J.D. degree from the University of Oregon. He is
a member of the Oregon State Bar.
ROBERT L. CARTER has been a director of the Company since 1990, and is
a former Chairman, President and Chief Executive Officer of the Company. Mr.
Carter was the Company's first full-time employee and played a key role in the
early design and development of certain ThrustMaster products. He has been the
President and Chief Executive Officer of Military Simulations, Inc., a publisher
of entertainment software, since December 1993. He received a B.S.M.E. degree
from the University of Missouri.
GRAHAM E. DORLAND became a member of the Board of Directors in November
1993. Mr. Dorland is President of Dorland and Associates, a consulting group,
and President and Chief Executive Officer of Nautamatic Marine Systems, Inc., a
manufacturer of marine autopilots located in Newport, Oregon. From June 1993 to
January 1995, he was Managing Partner of Snobird Aircraft Partners, a developer
of experimental aircraft. From May 1982 to December 1992, Mr. Dorland was
Chairman and President of ABX Air Inc., the wholly-owned airline subsidiary of
Airborne Freight Corporation, doing business as Airborne Express.
GENERAL MERRILL A. MCPEAK became a member of the Board of Directors in
March 1996. He has been the President of McPeak and Associates, an international
aerospace consulting firm, since January 1995. General McPeak spent 37 years in
the United States Air Force, and was Chief of Staff from October 1990 to October
1994, when he retired. He is a member of the Boards of Directors of Tektronix,
Inc., Praegitzer Industries, Inc., TWA, Inc. and ECC International Corp., where
he serves as Chairman of the Board. He holds a B.A. degree in economics from San
Diego State University and an M.S. degree in international relations from George
Washington University.
G. GERALD PRATT has been a director of the Company since its inception.
Since 1980, Mr. Pratt has been a private venture capitalist. Mr. Pratt has been
a trustee of the Meyer Memorial Trust, a charitable trust, since 1978.
MILTON R. SMITH has been a director of the Company since its inception.
Mr. Smith served as the Company's President from October 1992 until May 1994 and
as the Company's Secretary from July 1990 until April 1993 and again from
December 1994 until May 1995. Since April 1997, Mr. Smith has been a member of
the Board of Directors of Integrated Measurement Systems, Inc., a manufacturer
of high performance engineering test stations. Mr. Smith was the President and
Chief Executive Officer of Zeelan Technology, Inc., a software engineering
company, from October 1994 until April 1995. Since May 1995, Mr. Smith has been
a private venture capitalist. He recently completed terms as a member of the
national Board of Directors and as Chairman of the Oregon Council of the
American Electronics Association. He received a B.S. degree in physics from
Portland State University, an M.S.E.E. degree from Oregon State University, and
a J.D. degree from Lewis and Clark College.
FREDERICK M. STEVENS became a member of the Board of Directors in
December 1993. From April 1988 until his retirement in January 1991, Mr. Stevens
was the Chairman of the Board and Chief Executive Officer of Fred Meyer, Inc.
40
<PAGE>
DAVID K. BERGESON has been employed by the Company since May 1997 as
Vice President, Sales. From August 1995 to April 1997, he was National Sales
Manager at Creative Labs. Mr. Bergeson has held senior sales positions in the
retail computer industry over the past 12 years. Mr. Bergeson started in the
computer industry with Epson America. He later joined NEC Technologies as a
Regional Director from October 1989 through October 1991. Mr. Bergeson
co-founded Personal Computer Solutions in 1991, where he served as Vice
President of Sales and Marketing until June 1994.
FRANK M. BOUTON joined the Company in June 1992, having previously
consulted with Robert L. Carter on the development of the Company's original
products. He has been Vice President, New Technologies, since January 1996. From
October 1992 to January 1996, he was Vice President, Engineering. From January
1987 to June 1992, Mr. Bouton was the President and owner of THECO Logic, Inc.,
a designer and manufacturer of hardware and software products for the medical
field.
G. EDWARD BRIGHTMAN has been employed by the Company since August 1992
and became Vice President, Operations, in October 1992. He has 14 years'
experience in manufacturing and operation management. From October 1983 to
August 1992, Mr. Brightman worked for Toyota Motor Sales, Toyota Motor
Manufacturing and Vehicle Processors Inc. in management positions at several
assembly plants and import facilities.
RONALD J. RESNICK has been employed by the Company since May 1996 as
Vice President, Marketing. Prior to joining the Company he was a marketing
consultant from August 1995 until April 1996. From April 1994 through July 1995,
Mr. Resnick was the Vice President and Publisher at Infotainment World, Inc., a
book and magazine publishing company. He was Vice President, Business
Development, at Prima Publishing, a book publishing company, from March 1992
until March 1994, and Product Marketing Manager at Software Toolworks, Inc., an
entertainment software publishing company, from July 1990 to December 1991. Mr.
