<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
_____________
AMENDMENT NO. 1 TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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, OREGON, 97124-5839
(Address of principal executive offices)
(Zip Code)
(503) 615-3200
(Registrant's telephone number)
_____________
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common stock, no par value 4,926,972 shares
(Class) (Outstanding at September 3, 1999)
===============================================================================
<PAGE>
THRUSTMASTER, INC.
Index to Form 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets................................... 2
Consolidated Statements of Operations......................... 3
Consolidated Statements of Cash Flows......................... 4
Consolidated Statements of Changes in
Shareholders' Equity..................................... 5
Notes to Consolidated Financial Statements.................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................ 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk.... 14
SIGNATURES............................................................ 17
</TABLE>
Restatement of Financial Statements and Changes to Certain Information
This Quarterly Report on Form 10-Q/A is being filed as Amendment No. 1 to the
Registrant's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 16, 1999 for the purpose of restating financial
information and related disclosures as of June 30, 1999 to account for a
beneficial conversion feature related to convertible debt, to reclassify the
presentation of the convertible debt and to account for warrants.
In addition the income tax provision from continuing operations in the
statements of operations for the periods ended June 30, 1998 have been
reclassified to discontinued operations.
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(Unaudited)
(Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,450 $ 460
Accounts receivable, net 358 -
Inventories 261 -
Prepaid and other expenses 130 134
Net assets from discontinued operations 10,173 17,737
Income taxes receivable - 2,078
Deferred income taxes - 4,677
-------- -------
Total current assets 13,372 25,086
Plant and equipment, net 718 843
Other 25 25
-------- -------
Total assets $ 14,115 $25,954
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Operating line of credit $ 671 $ 5,821
Accounts payable 1,884 7,202
Accrued liabilities 222 1,378
-------- -------
Total current liabilities 2,777 14,401
-------- -------
Long-term debt 5,244 -
Shareholders' equity:
Preferred stock - -
Common stock 20,174 14,846
Accumulated deficit (13,987) (3,262)
Accumulated comprehensive loss (93) (31)
-------- -------
Total shareholders' equity 6,094 11,553
-------- -------
Total liabilities and shareholders' equity $ 14,115 $25,954
======== =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
2
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
(Restated)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues $ 375 $ - $ 721 $ -
Cost of goods sold 140 - 240 -
-------- ------- -------- -------
Gross profit 235 - 481 -
-------- ------- -------- -------
Operating expenses:
Research and engineering 93 - 130 -
Selling, general and administrative 493 203 904 406
-------- ------- -------- -------
Total operating expenses 586 203 1,034 406
-------- ------- -------- -------
Loss from operations (351) (203) (553) (406)
Expense related to beneficial conversion feature (230) - (230) -
-------- ------- -------- -------
Loss before taxes (581) (203) (783) (406)
Provison for income taxes (4,532) - (4,532) -
-------- ------- -------- -------
Loss from continuing operations (5,113) (203) (5,315) (406)
Loss from discontinued operations (5,011) (2,626) (5,207) (3,664)
-------- ------- -------- -------
Net loss $(10,124) $(2,829) $(10,522) $(4,070)
======== ======= ======== =======
Loss per share from continuing operations:
Basic $ (1.05) $ (0.05) $ (1.10) $ (0.09)
======== ======= ======== =======
Diluted $ (1.05) $ (0.05) $ (1.10) $ (0.09)
======== ======= ======== =======
Loss per share from discontinued operations:
Basic $ (1.03) $ (0.60) $ (1.08) $ (0.84)
======== ======= ======== =======
Diluted $ (1.03) $ (0.60) $ (1.08) $ (0.84)
======== ======= ======== =======
Weighted average shares outstanding:
Basic 4,874 4,372 4,829 4,337
======== ======= ======== =======
Diluted 4,874 4,372 4,829 4,337
======== ======= ======== =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
1999 1998
-------- -------
(Restated)
<S> <C> <C>
Cash flows from operations:
Loss from continuing operations $ (5,315) $ (406)
Loss from discontinued operations (5,207) (3,664)
-------- -------
Net loss $(10,522) $(4,070)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Depreciation 207 225
Deferred income taxes and taxes receivable 6,755 (93)
Beneficial conversion feature on debt 230 -
Changes in operating assets and liabilities:
Accounts receivable (358) -
Inventories (261) -
Prepaid expenses and other assets 4 (2,557)
Payables and accrued liabilities (6,536) (3,686)
Net assets from discontinued operations 7,564 11,349
-------- -------
Net cash provided by (used in) operating activities (2,917) 1,168
-------- -------
Cash flows used in investing activities:
Purchase of plant and equipment (82) (577)
Cash flows from financing activities:
Payments on line of credit (5,150) (1,110)
Proceeds from issuance of debt 6,000 -
Proceeds from issuance of common stock 4,139 364
-------- -------
Net cash provided by (used in) financing activities 4,989 (746)
-------- -------
Net increase (decrease) in cash and cash equivalents 1,990 (155)
Cash and cash equivalents, beginning of period 460 449
-------- -------
Cash and cash equivalents, end of period $ 2,450 $ 294
======== =======
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE>
THRUSTMASTER, INC.