Resnick has a B.S. degree in electrical engineering from Rutgers University.
There are no arrangements or understandings pursuant to which any
person has been appointed as an executive officer or director of the Company.
The Company has no employment contracts with any of its executive officers or
directors.
FAMILY RELATIONSHIPS
There are no family relationships between any director, executive
officer or person nominated or chosen to be a director or executive officer, and
any other director, executive officer or person nominated or chosen to become a
director or executive officer of the Company.
COMPENSATION OF DIRECTORS
During 1998, each nonemployee director received an annual fee of
$5,000, an additional $1,000 for each Board meeting and committee meeting
attended in person (unless the committee meeting was held on the same day as
a Board meeting), and $500 for each Board and committee meeting attended via
telephone. Upon becoming a director, each nonemployee director received
options to purchase 16,480 shares of Common Stock under the Directors'
Nonqualified Stock Option Plan of the Company. In 1998, each nonemployee
director who had been a director for more than one year received options to
purchase 5,000 shares of Common Stock at a price equal to its fair market
value on the date of grant. No employee director receives additional
compensation for his service as a director.
41
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee during 1998 were Messrs.
Carter, Stevens, Winningstad and General McPeak. Mr. Carter is a former
Chairman, President and Chief Executive Officer of the Company. No executive
officer of the Company serves as a member of the Compensation Committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors and executive officers and any
persons who beneficially own more than 10 percent of the Company's Common Stock
to report their initial ownership of Common Stock and any subsequent changes in
that ownership to the Securities and Exchange Commission (the "SEC"). Specific
due dates for such reports have been established. Persons subject to the Section
16(a) reporting requirements are required to furnish the Company copies of all
Section 16(a) reports they file with the SEC. To the Company's knowledge, based
solely on a review of copies of such reports furnished to the Company and
representations that no other reports are required, all Section 16(a) filing
requirements applicable to such reporting persons have been complied with since
the Company became subject to the Exchange Act provisions in March 1995.
42
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company
during 1996, 1997 and 1998 to the Company's Chief Executive Officer, the other
four most highly compensated executive officers of the Company who were serving
as executive officers as of December 31, 1998 and the Company's former President
and Chief Executive Officer, Stephen A. Aanderud, whose employment with the
Company terminated during 1998 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) OPTIONS (2) (3)
- --------------------------- ---- ------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Frank G. Hausmann (4) 1998 $ 82,150 $ 25,000 190,000(5) --
PRESIDENT AND CEO
Stephen A. Aanderud (6) 1998 135,958 -- 88,700(7) $64,362(8)
FORMER PRESIDENT AND CEO 1997 155,000 69,168 45,450 3,304
1996 135,000 65,299 25,750 2,250
Ronald J. Resnick (9) 1998 142,000 -- 23,500(7) 2,130
VICE PRESIDENT, 1997 130,000 42,088 9,270 1,073
MARKETING 1996 78,692 28,172 41,020 --
David K. Bergeson (10) 1998 142,000 -- 23,500(7) 1,509
VICE PRESIDENT, SALES 1997 87,823 33,593 40,000 --
G. Edward Brightman 1998 125,000 -- 23,500(7) 1,016
VICE PRESIDENT, 1997 110,000 35,228 9,270 968
OPERATIONS 1996 90,000 32,445 18,540 988
Frank Bouton 1998 110,000 -- 13,500 1,031
VICE PRESIDENT, 1997 100,000 38,460 9,270 989
NEW TECHNOLOGIES 1996 85,000 36,770 16,480 970
</TABLE>
- ----------------
(1) Cash bonuses are paid to executive officers of the Company based upon
their individual contributions to the Company and the Company's overall
performance. Bonuses for a given year are paid in the first quarter of the
following year.
(2) The number of shares reflects a 3% stock dividend declared by the Board of
Directors on January 21, 1997.
(3) Unless otherwise noted, consists solely of the Company's matching
contributions under its 401(k) plan.
(4) Mr. Hausmann joined the Company in July 1998 as Vice President, Finance
and Administration and Chief Financial Officer. He was appointed President
and Chief Executive Officer in October 1998.
(5) Includes 80,000 replacement options granted upon surrender of options
previously granted. Surrendered options had an exercise price of $7.00
per share.
(6) Mr. Aanderud served as the Company's President and Chief Executive Officer
until October 1998.