CONSOLIDATED STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
(Restated)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Accumulated
----------------- Accumulated Comprehensive Comprehensive
Shares Amount Deficit Loss Loss
------ ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 4,597 $14,846 $(3,262) $(31)
Issuance of common stock 250 3,956
Beneficial conversion feature on convertible debt - 986
Warrants provided to common shareholders - 203 (203)
Stock options exercised 44 183 -
Translation adjustment - - - (62) $ (62)
Net loss - - (10,522) (10,522)
----- ------- -------- ---- --------
Balance, June 30, 1999 4,891 $20,174 $(13,987) $(93)
===== ======= ======== ====
Comprehensive loss, June 30, 1999
$(10,584)
========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
5
<PAGE>
THRUSTMASTER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE 1 -- BASIS OF PRESENTATION
The accompanying 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, and have been prepared by the Company without
audit and in conformity with generally accepted accounting principles for
interim financial information pursuant to rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the unaudited
consolidated financial statements include all necessary adjustments (which are
of a normal and recurring nature) for the fair presentation of the results of
the interim periods presented. These consolidated financial statements should
be read in conjunction with the Company's audited financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1998. The results of operations for the periods presented are not
necessarily indicative of the results that may be expected for the entire fiscal
year.
On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business and sales and return
warranty reserves for approximately $15 million in cash (which is being held in
an escrow account pending closing of the transaction), subject to adjustments in
specified circumstances. While the transaction is subject to customary closing
conditions, including formal approval by the Company's shareholders, the
purchaser has received irrevocable proxies from shareholders representing more
than 50 percent of the Company's outstanding shares approving the transaction.
Prior to the expected closing in September 1999, the Company will continue to
operate the hardware business for the benefit of the purchaser. The continuing
operations of the Company consist of its software business which began in
mid-1998 and generated minor revenues in 1999. On or before the closing, the
Company expects to reduce its workforce to match its future operations.
The hardware business has been accounted for as discontinued operations
and, accordingly, its operations are segregated in the accompanying statements
of operations. Revenues from these operations were $11,205 for the first six
months of 1999, and $25,905, $45,494 and $30,821 for the years ended December
31, 1998, 1997 and 1996, respectively. Certain expenses have been allocated to
continued operations, based on the number of employees expected to remain with
the software business, their related employee costs and overhead for facilities
and other related costs and corporate overhead expenses that are expected to
represent continuing expenses. All income tax provisions and benefits have
been allocated to disontinued operations. The components of net assets of
discontinued operations included in the Company's Consolidated Balance Sheets
at June 30, 1999 and December 31, 1998, follow:
<TABLE>
<CAPTION>
(Dollars in thousands) June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . $ 4,048 $10,581
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . 6,173 6,786
Prepaid and other expenses . . . . . . . . . . . . . . . . . . . . 341 117
Tooling, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,228 1,506
Warranty accrual . . . . . . . . . . . . . . . . . . . . . . . . . (619) (1,253)
Loss from July 1 through July 26 on discontinued operations. . . . (998) -
------- -------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $10,173 $17,737
======= =======
</TABLE>
6
<PAGE>
On June 9, 1999, the Company issued and sold to two investor's
$6,000,000 aggregate principal amount of the Company's zero coupon
Convertible Debentures due June 9, 2002 for $6,000,000 in cash. See also
Part II, Item II. The Convertible Debentures were recorded as equity. The
consolidated balance sheet as of June 30, 1999 has been restated to properly
record the convertible debentures as debt and the discount related to the
beneficial conversion feature. The beneficial conversion feature has been
recorded as additional paid in capital and as a discount against long term
debt. The beneficial conversion feature of $986,000 is being recognized over
90 days using the interest method, resulting in a charge of $230,000 to
continuing operations in the quarter ended June 30, 1999.
On June 9, 1999 in connection with the Debenture Purchase Agreement, the
Company also issued a warrant to one of the investors in exchange for that
investor's waiver of certain rights under the Securities Purchase Agreement,
dated January 28, 1999, between the Company and three investors. The number of
shares of the Company's common stock issuable upon exercise of the warrant
depended on the market price of the stock during specified periods. At the date
of the Agreement the value attributable to the warrant, using a Black Scholes
pricing model, was $203,000, which was recorded as a dividend to common
shareholders in the accumulated deficit with the offsetting amount recorded as
additional paid in capital in common stock. This transaction has no effect on
earnings per share. Due to the market price of the Company's stock during the
periods specified under the agreement the Company will not be required to issue
shares of Common Stock under the terms of this warrant.
The effect of this restatement on previously reported consolidated
financial statements as of and for the three and six months ended June 30, 1999
is as follows (in thousands except per share amounts, unaudited):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
As Reported Restated As Reported Restated
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Loss from continuing operations $(4,883) $(5,113) $(5,085) $(5,315)
Loss per share from continuing operations:
Basic $ (0.99) $ (1.05) $ (1.05) $ (1.10)
Diluted $ (0.99) $ (1.05) $ (1.05) $ (1.10)
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
As Reported Restated
----------- --------
<S> <C> <C>
Balance Sheet:
Long-term debt $ - $5,244
Total shareholders' equity 11,338 6,094
</TABLE>
7
<PAGE>
NOTE 2 -- INVENTORIES FOR CONTINUING OPERATIONS
Inventories for continuing operations are stated at the lower of cost or
market on a first-in, first-out basis. These inventories are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials $ 80 $ -
Finished goods 181 -
-------- --------
$ 261 $ -
======== ========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING INFORMATION
The discussion and analysis below contains "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 statements 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 that the Company makes in this Report on Form 10-Q are forward-
looking. In particular, statements regarding year 2000 compliance and
compliance costs; the adequacy of funds to meet the Company's current or future
cash needs; the sale of substantially all of the Company's hardware business
assets; the development of the Company's software products; the Internet
community, collaboration and communications market; 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 in the Company's annual report on Form 10-K under the heading "Additional
Risk Factors that Could Affect Operating Results and Market Price of Stock."
The Company does not intend to update any forward-looking statements due to new
information, future events or otherwise.
SALE OF THE HARDWARE BUSINESS (DISCONTINUED OPERATIONS)
On July 26, 1999 the Company entered into an agreement to sell
substantially all of the assets of the hardware business and its sales and
return warranty reserves for approximately $15 million in cash (which is being
held in an escrow account pending closing of the transaction), subject to
adjustments in specified circumstances. The hardware business has historically
comprised the bulk of the Company's assets, liabilities, revenues and expenses.
From its founding in 1990 through 1997, the Company was a leader in designing
and marketing innovative PC game controller products. However, commencing in
1997, many larger competitors with greater economies of scale entered the game
controller market creating an extremely competitive environment characterized by
declining prices and increased marketing costs. Company management determined
that the Company could not achieve the economies of scale necessary to be
profitable in the game controller market in the foreseeable future, and
concluded that the Company should sell the hardware business and invest the
proceeds in the Company's new Internet communications software business. The
sale of the hardware business is expected to close in September 1999.