(7) Represents replacement options granted upon surrender of options
previously granted. Surrendered options had exercise prices ranging from
$11.50 to $12.375 per share.
(8) Consists of $2,745 of the Company's matching contributions under its
401(k) plan and $61,617 in severance and accrued vacation time payments.
43
<PAGE>
(9) Mr. Resnick joined the Company in May 1996.
(10) Mr. Bergeson joined the Company in May 1997.
OPTION GRANTS
The following table sets forth information with respect to grants of
stock options to the Named Executive Officers during 1998.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED ANNUAL
SHARES TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS EXERCISE APPRECIATION FOR OPTION
OPTIONS GRANTED TO PRICE PER TERM (3)
GRANTED EMPLOYEES SHARE EXPIRATION -------------------------
NAME (1) IN YEAR (2) DATE 5% 10%
- ------------------------ ----------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Frank G. Hausmann 80,000(4) 9.7% $3.50 10/01/08 $ 176,000 $ 446,248
110,000 13.4 2.75 10/12/08 190,241 482,107
Stephen A. Aanderud(5) 88,700(4) 10.8 3.50 10/09/99 195,240 494,777
Ronald J. Resnick 13,500(4) 1.6 3.50 10/01/08 29,715 75,304
10,000 1.2 3.00 12/01/08 18,857 47,612
David K. Bergeson 13,500(4) 1.6 3.50 10/01/08 29,715 75,304
10,000 1.2 3.00 12/01/08 18,857 47,612
G. Edward Brightman 13,500(4) 1.6 3.50 10/01/08 29,715 75,304
10,000 1.2 3.00 12/01/08 18,857 47,612
Frank M. Bouton 9,450 1.2 12.375 02/02/08 73,545 186,378
4,050 .5 11.50 05/21/08 29,291 74,229
</TABLE>
- -----------------------------
(1) Options may terminate before their expiration dates if the optionee's
status as an employee or director is terminated. One-fourth of the
shares of Common Stock covered by each such option vests and becomes
exercisable on each of the first four anniversaries of the grant date.
(2) Based on the closing prices of the Common Stock as reported on The
Nasdaq National Market on the respective grant dates.
(3) This column shows the hypothetical gains or option spreads of the
options granted based on assumed annual compound stock appreciation
rates of 5% and 10% over the full 10-year term of the options. The
assumed rates of appreciation are mandated by the rules of the
Securities and Exchange Commission and do not represent the Company's
estimate or projection of future Common Stock prices.
(4) Replacement options granted upon surrender of options previously
granted. Surrendered options had exercise prices ranging from $7.00 to
$12.375 per share.
(5) Upon termination of Mr. Aanderud's employment with the Company, all of
his options vested and are exerciseable through October 9, 1999.
44
<PAGE>
AGGREGATE OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth certain information regarding exercises
of stock options during 1998 by the Named Executive Officers and the year-end
value of options held by such individuals.
AGGREGATE OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Frank G. Hausmann -- $ -- -- 190,000 $ -- $2,457,500
Stephen A. Aanderud 169,180 894,760 3,400 -- 42,500 --
Ronald J. Resnick -- -- 22,917 51,053 241,708 574,687
David K. Bergeson -- -- 10,000 53,500 72,500 516,250
G. Edward Brightman -- -- 64,267 39,723 940,548 452,032
Frank M. Bouton -- -- 10,557 28,693 106,823 193,534
</TABLE>
- ---------------------------------
(1) Calculated based on the difference between the option exercise price and
the closing price of the Common Stock on December 31, 1998 as reported on
The Nasdaq National Market ($16.00 per share). The potential values have
not been, and may never be, realized. The underlying options have not
been, and may never be, exercised. Actual gains, if any, on exercise will
depend on the value of the Common Stock on the date of exercise.
45
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding
beneficial ownership, as of April 30, 1999, unless otherwise indicated, of
the Company's Common Stock by (i) each shareholder known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers and
(iv) all directors and executive officers as a group. Except as otherwise
indicated, the Company believes that the beneficial owners of the Shares of
Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
SHARES PERCENT
NAME AND ADDRESS BENEFICIALLY BENEFICIALLY
OF BENEFICIAL OWNER (1) OWNED (2) OWNED (2)
- ---------------------------------------------- ------------- ------------
<S> <C> <C>
C. Norman Winningstad (3) 483,220 9.9
Sawtooth Capital Management, L.P. (4) 448,400 9.2
G. Gerald Pratt (5) 416,108 8.5
Robert A. Simms, Sr. (6)