INTERNET COMMUNICATIONS SOFTWARE BUSINESS (CONTINUING OPERATIONS)
On May 31, 1998 the Company entered into a license agreement with Intel
Corporation that licensed to the Company certain software source code technology
related to voice communications over the Internet. The scope of the license was
limited primarily to the PC gaming and entertainment market where the bulk of
the Company's historical business activity was conducted. In December 1998, the
9
<PAGE>
Company re-negotiated the license agreement and secured additional terms
allowing it to use the technology in additional market segments outside of PC
gaming and entertainment.
In January 1999, the Company shipped its first Internet communications
software product into the distribution and retail channels. The product, called
Talk n' Play, incorporates the Intel technology and allows up to four people in
separate locations to conduct a four-way voice conference over the Internet
while they play on-line games. The product also allows the user to participate
in certain Internet communities provided by PeopleLink Inc., a provider of
outsourced Internet community communications. In June 1999, the Company shipped
its second Internet communications product, iConference, into the distribution
and retail channels, targeting the small-office/home-office market. iConference
provides the same four-way Internet voice conferencing capability as Talk n'
Play and adds the ability for up to four people to transfer files, share files
or share a white board while they are engaged in their voice conference.
In August 1999, the Company entered into a second license agreement with
Intel Corporation that licensed to the Company additional software source code
that the Company believes will enable it to accelerate the development of its
next generation Internet community, collaboration and communications products.
The Company intends to target these new products at the strategic Internet OEM
and PC-OEM channels. Most of the Company's year-to-date revenue from its new
Internet software business has been generated in the computer retail channel.
The Company believes that Internet community, collaboration and
communications by the mass market is in an early stage of development and
that increasing demand for these services will drive the convergence of real
time data, voice and video multimedia interactivity over the Internet.
Currently, most of this technology is "server based." This requires a
provider of these services to buy additional computer equipment in order to
constantly "scale-up" to meet the increased demands of its subscribers or
visitors. The audio technology the Company licensed from Intel Corporation
provides for a "client-to-client" solution. This technology allows a
provider to offer a desktop client software solution that will allow its
subscribers or visitors to engage in real-time multimedia communications
without being "tied" to the provider's server. The Company believes that a
significant trend in the future of Internet community, collaboration and
communications will be driven by open, standards-based, "client-to-client"
technology and solutions.
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
this report.
10
<PAGE>
RESULTS OF OPERATIONS
On July 26, 1999, the Company entered into an agreement to sell
substantially all of the assets of the hardware business and its sales and
return warranty reserves for approximately $15 million in cash (which is being
held in an escrow account pending closing of the transaction), subject to
adjustments in specified circumstances. While the transaction is subject to
customary closing conditions, including formal approval by the Company's
shareholders, the purchaser has received irrevocable proxies from shareholders
representing more than 50 percent of the Company's outstanding shares approving
the transaction. Prior to the expected closing in September 1999, the Company
will continue to operate the hardware business for the benefit of the purchaser.
The continuing operations of the Company consist of its software business which
began in mid-1998 and generated minor revenues in 1999. On or before the
closing, the Company is expecting to reduce its workforce to match its future
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Revenues 100.0% -% 100.0% -%
Cost of goods sold 37.3 - 33.3 -
-------- --- -------- ---
Gross profit 62.7 - 66.7 -
Operating expenses:
Research and engineering 24.8 - 18.0 -
Selling, general and administrative 131.5 - 125.4 -
-------- --- -------- ---
Total operating expenses 156.3 - 143.4 -
-------- --- -------- ---
Loss from operations (93.6) - (76.7) -
Expenses related to beneficial conversion feature (61.4) - (31.9)
-------- --- -------- ---
Loss before taxes (155.0) - (108.6) -
Provison for income taxes (1,208.5) - (628.6) -
-------- --- -------- ---
Loss from continuing operations (1,363.5) - (737.2) -
Loss from discontinued operations (1,336.3) - (722.2) -
-------- --- -------- ---
Net loss (2,699.8)% -% (1,459.4)% -%
======== === ======== ===
</TABLE>
The continuing operations of the Company consist of its software business which
began in mid-1998 and generated minor revenues in 1999.
REVENUES
Revenues for the three months and six months ended June 30, 1999 were
$375,000 and $721,000 respectively.
11
<PAGE>
GROSS PROFIT
Gross profit for the three months and six months ended June 30, 1999 was
$235,000 and $481,000 respectively. As a percentage of revenues, gross profit
was 62.7% and 66.7% for the three months and six months ended June 30, 1999.
RESEARCH AND ENGINEERING
Research and engineering expenses were $93,000 and $130,000 for the three
months and six months ended June 30, 1999 which represents software engineers
and related costs.
SELLING, GENERAL, AND ADMINISTRATIVE
Selling, general and administrative expenses were $493,000 and $904,000
which represents selling costs and associated general and administrative
expenses for the three months and six months ended June 30, 1999. The hardware
business has been accounted for as discontinued operations; however certain
expenses have been allocated to continuing operations, based on the number of
employees expected to remain with the software business, their related employee
costs and overhead for facilities and other related costs and corporate overhead
expenses that are expected to represent continuing expenses.
EXPENSE RELATED TO BENEFICIAL CONVERSION FEATURE
Expense related to beneficial conversion feature of $230,000 was
recognized in the second quarter of 1999 relating to the issuance of
$6,000,000 of zero coupon convertible debentures. This expense represents the
change for the beneficial conversion feature of the convertible debt.
PROVISION FOR INCOME TAXES
Amounts represent the establishment of a full valuation alllowance on
the Company's deferred tax asset due to the change in the Company's business
as described in Note 1.
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.
In late 1998, the Company entered into a demand discretionary $16,000,000
line of credit. The Company did not utilize the line as expected. As of June
30, 1999, $671,000 was outstanding under the facility and the Company was in
compliance with all loan covenants. On July 30, 1999, the Company paid off the
balance of the line of credit and the Company and the lender terminated the line
of credit. Prior to its termination, the line of credit bore interest at a
fluctuating rate equal to the prime rate plus 4% and was collateralized by
substantially all of the Company's assets.
On January 28, 1999, the Company issued to three investors an aggregate of
250,000 shares of the Company's Common Stock (subject to adjustment as described
below) and warrants exercisable for an aggregate of 70,754 shares of Common
Stock for an aggregate of $4,000,000. 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 also agreed to issue to the investors "adjustment" shares of its Common
Stock for no additional consideration depending upon the
12
<PAGE>
market price of the Company's Common Stock during specified periods
following the investment. The adjustment periods lapsed in July 1999 and the
Company was not required to issue any additional shares. The Company may
elect, subject to the satisfaction of certain conditions, to sell one
additional tranche of equity investment to the investors. As of the date
hereof, the conditions to the additional tranche of investment have not been
satisfied. The amount of the 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. The Company could be required to issue additional shares of its
Common Stock in connection with any additional tranche of investment to
ensure at least a 12.5% return to the investors.
On June 9, 1999 (the "Closing Date"), the Company issued and sold to two
investors $6,000,000 aggregate principal amount of the Company's zero coupon
Convertible Debentures due June 9, 2002 (the "Debentures"). The Debentures
may be converted into shares of the Company's Common Stock at any time prior
to June 9, 2002. The number of shares into which each Debenture is
convertible is equal to the outstanding principal amount of the Debenture
divided by the conversion price, which may fluctuate from time to time. See
Part II, Item 2. The Company has agreed to register under the Securities Act
of 1933, as amended, the shares of Common Stock issuable upon exercise of the
Debentures. The registration rights agreement provides that the Company will
pay liquidated damages of $120,000 if, among other things, the Company fails
to file with the SEC a registration statement covering such shares within 35
days after the Closing Date or if the registration statement is not declared
effective by the SEC within 90 days after the Closing Date. The registration
rights agreement provides that additional liquidated damages of $120,000
each will be payable for each 30-day period any such default continues.