55 Railroad Ave.
Greenwich, CT 06830 319,850 6.6
Milton R. Smith (7) 271,492 5.5
Robert L. Carter (8) 248,685 5.1
G. Edward Brightman (9) 75,004 1.5
Frank Bouton (10) 38,523 *
Graham E. Dorland (11) 35,290 *
Ronald J. Resnick (12) 30,535 *
Frederick M. Stevens (13) 24,308 *
David K. Bergeson (14) 20,000 *
General Merrill A. McPeak (15) 12,360 *
Stephen A. Aanderud 0 *
Frank G. Hausmann (16) 0 *
All Executive Officers and
Directors as a group (12 persons) (17) 1,655,525 32.0
</TABLE>
46
<PAGE>
- --------------------------------
* Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner
identified is c/o ThrustMaster, Inc., 7175 NW Evergreen Parkway #400,
Hillsboro, Oregon 97124.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. For purposes of this table, a person
is deemed to be the beneficial owner of securities that (i) can be
acquired by such person within 60 days after April 30, 1999 upon the
exercise of options or warrants and (ii) are held by such person's spouse
or other immediate family member sharing such person's household. Each
beneficial owner's percentage ownership set forth above is determined by
assuming that options and warrants that are held by such person (but not
those held by any other person) and that are exercisable or convertible
within 60 days after April 30, 1999 have been exercised or converted.
(3) Includes 64,010 shares beneficially owned with spouse and 19,570 shares
subject to options exercisable within 60 days after April 30, 1999.
Excludes 10,150 shares subject to options exercisable more than 60 days
after April 30, 1999.
(4) Includes 250,480 shares beneficially owned by with Sawtooth Partners,
L.P. Sawtooth Capital Management, L.P. is a registered investment
advisor whose clients, including Sawtooth Partners, L.P., have the
right to receive or the power to direct the receipt of dividends from,
or the proceeds from the sale of, shares of Common Stock. No person,
other than Sawtooth Partners, L.P., holds more than five percent of
the shares. Sawtooth Capital Management, L.P. is the sole general
partner of Sawtooth Partners, L.P. Sawtooth Capital Management, Inc.
is the sole general partner of Sawtooth Capitol Management, L.P., and
Bartley B. Blout is the controlling shareholder of Sawtooth Capital
Management, Inc. The address for all of these persons is 100 Wilshire
Blvd., 15th Floor, Santa Monica, CA 90401. This information is based on
a Schedule 13G filed March 22, 1999.
(5) Includes 16,480 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 13,240 shares subject to options
exercisable more than 60 days after April 30, 1999.
(6) Share ownership based on a Schedule 13D/A filed April 23, 1999.
Includes 98,450 shares beneficially owned with Simms Capital
Management, Inc.
(7) Includes 69,010 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 10,150 shares subject to options
exercisable more than 60 days after April 30, 1999.
(8) Excludes 10,150 shares subject to options exercisable more than 60 days
after April 30, 1999.
(9) Includes 71,220 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 32,770 shares subject to options
exercisable more than 60 days after April 30, 1999.
47
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(10) Includes 18,154 shares beneficially owned with spouse and 20,369 shares
subject to options exercisable within 60 days after April 30, 1999.
Excludes 18,881 shares subject to options exercisable more than 60 days
after April 30, 1999.
(11) Includes 2,480 shares beneficially owned with spouse and 19,570 shares
subject to options exercisable within 60 days after April 30, 1999.
Excludes 10,150 shares subject to options exercisable more than 60 days
after April 30, 1999.
(12) Includes 30,535 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 38,435 shares subject to options
exercisable more than 60 days after April 30, 1999.
(13) Includes 4,738 shares beneficially owned with spouse and 19,570 shares
subject to options exercisable within 60 days after April 30, 1999.
Excludes 10,150 shares subject to options exercisable more than 60 days
after April 30, 1999.
(14) Includes 20,000 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 43,500 shares subject to options
exercisable more than 60 days after April 30, 1999.
(15) Includes 12,360 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 13,240 shares subject to options
exercisable more than 60 days after April 30, 1999.
(16) Excludes 190,000 shares subject to options exercisable more than 60 days
after April 30, 1999.
(17) Includes 298,684 shares subject to options exercisable within 60 days
after April 30, 1999. Excludes 400,816 shares subject to options
exercisable more than 60 days after April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 AND RULE 12B-15 PROMULGATED THEREUNDER, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO THE REGISTRANT'S 10-K TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Date: May 17, 1999
THRUSTMASTER, INC.
By /s/ Frank G. Hausmann
------------------------------------
Frank G. Hausmann
President and Chief Executive Officer
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