Net cash used in operating activities was $2,917,000 for the six months
ended June 30, 1999. The primary uses of cash were a net loss of $10,522,000,
an increase in accounts receivable of $358,000, an increase in inventories of
$261,000, and a decrease in payables and accrued liabilities of $6,536,000.
These uses were offset by decreases in deferred income taxes and taxes
receivable and net assets from discontinued operations of $6,755,000 and
$7,564,000, respectively. This compares to net cash provided by operating
activities of $1,168,000 for the six months ended June 30, 1998.
Capital expenditures for the six months ended June 30, 1999 were $82,000,
compared to $577,000 for the same period in the prior year. These expenditures
were primarily for new computer equipment.
The Company believes that available funds to be generated by the
anticipated sale of the hardware business and the receipt of cash from the
issuance of additional Common Stock in September 1999 will be adequate to
meet the Company's cash needs during the next twelve months. The Company may
require additional capital beyond the amounts currently forecasted by the
Company. Any such required additional capital may not be available on
reasonable terms, if at all, at such time or times as required by the Company.
13
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As of June 30, 1999, the Company had cash and cash equivalents of
$2,450,000 compared to $460,000 as of December 31, 1998. The Company invests
its cash in highly liquid marketable securities with maturities of three months
or less at date of purchase. The Company does not invest in derivative
securities.
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 begun 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.
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 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
plans.
The Company has queried its important suppliers and service providers
and has obtained assurances from those third parties that they are or will be
Year 2000 compliant. The inability of those parties to become Year 2000
compliant could have a material adverse effect on the Company. The effects
of non-compliance by third parties where no system interface exists is not
determinable.
The Company has made and will continue to make investments in systems and
applications to address Year 2000 issues. The Company has not tracked all
internal resources dedicated to the resolution
14
<PAGE>
of the Year 2000 issue and, therefore, is unable to quantify precisely
internal costs incurred to date that are associated with the Year 2000 issue.
Identifiable expenditures for these investments were approximately $46,000
through June 30, 1999. Management estimates that additional expenditures in
1999 will total approximately $84,000. 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 include the availability and
cost of personnel trained in this area and the ability to locate and correct all
relevant computer codes.
15
<PAGE>
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On June 9, 1999, the Company and two investors, Strong River Investments
Inc. ("Strong River") and Bay Harbor Investments Inc. (collectively, the
"Investors") entered into a Convertible Debenture Purchase Agreement (the
"Debenture Purchase Agreement") pursuant to which the Investors purchased
$6,000,000 aggregate principal amount of the Company's zero coupon Convertible
Debentures due June 9, 2002 (the "Debentures").
The Debentures may be converted into shares of the Company's Common
Stock at any time prior to June 9, 2002. The number of shares into which
each Debenture is convertible is equal to the outstanding principal amount of
the Debenture divided by the conversion price. The conversion price for the
first 89 days after June 9, 1999 (the "Closing Date") is $24.00. During the
period commencing on the date 90 days and ending on the date 300 days after
the Closing Date, the conversion price will be the lesser of (a) $24.00 and
(b) 88.89% of the average of the ten lowest closing bid prices per share of
the Company's Common Stock during the 25 trading days preceding the
conversion date. After the date 300 days after the Closing Date, the
conversion price will remain equal to the conversion price in effect on the
date 300 days after the Closing Date.
In connection with the Debenture Purchase Agreement, the Company agreed to
issue a warrant to Strong River (the "Warrant") in exchange for Strong River's
waiver of certain rights under the Securities Purchase Agreement, dated as of
January 28, 1999, between the Company, Strong River and two private investors.
The number of shares of the Company's Common Stock issuable upon exercise of the
Warrant depended upon the market price of the Common Stock during specified
periods. Due to the market price of the Company's Common Stock during these
periods, the Company will not be required to issue any shares of Common Stock
under the Warrant.
The initial sale of the Debentures and the Warrant was not registered under
the Securities Act of 1933, as amended (the "Act"), in reliance on Section 4(2)
of the Act for offerings not involving a public offering. The Investors are
sophisticated and "accredited investors," as defined in Section 501(a) under the
Act. The Company did not make a general solicitation in connection with
offering.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
------ -----------
*3.1 Articles of Incorporation, as amended
**3.2 Amended and Restated Bylaws
*4.1 Description of Capital Stock contained in the Articles of
Incorporation, as amended (See Exhibit 3.1)
**4.2 Description of Rights of Security Holders contained in the
Amended and Restated Bylaws (See Exhibit 3.2)
16
<PAGE>
*4.3 Form of Certificate for Shares of Common Stock
***4.4 Convertible Debenture Purchase Agreement dated as of June 9,
1999 among the Company, Strong River Investments, Inc. and
Bay Harbor Investments, Inc.
***4.5 Form of Convertible Debenture
***4.6 Form of Warrant
***4.7 Registration Rights Agreement dated as of June 9, 1999 among
the Company, Strong River Investments, Inc. and Bay Harbor
Investments, Inc.
11.1 Statements Regarding Computation of Per Share Earnings.
27 Financial Data Schedule as of June 30, 1999
- ----------------------------
* Incorporated by reference to the same exhibit number from the Registration
Statement on Form SB-2 filed on January 5, 1995, as amended on February 7, 1995,
and February 24, 1995 (File No. 33-88252-LA).
** Incorporated by reference to the same exhibit number from the Company's
Report on Form 10-K for the year ended December 31, 1996.
*** Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 14, 1999.
(b) Reports on Form 8-K:
On June 14, 1999, the Registrant filed a Current Report on Form 8-K with
respect to its entering into a Convertible Debenture Purchase Agreement and the
issuance of its convertible debentures and a warrant in connection with that
agreement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment No. 1 to report to be signed on its
behalf by the undersigned thereunto duly authorized.
THRUSTMASTER, INC.
Date: September 7, 1999 By /s/ Frank G. Hausmann
------------------------------------
Frank G. Hausmann
President and Chief Executive Officer
17
<PAGE>
EXHIBIT 11.1
THRUSTMASTER, INC.
STATEMENTS REGARDING COMPUTATION
OF PER SHARE EARNINGS
(Dollars in thousands, except net loss per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of
common shares outstanding - basic 4,874 4,372 4,829 4,337
Common stock equivalents
arising from stock options - - - -
------- ------- ------- -------
Weighted average number of
common shares outstanding - diluted 4,874 4,372 4,829 4,337
======= ======= ======= =======
Net loss from continuing operations $(5,113) $ (203) $(5,315) $ (406)
======= ======= ======= =======
Net loss from discontinued operations $(5,011) $(2,626) $(5,207) $(3,664)
======= ======= ======= =======
Net loss per share from continuing operations:
Basic $ (1.05) $ (0.05) $ (1.10) $ (0.09)
======= ======= ======= =======
Diluted $ (1.05) $ (0.05) $ (1.10) $ (0.09)
======= ======= ======= =======
Net loss per share from discontinued operations:
Basic $ (1.03) $ (0.60) $ (1.08) $ (0.84)
======= ======= ======= =======
Diluted $ (1.03) $ (0.60) $ (1.08) $ (0.84)
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE RELATED STATEMENT OF
INCOME FOR THE PERIOD THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,450
<SECURITIES> 0
<RECEIVABLES> 362
<ALLOWANCES> 4
<INVENTORY> 261
<CURRENT-ASSETS> 13,372
<PP&E> 2,436
<DEPRECIATION> 1,718
<TOTAL-ASSETS> 14,115
<CURRENT-LIABILITIES> 2,777
<BONDS> 5,244
0
0
<COMMON> 20,174
<OTHER-SE> (14,080)
<TOTAL-LIABILITY-AND-EQUITY> 14,115
<SALES> 721
<TOTAL-REVENUES> 721
<CGS> 240
<TOTAL-COSTS> 240
<OTHER-EXPENSES> 1,034
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 230
<INCOME-PRETAX> (553)
<INCOME-TAX> 4,532
<INCOME-CONTINUING> (5,315)
<DISCONTINUED> (5,207)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,522)
<EPS-BASIC> (2.18)
<EPS-DILUTED> (2.18)
</TABLE>
